“Goldman Sachs”

Tariff Hike: A Bleak Short-Term Outlook

tariff increase looms on the horizon, casting a grim shadow over the near future. Within the current administration, there’s no vocal, high-profile critic openly challenging the policy head-on—President Trump has assembled a loyal team. Yet voices from his first term, such as Gary Cohn, former director of the National Economic Council, have resurfaced in outlets like CBS News (November 26, 2024) to condemn the approach. “Trump’s 2018 tariffs already proved that American consumers foot the bill, not foreign nations,” Cohn said. “This will be worse.”

Trade Groups Gear Up for a Fight

U.S. trade associations and industry groups are swiftly mobilizing to push back. Here are some key players and their strategies:

• Alliance for Automotive Innovation, led by John Bozzella, issued a statement on February 1, 2025: “North American auto trade generates $300 billion in economic value. These tariffs threaten jobs and competitiveness.” The group is lobbying the government to exempt auto parts and negotiate with Canada and Mexico, critical supply-chain partners.
• American Fuel & Petrochemical Manufacturers, headed by Chet Thompson, warned on the same day: “U.S. refiners rely on crude from Canada and Mexico. This will drive up gas prices.” They’re planning aggressive lobbying for energy exemptions to shield consumers from the fallout.
• Farmers for Free Trade, represented by Bob Hemesath, told CBS News on February 6: “Canada, Mexico, and China are vital markets for American agriculture. Prolonged tariffs would be devastating.” The group is preparing public campaigns and legislative pressure to oppose the measures.
• Distilled Spirits Council of the U.S., alongside partners in Mexico and Canada, noted on February 1: “Tariff-free liquor trade has boomed since the ‘90s. This will hurt bourbon, tequila, and Canadian whisky.” They’re seeking targeted carve-outs.

These organizations aren’t just sounding alarms—they’re launching legal and political counteroffensives, bracing for retaliatory moves like Canada’s $155 billion tariff package (announced by Prime Minister Trudeau) and Mexico’s “Plan B” under President Sheinbaum, which blends tariffs with non-tariff barriers.

Short-Term Fallout and Expert Insights

The short-term consequences of the tariffs are already taking shape, and prominent economists are weighing in with hard-hitting assessments:

1. Paul Krugman (Nobel Laureate in Economics)
   In a February 1, 2025, article cited on X, Krugman cautioned: “These tariffs breach the USMCA and throw sand in the gears of global trade. Trump wants them for optics, but consumers will pay the price.” He forecasts immediate U.S. inflation (up to 2%, per his models) and recessions in Mexico and Canada.
2. Brad Setser (Council on Foreign Relations)
   Posting on X on February 1, Setser warned: “If sustained, these tariffs will deliver a shock bigger than anything in Trump’s first term.” He predicts price spikes for goods like cars (up to $3,000 per unit, per TD Economics) and fresh produce (60% of U.S. vegetables come from Mexico) within weeks.
3. Shannon K. O’Neil (Council on Foreign Relations)
   In a February 4 CFR analysis, O’Neil said: “Canada and Mexico will suffer most in the short term due to their reliance on the U.S. market, but the U.S. will face inflation and supply-chain chaos. It’s a self-inflicted wound.” She estimates a potential 16% drop in Mexico’s GDP if the policy persists.
4. Gregory Daco (EY Chief Economist)
   Quoted by CBS on February 6 from a January 31 report, Daco warned: “This could trigger a stagflation shock—stagnant growth with rising prices. Effects will hit in months, not years.” He projects an initial $2,600 annual hit to U.S. households (Peterson Institute data).
5. Joshua P. Meltzer (Brookings Institution)
   In a February 3 Brookings piece, Meltzer argued: “There’s no clear link between tariffs and solving issues like fentanyl or migration. In the short term, costs to U.S. consumers and businesses will be immediate, while Canada and Mexico slide into recession.” He flags diplomatic damage to the USMCA as an underappreciated risk.

Can Anyone Predict the Outcome?

No one has a definitive handle on the situation. The sheer scale of the tariffs—covering nearly half of U.S. imports—and uncertainty over their duration cloud projections. Still, experts like Krugman, Setser, and Daco offer “sustainable truths” grounded in historical data from prior tariffs (2018-2019) and current economic models.

Their consensus:

• Rapid U.S. inflation from higher prices for essentials (food, cars, energy).
• Recessions in Canada and Mexico, where trade with the U.S. drives 70% of GDP.
• Inevitable retaliation, already underway with Canada’s $155 billion package and Mexico’s Plan B, hitting U.S. exports.

The political wildcard—whether Trump bends to domestic or international pressure—remains unpredictable. Goldman Sachs (February 2) suggests the tariffs could be short-lived if negotiations emerge, but without clear benchmarks for lifting them, the short-term outlook remains bleak.