U.S. Tariffs & Inflation: Solution or Economic Risk?

By Marcelina Horrillo Husillos, Journalist and Correspondent at The European Financial Review 

US President Donald Trump has announced a 25% tariff on all steel and aluminium imports, following his signing on three separate executive orders imposing 25 percent on goods from Canada and Mexico, and 10% on all imports from China – – which has responded with its own measures.

He said that he planned to slap reciprocal tariffs on “every country” that imposes import duties on the U.S. “Very simply it’s if they charge us, we charge them,” he said on Air Force One, NBC News reported.

Trump’s policies come at a time when the US operates a large negative trade balance with the rest of the world. In 2024, the US operated a trade deficit in goods of more than $1.2tn (£970bn) with the rest of the world, but operated a surplus of nearly $300bn in services.

Figures from 2024 show that the US’s largest trade deficit was with China, at $296bn, followed by Mexico, at $172bn. These countries were among the first to have the threat of tariffs hanging over them.

Corporate America, outraged by the tariffs, has lobbied hard against them. Mainstream economists largely agree that Trump’s tariff plan will reignite inflation and slow US economic growth. Last month, the Wall Street Journal’s editors, who typically side with the president’s policies, called Trump’s tariff plan “the dumbest trade war in history.”

What are Tariffs

Tariffs are taxes charged on goods imported from other countries. The companies that bring the foreign goods into the country pay the tax to the government. This happens when a country buys or imports more from other countries than it sells or exports to them.

Typically, tariffs are a percentage of a product’s value. The 10% tariff on Chinese goods means a product worth $10 would have an additional $1 charge applied to it. Firms may choose to pass on some or all of the cost of tariffs to customers.

Nearly a quarter of all steel used in the U.S. is imported, with the bulk of it from neighboring Mexico and Canada or close allies in Asia and Europe such as Japan, South Korea and Germany.

In 2024, the US received the most imports from Mexico, China and Canada. Each of these countries exported more than $400bn of goods into the US.

Mexico and Canada export a lot of vehicles to the US, as well as energy and oil. Machinery and electrical equipment also form a significant portion of Mexican exports to the US. Chinese exports include electronics, machinery and agricultural goods.

European and Asian allies – such as Germany, Japan, South Korea and Vietnam – are the next biggest exporters to the US, with the US importing more than $100bn of goods from each of these countries last year. The US imported $68bn of goods from the UK that year.

Tackling deficit

Trump has promised to expand tariffs for three primary purposes: to raise revenue, to bring trade into balance and to bring rival countries to heel.

America is running a massive budget deficit, and Trump has said the tariffs will make up for lost revenue — in particular, his 2017 tax cuts, which he has said he wants to extend and expand. In the annual meeting of the World Economic Forum last month, Trump predicted that his tariffs would bring in hundreds of billions of dollars — perhaps trillions of dollars — into the US Treasury.

But trade works both ways: the US is the world’s largest importer of goods, but China is the biggest exporter. Overall, when tallying the total value of imports versus exports, the US also has the world’s largest trade deficit, worth more than $1tn. According to the US International Trade Administration, the countries that the US has the largest trade deficits with are China and Mexico.

Figures from 2024 show that the US’s largest trade deficit was with China, at $296bn. For Mexico it was $172bn. These countries were among the first to have the threat of tariffs hanging over them. The US’s next largest deficits are with Vietnam – increasingly a gateway to the US for Chinese companies avoiding tariffs – followed by Ireland, Germany and Taiwan.

In what respects to the EU, the U.S. imported roughly $600 billion worth of goods from European Union member states in 2024, and as President Trump prepares to potentially extend his tariffs beyond metals to a wide range of products from allies, some product categories would be hit much harder than others in the latest “reciprocal” trade war move by the U.S. government.

Reciprocal effect

China slapped tariffs on US imports in a swift response to new US duties on Chinese goods, renewing a trade war between the world’s top two economies even as President Donald Trump offered reprieves to Mexico and Canada.

China’s Finance Ministry said it would impose levies of 15% for US coal and LNG and 10% for crude oil, farm equipment and some autos. The Chinese government hit back with new tariffs on US exports and a series of retaliatory steps. Beijing said it had filed a complaint with the World Trade Organization (WTO) “to defend its legitimate rights and interests” in response to hiked US tariffs on Chinese goods.

European Union leaders have vowed the tariffs “will not go unanswered” and will be met with tough countermeasures, while Canadian Prime Minister Justin Trudeau said Canadians will “stand up strongly and firmly” against the hike.

U.S. trade war tariffs have generated more than $264 billion of higher customs duties collected for the U.S. government from importers, as of the end of last year, according to analytics and analysis from the Tax Foundation. Out of that total, $89 billion (34%) was collected during the Trump administration. The remaining $175 billion (64%) was collected during Biden’s term.

Currently, the national tariffs bill to the business world is $78 billion, based on the 2024 data from Trade Partnership Worldwide. That could rise to over $400 billion if all of Trump’s new and threatened tariffs, from steel and aluminum, to Mexico, Canada, China and the EU, are enacted.

Conclusion

Trump routinely criticizes American trade policy for “subsidizing” foreign countries, saying America is “losing” hundreds of billions of dollars to its neighboring nations. Trump is imprecisely talking about the trade gap, the difference between what America exports and imports. Some economists caution that Trump’s language about America’s trade gap presents an unfair representation of what has become a crucial mechanism for the US economy 

Trump and his economic team have made many contradictory statements about the rationale for tariffs, leaving American multinational businesses unsure how to plan, and foreign countries unclear on how to negotiate. Trump launched massive and punishing import taxes on Canada and Mexico, only to postpone them for a month in exchange for relatively little from America’s neighbors. Across-the-board Chinese tariffs are on, but a repealed exemption on small items caused massive confusion at the US Postal Service and was temporarily put back in place. And more tariffs on steel and aluminum are expected to be announced Monday, before a potentially far more expansive reciprocal tariff plan is set to be announced later this week.

That may just be the beginning: Trump has hinted at launching tariffs on the European Union, and he has also promised a broader tariff on every single item that comes into the United States.