President Donald Trump’s plan to impose widespread tariffs on imports could double U.S. inflation, according to a new study. If the tariffs are fully implemented, they may make recent price hikes worse. This could affect everyday costs for Americans.

Gary Hufbauer, an economist at the Peterson Institute for International Economics, said, “This would deliver a real shock to the American economy.” He believes these tariffs could cause inflation to rise sharply.

This is the worst-case scenario, but it might be partly reduced. The Trump administration has said that tariffs are a way to negotiate. The goal is to pressure foreign governments to lower import fees on U.S. goods. A White House official said they would first target countries with large trade deficits with the U.S.

Retailers and manufacturers might absorb some of the costs rather than passing them all on to consumers. However, the tariffs could still increase prices. This would happen, especially if combined with other tariffs that Trump has already proposed.

Capital Economics, in a note to clients, said, “U.S. reciprocal tariffs will be a big deal.”

What Are Reciprocal Tariffs?

To understand how these tariffs work, it’s helpful to know what reciprocal tariffs are. These tariffs would charge fees on imports equal to the tariffs and value-added taxes (VAT) that U.S. trade partners place on U.S. exports. VATs are similar to sales taxes and are often much higher than tariffs.

As Trump said, “Whatever another country charges, we’re charging them.” This is unusual because VATs generally apply to both imported and domestic goods. The U.S. does not have a VAT; instead, states charge sales taxes, which do not apply to imports.

The U.S. tariffs would also aim to counter foreign subsidies, trade rules, and obstacles that hurt U.S. exports. However, as Deutsche Bank economist Justin Weidner pointed out, the method to calculate the tariffs for these costs is still unclear.

A White House memorandum directs U.S. trade officials to study the economic damage caused by non-reciprocal trade deals. A report will be ready within six months. Trump argues that these tariffs are necessary to level the playing field, which he believes has long favored foreign countries.

U.S. Trade Deficits and Tariffs

Many countries impose tariffs on U.S. goods, which creates trade imbalances. For example, the European Union places a 10% tariff on imported cars, while the U.S. only charges 2.5% on car imports. India charges a 100% tariff on U.S. motorcycles, while the U.S. charges just 2.4% on motorcycles from India. Brazil adds an 18% tariff on U.S. ethanol shipments, while the U.S. only charges 2.5%.

The total U.S. goods trade deficit was over $1 trillion last year, according to White House data. The 15 largest U.S. trading partners impose an average trade-weighted tariff of 6.7%, compared to the U.S. average of 2.6%. When VATs are factored in, U.S. imports face effective tariff rates of 29% from India, 28% from Brazil, 25% from the European Union, 23% from Mexico, and 19% from Canada, according to Paul Ashworth, Chief North American Economist at Capital Economics.

How Tariffs Could Cause Inflation

Ashworth estimates that U.S. tariffs on imports could rise from below 3% to around 20%. This increase could add about 2 percentage points to inflation later this year. Inflation was already at 2.6% in December, according to the Federal Reserve’s measure.

Deutsche Bank’s Weidner says U.S. companies will likely pass half of these added costs to consumers, absorbing the rest. Even with some absorption, the overall impact could raise annual inflation by 1 percentage point, reaching 3.6%.

Inflation had dropped from its peak of 7.2% in mid-2022 as supply chain issues and pandemic-related demand slowed. But inflation has remained high recently, keeping the Federal Reserve from reducing interest rates. A sudden rise in inflation from tariffs might force the Fed to keep rates higher for a longer period.

What makes these tariffs different is that companies may not be able to avoid them by shifting imports to other countries. If high tariffs are applied worldwide, finding alternatives might not be possible.

The Challenge of Tariff Implementation

Another problem is that U.S. officials would have to determine tariffs for around 5,000 products from nearly 200 countries. Hufbauer called this “an incredibly complex undertaking.” He suggested a simpler solution: apply a tariff based on the average rate that foreign countries charge on U.S. goods. Goldman Sachs also agreed with this idea, saying it would reduce the overall tariff burden.

Trump’s Record on Tariffs

Reciprocal tariffs would add to the list of trade restrictions that Trump has imposed since he took office. Trump has already placed a 10% tariff on Chinese imports, 25% duties on steel and aluminum, and proposed a 25% tariff on all goods from Canada and Mexico. However, enforcement of this tariff has been delayed until March. This delay gives Canada and Mexico time to address Trump’s concerns over illegal immigration and drug trafficking.

If fully implemented, these tariffs could add over a percentage point to annual inflation, according to Weidner.

Some economists think inflation would drop back down after an initial shock. Others worry that if prices keep rising, inflation could become a persistent problem. If businesses raise prices, workers may demand higher wages, which could set off a cycle of rising costs.

Ashworth believes any negative effects from tariffs would be balanced by Trump’s tax cuts. This could help the economy continue to grow.

For more information on U.S. tariffs and their impact on inflation, visit Wallstreet Storys.