On April 3, 2025, China International Capital Corporation (CICC) revealed that President Donald Trump's tariff policy could increase the effective U.S. tariff rate by 22.7%, impacting the economy.
Potential Impact on U.S. Economy
These measures could lead to stagflation, marked by higher inflation and reduced growth, complicating Federal Reserve policies. Rising tariffs may lower consumer spending and investment and inflate PCE rates by 1.9 percentage points.
Historical Parallels with 1930s Economy
The proposed tariff rate hikes are comparable to the steep tariffs of the 1930s, a period marked by both economic contraction and high inflation, providing important historical parallels. With current inflation above the Federal Reserve's target, the risk of stagflation is heightened. Economists point out that it's harder for businesses to absorb these costs now compared to past episodes, when adjustments were more manageable.
Challenges for Companies and Consumers
Companies have limited capacity to manage increased costs internally, raising the likelihood that these will be passed onto consumers, driving consumer inflation expectations higher. According to a CICC report, "Tariffs are effectively a form of fiscal tightening, suppressing consumer spending, investment, and leading to an inevitable decline in economic growth." Consumers anticipate heightened inflation and reduced economic growth.
The predicted tariff hike could significantly complicate the U.S. economic situation, reverting to issues similar to those in the 1930s.
