By Matt Peterson

President Donald Trump campaigned on the promise of growth, a booming stock market, and lower taxes. So far, he's delivering the opposite.

The tariffs imposed Tuesday on Mexico, Canada, and China hit the economy at a moment of heightened uncertainty -- and incipient weakness. Trump and his advisers claim that these levies will produce short-term economic pain but achieve long-term gain. Yet, their rationale for the tariffs is shifting, and their analysis of the impact on assets such as the dollar don't match the current effects.

To the contrary, a full-blown tariff war is likely to exact a toll on the economy. "Over time, this tariff policy could very well amount to one of the biggest tax increases since the end of World War II," said Pete Sepp, president of the National Taxpayers Union, a conservative advocacy group. Tariffs will slow growth and add to already-inflated rates of inflation.

It isn't clear there will be a payoff any time soon.

New 25% tariffs on Canada and Mexico went into effect on Tuesday, and tariffs on China rose by 10 percentage points. All three major stock-market indexes fell, with the S&P 500 and the Nasdaq closing below their level on Election Day, Nov. 5, 2024. The Dow hung onto less than a percentage point gain since that date.

Trump has said he expects Americans to feel "some pain" from tariffs. Treasury Secretary Scott Bessent has described tariffs as a strategy of "escalate to de-escalate" -- in other words, they are aimed at fixing problems whose solutions will be worth it in the long run.

Tariffs were imposed on Canada and Mexico on national security grounds, after Trump declared the flood of unauthorized people and illegal drugs into the U.S. at the northern and southern borders a national emergency. The White House says those factors matter more than any economic effect from tariffs, such as their impact on Americans' taxes.

"More Americans are dying from fentanyl overdoses each year than the number of American lives lost during the entirety of the Vietnam War. This status quo will not be tolerated by President Trump, who refuses to put a dollar figure on American lives," said White House spokesman Kush Desai.

Commerce Secretary Howard Lutnick tied the tariffs' fate to Trump's agenda. "If they [Canada and Mexico] can stop the flow of fentanyl, and they can prove to the president they can stop the flow of fentanyl, then of course the president can remove these tariffs," Lutnick said on CNBC Tuesday morning.

But while significant flows of fentanyl come into the U.S. from Mexico, that isn't the case from Canada. Data from U.S. Customs and Border Protection show the rate of fentanyl seizures falling over the past few months. The government seized just 0.03 pounds of fentanyl at the northern border in January, the most recent month for which data are available. That is equivalent in weight to about a dozen jelly beans.

Mexico has taken steps to address Trump's requests. President Claudia Sheinbaum announced the transfer of 29 drug lords to U.S. custody last week. Bessent says Mexico also plans to impose its own tariffs on China, which supplies some raw materials for drug production, to match those from the U.S.

Those policies will come at a cost to Mexico, notes Karthik Sankaran of the Quincy Institute. "But evidently, this was a price Sheinbaum felt was worth paying to avert the tariffs," he writes.

And yet the tariffs were imposed anyway.

Meanwhile, the Trump administration's rationale for tariffs appears to be shifting. "If companies move to the United States, there are no tariffs," Trump posted in all-caps on his Truth Social platform Tuesday.

That is an economic argument, not a national-security case. No wonder businesses are confused.

Lutnick suggested late Tuesday that the tariffs may be short-lived. Mexico and Canada were negotiating, he said on Fox News. Trump was like to say he would "meet you in the middle. And we'll probably be announcing that tomorrow," Lutnick said, without giving further details.

Torsten Slok, chief economist at private-equity firm Apollo, recently reviewed corporate-investment data collected by regional Federal Reserve banks. Those data showed capital-expenditure plans ramping up in November, December, and January. "In other words, sentiment was stronger after the election, where capex plans really started moving higher," Slok said on a client call. "But the data out for February has shown some of a reversal, where capex plans have now pulled back."

That suggests companies aren't rushing to rebuild factories in the U.S., despite the tariff push.

Slok doesn't expect the economy to enter a recession, but the signs so far correspond to a "stagflation shock, where you will have a modest downward pull in GDP growth, [and] a modest upward push on inflation."

Investors in a difficult environment like this tend to turn to safe-havens. And yet one important haven, the U.S. dollar, isn't behaving as expected. DYX, a trade-weighted index of the dollar against major currencies, fell near a percentage point on Tuesday as tariffs went into effect.

That isn't just a market anomaly, it's a potential problem for the Trump administration's analysis of tariffs. Bessent has said, including in his Senate confirmation hearings, that he expects the dollar to appreciate as tariffs go into effect, softening the impact on consumers, who will then have more purchasing power even as goods get more expensive. But a richer dollar hasn't come to pass.

The Treasury Department didn't respond to a request for comment.

Meanwhile, the yield on 10-year Treasury notes has fallen to near 4.2% this week after rising above 4.6% in mid-February. That decline in yields, which pushes bond prices higher, may appeal to Bessent, who has said the administration is focused on the 10-year yield, since consumer interest rates rise and fall along with it.

If the price of financing government debt is growing cheaper, though, it is happening for the wrong reasons. "The rally began with policy and evolved into concerns about growth," writes Barry Knapp of Ironsides Macroeconomics in a note to clients.

Fiscal policy will add to questions about the economic trajectory. Congress is proceeding slowly with negotiations over a tax cut that is expected to cost at least $4.5 trillion. That cut is likely to add to the deficit, currently running near $2 trillion. The new debt issuance may drive Treasury yields back up.

But before Congress can vote on tax plans, the Trump administration is effectively raising taxes through its new tariffs.

"For many families, the resulting financial loss could rival the blow they would suffer if Congress allowed the 2017 taxpayer relief law to expire," Sepp said in a statement.

President Trump will have an opportunity to make his case for his policies at a joint address to Congress Tuesday night. But whatever he says, Americans will soon start feeling the results of his policies in their pocketbooks and retirement accounts. He may not listen to the leaders of Mexico and Canada. It remains to be seen if he will listen to anyone else -- including U.S. investors.

Write to Matt Peterson at matt.peterson@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

March 04, 2025 17:36 ET (22:36 GMT)

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