Buying foreign? That’ll now cost Americans a lot more

(CNN) — America has a brand new tax on virtually every item that comes over its border: 10%.

The universal tariff went into effect Saturday at 12:01 a.m. ET after President Donald Trump signed an executive order earlier in the week requiring a baseline tax for all imports. The announcement sparked an outcry from America’s trading partners — allies and foes alike — along with American businesses, investors and consumers.

Economists fear the tariffs — the highest America has imposed in a century — will plunge the United States and the world into a recession. Markets have tumbled, and China’s tariff retaliation Friday launched a full-blown trade war.

And Trump isn’t done.

On Wednesday, America will impose significantly higher “reciprocal” tariffs on a number of countries that have the highest trade imbalances with the United States. Trump has also put in place tariffs on autos, steel and aluminum. He placed 25% tariffs on certain goods from Canada and Mexico. Tariffs on auto parts are set to go into effect no later than May. And Trump has also threatened tariffs on lumber, pharmaceuticals, copper and microchips, among other products.

What Trump wants from tariffs

Trump has treated tariffs as a kind of panacea: an economic magic wand he can wave to restore America’s manufacturing prowess, bring foreign nations to heel on key disputes, restore the balance of trade and bring in gobs of money that can help pay off the US deficit and reduce Americans’ tax burdens.

Economists largely agree that tariffs can help fulfill many if not all of those promises: When used effectively, tariffs can help boost production at home by making foreign goods more expensive. Revenue raised by tariffs could help offset some of its deficits.

And many Americans who voted for Trump are hopeful for a change. Despite an economy that has fully recovered from the pandemic — on paper, at least — many people feel left out. Free-trade agreements have in some instances accelerated factory shutdowns, leading to ghost towns and the deterioration of many blue-collar jobs.

But Trump’s tariffs seek to remake the global economy in one fell swoop. They aim to bring back a long-gone era of booming factories that companies are hesitant to restore, even if it means paying a higher tax to import goods. Trump promises a return to the golden age of factory work.

Trump’s tariffs, if he doesn’t negotiate them lower, could inflict more harm to the US economy than the countries he is targeting – and in the process sink the economy into a painful recession.

There’s another potential problem with Trump’s plan: Tariffs can’t achieve all of his goals at the same time. Trump’s aims are often contradictory.

For example, if tariffs are a pressure campaign, they have to go away once the countries acquiesce — which means there will be no tariffs to restore the trade balance. If tariffs are designed to promote America’s manufacturing sector, they can’t also raise revenue to offset deficits. If Americans switch to made-in-the-USA goods, then who pays the tariff on foreign products?

Inflation and recession threat

The tariffs — including the taxes Trump has imposed, plans to levy and has threatened — could raise prices significantly for American consumers. That’s because importers pay the tariffs, not the countries exporting the goods that Trump has been targeting.

Companies that import the goods typically pass along all or some of that cost to wholesalers, retailers and, ultimately, consumers. Although some retailers with strong supply chain controls may eat some of the cost, others will be unable to take such a hit.

Federal Reserve Chair Jerome Powell on Friday acknowledged that Trump’s tariffs, which were significantly more aggressive than the central bank had expected, would drive prices higher and slow down the economy. Powell said the Fed wasn’t in a rush to act but was monitoring the effect tariffs have on the economy.

Other economists were far less sanguine.

The nonpartisan Tax Foundation said the average American household will pay $2,100 a year more for goods because of the significant universal and reciprocal tariffs Trump announced Wednesday. It said America’s average import tax will surge to 19% this year from 2.5% last year — the highest rate since the Smoot-Hawley era in 1933. Fitch Ratings said the rate would rise even higher, sending America’s effective tariff rate to its highest level in more than a century.

As a result, Americans’ after-tax incomes will decline 2.1% on average this year, the Tax Foundation said.

JPMorgan analysts noted Wednesday that the tariffs would hike taxes on Americans by $660 billion a year — the largest tax increase (by a longshot) in recent memory. It will cause prices to surge, too, adding 2% to the Consumer Price Index, a measure of US inflation that has struggled to come back down to earth in recent years.

If Trump maintains the massive tariffs he announced Wednesday, his unprecedented trade policies will probably cause both the US and global economies to fall into a recession in 2025, JPMorgan analysts said.

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