OPINION:
The U.S. economy is enduring a challenging year but isn’t going over a cliff.
President Trump’s tariffs have raised Americans’ taxes.
Through increases for imports of steel, aluminum and automotive products, Mr. Trump’s broad reciprocal tariffs and special levies on Canada and Mexico to coerce cooperation on drugs and illegal immigration, the average duty on imports is up about 16 percentage points to 18%.
Though the president’s reciprocal tariffs imposed under the International Emergency Economic Powers Act face a questionable future in the courts, he has other options to sustain those.
Negotiations with China and many other major trading partners are unlikely to conclude with comprehensive agreements anytime soon, and the deals with Britain, the European Union, Vietnam and others didn’t alter tariffs much.
Hence, higher taxes on imports are likely for the remainder of Mr. Trump’s second term.
At present levels, those tariffs would generate about $3 trillion in additional revenue over the next decade. That would offset most of the deficit-increasing effects of the president’s additional tax cuts and spending initiatives.
Large federal deficits and growing national debt are problems, but Mr. Trump’s overall fiscal policies should not significantly alter these trends.
In the near term, the tariffs are a drag on the economy because those and some of his spending cuts are biting this year, while most tax cuts won’t show up in paychecks until next year.
For shoppers, tariffs have not been highly visible. Inflation has ticked up and will likely accelerate further this fall.
When the president boosted tariffs on washing machines in January 2018, the consumer price index for laundry equipment showed little effect in February and March and jumped 11% by May.
As inflation accelerates, consumers will borrow more or spend less. It likely will be some of each, as banks are preparing for more losses on credit cards and other loans. With less inflation-adjusted spending, the pace of economic activity will remain slow.
In January, economic forecasters predicted 2% gross domestic product growth for this year, but with the tariffs, it will likely average only about 1.5%.
The conventional thinking is that the Federal Reserve could lower interest rates to boost homebuilders, debt-burdened consumers and overall economic growth, but at the expense of stoking inflation.
However, the Fed could prove mostly powerless.
From September to December last year, the Fed cut the federal funds rate, the overnight rate that banks pay to borrow funds, a full percentage point, but the rate on 10-year Treasury bonds jumped from about 3.6% to 4.6%.
That 10-year rate is the benchmark for most borrowing throughout the economy. So even as the Fed cut the bank overnight rate last fall, the rate on 30-year mortgages jumped about a percentage point.
In a full-employment, peacetime economy, a federal deficit exceeding 6% of GDP is unprecedented. Treasury borrowing requirements are overwhelming anything the Fed could do.
With fiscal and monetary policy essentially unchanged, the impacts of the Trump tariffs on the economy would be largely on the supply side if businesses had some certainty about how trade policy would settle out.
It’s one thing to say the average tariff on imports will stay at 18%, but it’s another to know what rates will be charged on specific products from various countries.
With more certainty about those tariffs, businesses could adjust supply chains more cost-efficiently by, for example, investing to source more from Vietnam and Mexico and less from China and manufacturing more in the United States. Still, early episodes with items as simple as children’s toys indicate that finding new suppliers can take months.
Parents will face fewer choices, shortages and higher prices filling Christmas stockings. Similar frustrations will repeat throughout the economy.
Building a new manufacturing capacity for complex products such as automobiles and cellphones can take years.
The best clarity business may assume is that Mr. Trump’s tariffs will stay mostly as they are or rise closer to 20%. That realization will come slowly, and business investment outside hot artificial-intelligence-related activities will recover, but only slowly.
GDP fell 0.5% in the first quarter because imports surged in March ahead of the Liberation Day tariffs.
That reversed in the second quarter, but tariffs are burdening demand this summer and fall.
In 2026, the economy should revert to 2% growth, in line with the consensus outlook before the tariffs.
While slower than in 2024, we won’t have a recession.
Inflation should surge above 3% and then subside as we move through 2026 if the Fed doesn’t enable reckless federal deficits by slashing interest rates.
The economy will be back on track next year. The hit to growth and purchasing power from tariffs will prove a one-time adjustment as we learn to live with Mr. Trump’s protectionism.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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