Trump tariffs: What could this mean for US dollar?

Key points

• Trump plans tariffs of 10% to 100% on imports, targeting China
• U.S. tariffs from 2018-2019 impact products valued at $380 billion
• Tariffs could reduce U.S. GDP by 0.8% and cut 684,000 jobs
• Retaliatory tariffs may incite trade wars and affect global economies
• Biden administration increased tariffs by $18 billion in 2024

What is Trump’s tariff plan?

President-elect Donald Trump has frequently highlighted tariffs as a cornerstone of his economic strategy. Trump’s tariff plan includes a universal tariff of 10% to 20% on all imports, with even steeper tariffs of 60% to 100% on Chinese imports. Trump’s reasoning is that these tariffs could serve as a dual-purpose tool: generating a new revenue stream for the U.S. government to offset tax cuts and extracting financial concessions from rival nations. A tariff is essentially a tax on imports, and it is paid by the importing company, not the exporting country. In this instance, U.S. companies importing goods from China would incur higher costs due to these tariffs. This serves two main purposes: protecting domestic industries by making foreign goods more expensive, thus discouraging undercutting of American businesses, and generating revenue for the government.

What have the current effects of tariffs been?

The imposition of tariffs by the Trump administration in his first term, and their continuation under the Biden administration, has significantly impacted the U.S. economy. These tariffs, totaling nearly $80 billion, were applied to products valued at around $380 billion between 2018 and 2019, marking one of the largest tax increases in decades. In 2024, the Biden administration further increased tariffs an additional $18 billion. Chinese goods, including semiconductors and electric vehicles, added another $3.6 billion to the tax burden. These measures are estimated to reduce the long-run GDP by 0.2 percent, decrease the capital stock by 0.1 percent, and result in the loss of 142,000 full-time equivalent jobs.

What could these tariffs mean for the US dollar?

Tariffs have naturally made imported goods more expensive, leading to higher prices for imported everyday items, which in turn reduces consumer purchasing power and overall economic activity. If implemented further, these tariffs are estimated to increase taxes by an additional $524 billion annually, potentially shrinking GDP by 0.8 percent, reducing the capital stock by 0.7 percent, and eliminating 684,000 full-time equivalent jobs. These estimates do not consider the potential retaliatory measures from trade partners, which could initiate a global trade war, further harming the U.S. economy. Historical and academic studies consistently show that such tariffs raise prices and reduce output and employment, underscoring the net negative impact on the nation's economic health.

Tariffs can impact the U.S. dollar by influencing demand for the currency, inflation expectations, economic growth, and the trade balance. If tariffs reduce imports more than exports, foreign demand for the dollar may decrease, potentially weakening it. Higher consumer prices due to tariffs can lead to inflation, prompting the Federal Reserve to hike interest rates, which might strengthen the dollar. Conversely, tariffs can dampen economic growth by raising costs for businesses and consumers, possibly leading to a weaker dollar. Additionally, while tariffs aim to reduce trade deficits, retaliatory measures can reduce U.S. exports, adversely affecting the trade balance and potentially weakening the dollar. The net effect on the dollar is determined by how these factors interact in response to tariff changes.

Global economic consequences of tariffs

Trump's new tariffs proposal, which includes imposing steep tariffs on Chinese goods and possibly other countries, could significantly impact trade relations and global economies, including those of China, Mexico, Canada, and Australia.

1. China: Trump's tariff proposal targets Chinese goods specifically, with tariffs of 60% to 100%. This could exacerbate economic tensions between the U.S. and China and lead to retaliatory tariffs from China, potentially escalating into a trade war. Such actions could further depress China’s economic growth, which has already faced challenges such as declining trade balances and currency devaluation attempts.

2. Mexico: Mexico's economy could be adversely affected as well due to its reliance on exports to the U.S. Increased tariffs could raise the costs of Mexican products in the U.S. market, reducing their competitiveness. This could hinder the near-shoring trend where U.S. companies have moved operations to Mexico for cost efficiency.

3. Canada: As a close trading partner of the U.S. and part of the USMCA agreement, Canada could face disruptions in its trade dynamics with the U.S. Increased tariffs might lead to higher prices for Canadian goods in the U.S. and could prompt Canada to seek retaliation or changes in trade terms to protect its industries.

4. Australia: Australia, being a significant trade partner with China, might experience indirect effects. If Chinese economic growth slows further due to heightened tariff policy, it could impact Australian exports to China, particularly in commodities.

What’s next? Economists await Trump’s treasury secretary choice

President-elect Donald Trump's choice for treasury secretary is pivotal, reflecting his administration's stance on import tariffs, a key campaign issue. Candidates like Scott Bessent and Howard Lutnick offer differing views on tariffs, with Bessent seeing them as a negotiation tool and Lutnick advocating for broader tariffs to protect American workers. Trump's proposed tariffs aim to renegotiate trade terms and generate revenue for tax cuts. Trump also is hopeful these tariffs could eliminate the need for income tax altogether, a direction that the Peterson Institute for International Economics describes as “literally impossible.” Overall, in terms of risk, these tariffs risk sparking international trade wars, increasing American consumer prices, and unsettling markets. Corporate America is preparing for various scenarios, with companies like Stanley Black & Decker and Columbia Sportswear expressing concerns over the impact of tariffs on costs and operations. Despite uncertainties, Trump's transition team focuses on personnel decisions, leaving companies to brace for potential changes in trade policy.

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