The newly announced tariffs from President Donald Trump could hurt the economies of the U.S. and its neighbors while putting upward pressure on inflation, according to Wall Street economists. Trump issued three executive orders on Saturday that impose 25% tariffs on goods from Mexico and Canada, along with10% levies on Canadian energy products and Chinese goods. Tariffs are a tax paid by companies when goods cross a border, but economists worry that the cost will be passed on to consumers in the form of higher prices and lead to weaker economic growth. “Our economists expect that fully implemented tariffs would have meaningful consequences. A recession in Mexico becomes the base case. US Inflation could be 0.3 to 0.6pp higher vs baseline over the next 3-4 months (putting headline PCE inflation at 2.9% to 3.2%) and US growth could be -0.7 to -1.1pp lower vs baseline over the next 3-4 quarters (putting real GDP growth at 1.2% to 1.6%),” Morgan Stanley strategist Michael Zezas said in a note to clients Sunday. The personal consumption expenditures index, or PCE, is the Federal Reserve’s preferred measure of inflation. The impact would be lessened if the tariffs are short-lived, full of exceptions or delayed, Zezas added. Goldman Sachs has estimated similar increase of 0.7% for PCE and a hit of 0.4% to GDP from the tariff plans. Goldman chief economist Jan Hatzius said in a note to clients Sunday that the firm would update those projections now that there are more details about the tariff plan available. One wrinkle that could make the impact for the U.S. economy worse than expected is retaliatory tariffs from other countries. Canada has already announced levies on U.S. goods . Hatzius pointed out that there is a “retaliatory clause” in Trump’s executive orders that could lead to Trump pushing tariffs even higher in a trade war back-and-forth. “While this is a clear warning against retaliation, it has no automatic effect,” Hatzius said. Trump mentioned tariffs repeatedly on the campaign trail in 2024, touting their ability to raise revenue and as a negotiating tool in other policy areas, like immigration and drug enforcement. The negotiation angle is one reason why Wall Street strategists and economists still seem optimistic that the tariffs will prove to be a temporary problem. “There are three reasons why we think the 25% tariffs may not be permanent. First, they would be disruptive for the US, and US business groups are already exerting pressure on the Trump administration. Second, they will be hard to implement due to the high degree of integration in manufacturing in North America. Lastly, we think Canada and Mexico are likely to agree to most of Trump’s terms on migration and drugs,” Bank of America global economist Claudio Irigoyen said in a note to clients Monday.
