Tariffs drive up prices, slow economic growth, increase unemployment, weaken productivity, cut into profits and escalate global tensions. Other than that, they’re fine.
While consumers haven’t yet felt the full impact, the effects of tariffs are already taking hold in the US. The New York Times spoke with small business owners about the challenges they’re facing, and it’s clear many are already struggling with rising costs and uncertainty:
“Several themes emerged. American businesses, not Chinese suppliers, were shouldering the cost of tariffs. Many companies said they would have to raise prices to offset the expense if they had not already. Some spoke of a feeling of business paralysis: They were afraid to make plans amid the unpredictable stream of new tariffs, fearing the risk of moving production out of China since no country seemed immune.
Turning to domestic alternatives was usually not viable because they were more expensive, the quality was inferior and there were fewer options. Finally, completely reinventing their supply chain would be a huge undertaking for the companies, requiring time and expense they cannot easily spare.”
One of the key benefits of globalization has been low inflation, which most economies have enjoyed for the past two decades. However, supply chain disruptions following the COVID-19 lockdowns have shown businesses that market disruptions can create pricing power. For example, in anticipation of the 25 per cent tariff on foreign-supplied steel, US steel mills have been raising prices, with the benchmark price for domestic steel already up nearly 25 per cent.
Higher steel prices will have major downstream effects, particularly in the auto sector. US automakers have warned about the impact on their industry, noting that higher costs will make domestic vehicles less competitive against to foreign alternatives. Another major concern is the possibility that Trump will impose blanket tariffs without the usual safeguards to mitigate their impact, such as duty drawback programs that allow levies to be refunded if imported goods are subsequently re-exported. These mechanisms are crucial, given the complex movement of parts across the North American supply chain.
A report by ING highlights the sharp rise in car and light truck prices following supply chain disruptions in the early part of this decade. Between 2021 and 2023, prices rose around 20 per cent. This didn’t just impact the price of new vehicles—it also drove up costs for related services like auto insurance. If the proposed tariffs are implemented, they could trigger another round of price increases for vehicles, parts, and related services like insurance.
A recent study by the Globalization and Prosperity Lab at UC San Diego looks at potential retaliation by Canada and Mexico. The study warns that,“[b]lunt retaliation could go so far as to eliminate all the take-home pay gains in 40 US states and make whatever gains occur elsewhere barely noticeable. Tariff-induced higher prices are a further drag on American families. Canada and Mexico would take a strong hit from blunt retaliation, but they can use smarter approaches and demonstrate the limits of America First Trade Policy for US workers.”
While Canada and Mexico would suffer greater economic losses from such an action, the analysis delivers a clear warning to US policymakers: “to reflect on the vulnerability of their own voters’ take-home pay and living standards.”
Clearly each side has the ability to impose significant economic pain. Hopefully we won’t see this as a long-term outcome.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Ontario aims to deliver 1.5 million new homes by 2031, but many Toronto-region cities are struggling to meet their targets. Despite initiatives like the $1.2 billion Building Faster Fund, rising construction timelines are slowing progress, with cities like Brampton, Markham, and Mississauga falling short.
Learn more about this growing challenge and how modular construction could help in our latest Housing Affordability Watch: Are Toronto Region Cities Building Faster?
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