Economists are predicting that former President Donald Trump’s trade and immigration policies could result in higher inflation and reduced economic growth. Despite rising living costs being a major concern for voters, Trump has vowed to raise consumer prices. His proposed reduction in legal immigration and mass deportations would further limit the workforce, potentially causing economic issues.
Trump’s Tariff Proposals and Consumer Prices
Donald Trump has proposed implementing a universal 10% tariff on imports and increasing tariffs on Chinese goods by 60% or more. Tariffs, which are essentially taxes paid by U.S. consumers and businesses, lead to higher prices for goods. These higher costs can make American products less competitive abroad and can encourage other countries to impose retaliatory tariffs. This creates inefficiencies in the economy by shielding domestic producers from global competition.
Economists Kimberly Clausing and Mary E. Lovely from the Peterson Institute report that such tariffs could decrease after-tax incomes by 3.5% for lower-income households and cost an average middle-income household around $1,700 annually. They warn that if Trump’s proposed tariffs are implemented, the economic damage could be severe, exacerbating the negative effects of previous tariffs.
The Peterson Institute also notes that Trump has suggested even higher tariffs than previously proposed. A 20% across-the-board tariff combined with a 60% tariff on Chinese goods could cost a typical U.S. household over $2,600 annually, a significant increase from the $1,700 cost associated with a 10% tariff.
Impact on Inflation
Economist Milton Friedman emphasized that inflation is driven by too much money chasing too few goods. Tariffs increase the cost of inputs, which can reduce the production of goods and services, thus contributing to inflation. Mark Regets, a senior fellow at the National Foundation for American Policy, explains that any reduction in production due to higher tariffs is inflationary.
Other economists share this concern. Mark Zandi, chief economist at Moody’s, predicts that increased tariffs could trigger a recession and raise inflation by 0.7 percentage points in the year following their implementation. Joe Brusuelas, chief economist at RSM, also warns that inflation risks are higher today compared to 2016. Goldman Sachs projects that Trump’s trade policies could lower economic growth by 0.5 percentage points, while Nomura estimates a 0.75 percentage point increase in inflation by 2025.
Federal Reserve Independence
Concerns extend beyond tariffs to Trump’s desire to influence the Federal Reserve’s interest rate decisions. Catherine Rampell of the Washington Post argues that Trump’s interference with the Fed could lead to higher inflation expectations. Former Treasury Secretary Lawrence Summers warns that such interference could result in self-fulfilling inflationary expectations.
Immigration Policies and Economic Growth
Trump’s proposed reduction in immigration could also contribute to higher inflation, similar to the effects seen during the Covid-19 pandemic. Federal Reserve Chair Jerome Powell noted that a labor supply shortfall, partly due to decreased immigration and increased deaths, has been a factor in rising inflation.
During a potential second term, Trump is expected to continue his restrictive immigration policies. His first term saw historically low refugee admissions and restrictions on various immigrant categories. These policies reduced the availability of skilled workers, leading to lower economic growth.
A study by the National Foundation for American Policy found that if the growth of the foreign-born workforce had continued at pre-2017 rates, U.S. GDP could have increased by up to 3.2 percentage points in 2022. Instead, GDP growth was only 1.9 percentage points.
A second Trump administration could further harm economic growth by reducing the foreign-born labor force. The U.S. workforce is aging, and the foreign-born labor force has been a significant driver of labor force growth. Removing millions of undocumented workers could decrease investment and job opportunities for U.S. workers.
Economists argue that increasing immigration could help control inflation by boosting the labor supply and productivity. NFAP’s Regets suggests that expanding the labor force is a less painful method of managing inflation compared to other approaches.