Living with Trump’s tariffs

OPINION:

President Trump has announced new trade deals with Japan and the European Union, and along with others now in place, it looks like tariffs will stay about where they are.

Higher prices

Importers front-loaded purchases in March to avoid the new tariffs, and many retailers are still running down those inventories. Some prices jumped quickly — baby products such as strollers and rockers — and others showed up in toys, apparel and furniture in June.

We’ll see wider price effects by this month.

Mr. Trump’s tariffs on steel, aluminum and automotive products, special levies on Canada and Mexico and reciprocal tariffs as high as 30% on China and other countries have raised the average tariff across all imports by about 14 percentage points.

Retail prices shouldn’t rise nearly that much.

Chinese-made car mats that cost $58.97 could increase 5.9% to $66.42, but the actual tariff collected would be only $1.80.

Tariffs are applied to the importer’s acquisition costs in China or wherever the product is made. For the car mats, that was $6. The rest of the estimated price increase applies the customary wholesaler and retailer markups, which each exceed 100%.

Motorists will resist. Some will do without car mats, and lower-income drivers could improvise by cutting up carpet remnants.

If the manufacturer absorbed just $1, the post-tariff price would be $62.28.

Many big retailers such as AutoZone and Target source directly from factories and could trim additional markups. Most of their distribution costs aren’t altered by the tariffs.

Also, the duties have many exclusions. U.S. content in automobiles from Canada and Mexico isn’t subject to the 25% auto tariffs.

The average price of a new vehicle is about $45,000, but the tariffs are expected to add $1,800, hardly 25%.

Overall, Mr. Trump’s tariffs could raise taxes as much as $300 billion annually.

Other complications

We aren’t in a controlled experiment.

Congress is cutting taxes and Medicaid and food stamps spending, devoting more resources to defense and border security and increasing funding to deport illegal immigrants.

Factoring in new tariff revenue, Mr. Trump’s overall program may boost the federal deficit, but not as much as critics complain.

Those combined policies will have a slightly stimulative effect on aggregate demand and growth.

During the Biden presidency, growth was greatly assisted by the influx of illegal immigrants and migrants enabled by parole programs.

Mr. Trump is shutting down those resources. Going forward, conventional legal immigration and indigenous population growth can be expected to support only about 90,000 new employees each month, compared with 168,000 in 2024.

Meatpackers and vegetable farmers in California face difficulties attracting American workers. The president will have to yield on some illegal immigrants, or Republicans will face voters angry about supermarket shortages.

We import and export beef to accomplish the mix of cuts, and ground beef is most attractive to consumers. With the struggles of meatpackers, reducing imports would be tough.

The flexibility to expand U.S. factory production is similarly limited by labor shortages and the time it takes to build new capacity. A lack of adequate investment has been reflected in lower manufacturing productivity growth since the early 2010s.

For all these considerations, we won’t likely slip into a recession, but growth will slow.

Before Mr. Trump’s announcement to apply broad reciprocal tariffs and punitive tariffs on Mexico and Canada, forecasters at Wells Fargo were pegging 2025 gross domestic product growth at 2.1%. As of mid-July, their estimate was 1.4%.

The Organization for Economic Cooperation and Development similarly estimates the downshift in growth to be 2.4% to 1.6%.

Inflation

Forecasters expect a bump to the Consumer Price Index of 1% to 1.7% over the next 18 months. Spread across six quarters, inflation will be closer to 3% than 2%, assuming the Federal Reserve continues its cautious posture about further cutting interest rates too soon.

The fear is that with elevated household expectations about inflation, these price increases could set off a wage-price spiral.

This is unlikely, though, because workers won’t easily be able to express their expectations through wage demands. Many white-collar jobs are being replaced by artificial intelligence, and major companies are thinning their ranks.

In public-facing service industries, the opportunities to further automate are growing. For example, I recently picked up several large appetizer trays at Whole Foods but was required to order online.

Ordering via cellphones at restaurants could become prevalent as businesses seek to use less labor and speed table turnover.

Consequently, the percentage point or so increase in prices is likely to be a one-off.

The bad news is most of us will have to eat the higher prices. Mr. Trump’s One Big Beautiful Bill Act targets its tax cuts to narrow groups; for example, tipped workers and moderate-income retirees.

That’s the price we pay for MAGA.

• Peter Morici is an economist and emeritus business professor at the University of Maryland and a national columnist.