#MacroFriday: Trump's proposed trade policy could result in highest tariff rate since the 1940's

Choosing a topic for this week’s #MacroFriday wasn’t easy, as significant macroeconomic developments continue to unfold: the start of China’s Two Sessions, Germany’s "Whatever It Takes" moment and the historic jump in its 10-year yield, another ECB rate cut, and ongoing stock market volatility. In the end, I decided to focus on the implementation of trade tariffs and how this could backfire on the U.S. consumer.

The proposed trade policy of U.S. President Donald Trump could push average U.S. tariff rates to 13.8%, their highest level since the 1940s. The accompanying graph illustrates the historical downward trend of U.S. import tariffs—driven by globalization and liberalization—while putting Trump’s proposed tariff hike into context. This week, he imposed tariffs on key trading partners, including Canada, China, and Mexico (excluding the EU). Unsurprisingly, these countries responded with retaliatory measures. Adding to the uncertainty, he has threatened to escalate further by introducing reciprocal tariffs on a "country-by-country" basis starting in April.

Despite what President Trump might believe, there are no winners in a trade war. Both American producers and consumers will bear the brunt, as importers pass higher costs down the supply chain. Prices of both imported and domestically produced goods will rise, resulting in inflationary pressures—especially for lower-income households. The impact of these measures is already beginning to take effect.

Yesterday’s data release showed that the U.S. trade deficit hit a record $131.4 billion in January, as imports surged 10% in anticipation of tariffs. Furthermore, as we discussed last week, consumer confidence in the U.S. is slipping, leading to weaker-than-expected personal expenditures in January. Both factors contributed to a dramatic drop in the Atlanta Fed’s GDP Nowcast for the first quarter of 2025, falling from +2.7% last week to -2.8% now.

Ironically, it may be "Dealmaker" Trump who triggers the long-awaited economic slowdown in the U.S. His aggressive tariff policies, intended to bolster domestic industries, could instead weigh heavily on growth and fuel inflation—ultimately backfiring on the very economy he aims to protect.