Artur Widak/NurPhoto via AP
The auto industry is facing a 25 percent tariff on foreign-made cars and components.
By far the loudest economic complaint against the Biden administration was about inflation. A May 2024 poll from Pew found 62 percent of adults rating it as a “very big problem,” the highest of any issue and 37 percentage points higher than unemployment. President Biden was blamed for this, and the discontent undoubtedly dragged down Kamala Harris’s campaign.
In many ways, this was unfair. Economic analyses show that most of the inflation stemmed from pandemic-era disruptions and Russia’s invasion of Ukraine; practically every country in the world saw similar price trends. And the policy that did fuel price increases somewhat, Biden’s American Rescue Plan mega-stimulus, also ended up stemming inflation by allowing the American economy to bust through supply bottlenecks with increased production thanks to high demand.
By mid-2024, inflation was nearly back to the Federal Reserve’s 2 percent target. The U.S. economy was envied around the world as having achieved the mythical “soft landing,” with inflation having been whipped without a recession or high unemployment.
So it’s a sad irony that Donald Trump’s deranged tariff policies are leading to price hikes across the economy—and this time, we almost certainly will not have the red-hot Biden labor market to compensate for the rises in price. Despite the inflation, real incomes actually increased between 2021 and 2024, particularly for low-income workers. This time around, however, a recession is building on the horizon. Prices will go up as people lose their jobs and incomes fall.
Tariffs can lead to price increases in a number of ways. Most obviously, an importer facing a new tax on their goods is going to pass that cost on to the customer if they possibly can. To what degree they can do that will vary based on profit margins, market competition, and other factors, but in general the customer will take most of the hit. Even a 10 percent tariff is a lot for most companies; they wouldn’t be able to eat the full cost of that even if they wanted to.
Consider the auto industry, which is facing a 25 percent tariff on foreign-made cars and components. General Motors estimates that will cost the company $5 billion this year, while Ford is expecting a $2.5 billion hit. Toyota said it has lost $1.3 billion in just two months. Sure enough, Ford recently announced a price hike on three models made in Mexico—the Mustang Mach-E, Bronco Sport, and Maverick—by up to $2,000. More such hikes will surely come.
Indeed, you are probably already noticing tariff effects yourself. A Chinese restaurant near my home recently hiked up prices for every menu item by about 12 percent, citing tariffs as the reason. My local Wegmans has also raised prices on some fruits and vegetables, again blaming tariffs. Some 17.3 percent of America’s food and beverages are imported; grocery stores are signaling that their prices will rise.
Just as the pandemic did, the tariffs are going to create severe shortages, panic buying, and skyrocketing prices.
Second, when importers raise prices, that provides an opportunity for others to do the same. We learned in 2022 that businesses often want to raise prices, and will benefit from doing so, but don’t want to be the first out of the gate. Importers being forced to hike provides perfect cover for domestic producers in their field; tariffs in general are a great excuse. Most people have no idea how a business’s supply chain works; even a fully domestic company can just point at Trump and say, “Sorry, can’t be helped.”
Third, tariffs will force many companies to scale back production or drive them out of business entirely, which translates to fewer competitors and therefore higher prices.
Fourth, when tariffs are high enough, like Trump’s 145 percent tax on many Chinese imports, they constitute a de facto trade embargo. As my colleague David Dayen writes, this has created a massive supply disruption that is only now starting to reach American stores. Cargo traffic at Pacific ports is plummeting and will keep falling for weeks. China exports not just cheap clothing and gadgets, but also innumerable raw materials and intermediate inputs that are vital for all kinds of American businesses, like rare earth minerals or steel pipe for oil drilling. These are not easily replaced.
Just as the pandemic did, the tariffs are going to create severe shortages, panic buying, and skyrocketing prices for affected items. Mike Beckham, the CEO of the stainless steel drinkware company Simple Modern, said on the Organized Money podcast that retailers are desperate for his inventory. “We’ve already had three or four retailers reach out and say, what do you have that you can sell us? We’ll just, we’ll take whatever you’ve got.” Those fears are easily explained; many goods will just vanish from store shelves altogether.
All told, the Yale Budget Lab estimates that tariffs will add 2.9 percent to overall price inflation in the short run, with much higher figures for certain goods—like apparel, which will go up by 64 percent.
This ungodly mess resembles the retreat from international trade during the Great Depression, worsened by the trade war touched off by the Smoot-Hawley tariffs in 1930. That, at least, was a panicked reaction to a galloping economic crisis that leaders did not create or understand. This time around, Trump has deliberately created a trade war entirely by himself, for incredibly stupid reasons.
But the basic similarity holds. In the ’30s, most countries were desperately trying to free themselves from international trade, and as the economist John Maynard Keynes pointed out in a 1933 speech, there was a lot of attendant bungling, above all in the Soviet Union. While Trump’s staggering incompetence does not (yet) approach the disaster of Russia’s collectivization of agriculture, which ruined Soviet farmers and caused a famine that killed perhaps seven million people, Keynes’s description of the Soviet leadership sounds ominously familiar. “Stalin has eliminated every independent, critical mind, even when they are sympathetic in general outlook. He has produced an environment in which the processes of mind are atrophied,” Keynes said. “The soft convolutions of the brain are turned to wood. The multiplied bray of the loud speaker replaces the inflections of the human voice.”
Voter file data coming in suggests that Trump’s margin of victory came from people who had not voted before. One must hope they learn a lesson from that disastrous first choice.
