U.S. President Donald Trump has officially implemented the previously delayed 25% tariffs on Canada and Mexico as of today, including a 10% tariff on energy imports from Canada.

Furthermore, an additional 10% tariff has been imposed on Chinese imports, on top of the existing 10% duty.

These tariffs represent the largest tariff hike the U.S. has implemented since the 1930s and have the potential to upend relations with key trade partners, potentially igniting a full-blown trade war.

Following Trump's move, swift retaliatory measures were announced by Canada and China, while similar actions from Mexico are also likely.

Canadian Prime Minister Justin Trudeau stated late Monday that Canada would implement a comprehensive counter-tariff package on U.S.-made goods.

In the initial phase, Canada's countermeasures will cover approximately $20 billion worth of trade, applying a 25% tariff in response to the U.S. measures. The scope of these tariffs is expected to expand within three weeks to cover roughly $85 billion in trade, including critical goods such as automobiles, trucks, steel, and aluminum.

Following Canada's move, China has announced counter-tariffs of up to 15% on key U.S. goods. Additionally, it has banned exports to certain defense companies and added ten more American firms to its unreliable entities list.

China's new retaliatory tariffs will target food and agricultural products, including poultry, wheat, corn, and cotton, which will face an additional 15% tariff. Soybeans, beef, and fruits will be subject to a 10% tariff.

Beijing's targeted countermeasures underline its cautious approach, signaling that it does not intend to escalate tensions further. However, given Trump's ongoing tariff threats, continued tensions seem inevitable.

Trump's Tariffs: A $2,000 Burden for U.S. Households?

Trump's tariffs on Canada, Mexico, and China will impact approximately $1.5 trillion of the U.S.'s annual imports. Economists argue that these tariffs will impose additional costs on U.S. consumers and put downward pressure on economic growth—an assessment shared by Federal Reserve economists.

According to the latest research from the Atlanta Fed, the impact of tariffs on consumer prices depends on how much of the cost increase is passed on by businesses. The study suggests that if businesses pass on half of the tariff-related costs, consumer prices for certain goods could rise by 0.81%. If the full cost is passed on, prices could increase by as much as 1.63%. Notably, under Trump's previous term, the full cost of tariffs was transferred to consumers.

The study also indicates that while tariffs cause a one-time, immediate price increase, they do not contribute to long-term inflation.

Meanwhile, a separate study by Yale's Budget Lab estimates that tariffs will impose nearly $2,000 in additional costs per U.S. household. Such extra costs have the potential to weigh on consumer spending, particularly impacting lower-income households, which may become more selective in their expenditures.

Economic Headwinds Strengthen: Is a Fed Pivot Inevitable?

As the Duhani Capital Research team, we believe that even though tariff-driven price increases may be one-time occurrences rather than persistent inflationary pressures, the additional costs they impose on household budgets could dampen consumer spending—the primary driver of the U.S. economy. This, in turn, could slow U.S. economic growth.

However, Trump's fulfillment of tariff threats demonstrated his seriousness on this issue. This could lead to a front-loading of demand ahead of the implementation of other planned tariffs, potentially boosting spending in the short term and slightly pushing inflation higher over the next few months.

Looking ahead, as inflation remains sticky and growth risks intensify, concerns about the U.S. economy slipping into stagflation are growing, while speculation rises over how the Fed would respond if this scenario unfolds.

Recent statements from Fed officials indicate that they are aware of rising risks to economic growth. However, they continue to emphasize in a unified manner that restrictive monetary policy should remain in place until there is more substantial evidence that inflation is progressing toward the 2% target.

In contrast, swap markets suggest that the Fed could cut rates sooner than expected, with more than two quarter-point cuts priced in for this year. The probability of a first rate cut by July is fully priced in, while the odds of a cut in May have risen above 40%.

Friday's jobs report will provide an update on the current state of the labor market and whether it could prompt the Fed to consider a rate cut. Any signs of labor market deterioration could put the Fed in a difficult position given its dual mandate.

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