Will Trump's tariffs and deportations bring inflation?

December 8, 2024

Will Trump's tariffs and deportations bring inflation?

That is the big question that everyone is trying to answer. The financial markets seem very positive about the Second Coming of Trump. Everyone thinks that everything will work out great. Hopefully it does. We're all counting on Trump and his team to keep the party going. The economy is doing super well as it is yet Trump will change it big time. There will be high tariffs on many foreign imports and there will be mass deportations of lower wage workers. These measures could lead to inflation, but that is not a foregone conclusion. 

Tariffs and Inflation 

Historically, the imposition of tariffs on foreign goods has often led to increased consumer prices, contributing to inflation. However, there have been instances where tariffs did not result in significant inflationary pressures, influenced by various economic factors and policy contexts. Domestic and international examples:

• Steel Tariffs (2002): In March 2002, President George W. Bush imposed tariffs of up to 30% on steel imports to protect domestic producers. While these tariffs led to higher steel prices domestically, the overall impact on consumer price inflation was minimal. This limited effect was partly due to the relatively small share of steel in consumer goods and the global economic conditions at the time. 

• U.S. Tariffs During the Trump Administration (2018-2019): Tariffs on Chinese Imports: The Trump administration imposed tariffs on a range of Chinese goods, aiming to address trade imbalances and intellectual property concerns. Studies indicated that while these tariffs increased costs for U.S. importers, the pass-through to consumer prices was limited, resulting in a modest impact on overall inflation. 

• In the Smoot-Hawley Tariff Act of 1930, which aimed to protect American industries during the Great Depression, the plan to impose sweeping tariffs led to international trade retaliation. 

• European Union's Common External Tariff: The EU imposes common external tariffs on non-member countries. The impact on inflation within member states has been minimal, largely due to the high volume of intra-EU trade and diversified import sources.

• Japan's Agricultural Tariffs: Japan maintains high tariffs on certain agricultural products to protect domestic farmers. While these tariffs lead to higher prices for specific goods, the overall inflation rate remains low, influenced by Japan's broader economic conditions and deflationary pressures.

• China has effectively utilized tariffs strategically in trade wars to protect China's economy. 

Can countries impose tariffs without causing inflation?

There can be other factors and mitigation measures keeping prices the same despite tariffs. Examples: 

• Absorption of Costs by Exporters: In some cases, foreign exporters may reduce their prices to maintain competitiveness, absorbing part of the tariff costs and mitigating the impact on consumer prices. 

• Exchange Rate Adjustments: Currency fluctuations can offset tariff effects. For instance, if the exporting country's currency depreciates relative to the importing country's currency, it can counterbalance the tariff's impact, keeping import prices stable.

• Supply Chain Flexibility: Businesses may adjust their supply chains to source from countries not subject to tariffs, thereby avoiding increased costs and preventing price hikes for consumers.

The relationship between tariffs and inflation is complex and influenced by various factors, including the scope of tariffs, the elasticity of demand for affected goods, currency movements, and the overall economic environment. While tariffs can lead to higher consumer prices, their impact on overall inflation is not uniform and can be mitigated by strategic economic responses and market dynamics.

Will Mass Deportations Bring Inflation?

Trump's mass deportation program is yet to be implemented so it is impossible to know if it will actually result in inflation or not. Trump's mass deportations and ending birthright citizenship, reflect a stringent approach reminiscent of historical U.S. immigration policies, such as the Chinese Exclusion Act of 1882 and the National Origins Act of 1924, which aimed to restrict certain immigrant groups, but that did not create historically significant inflation. Internationally, countries like Germany and Japan have implemented strict immigration controls, though not to the extent of mass deportations. They have not suffered from excessive inflation.

The impact of illegal immigration on wages and inflation is a multifaceted issue that has been extensively studied, yielding varied conclusions. Some studies suggest that an influx of undocumented workers can exert downward pressure on wages, particularly for low-skilled native workers who compete for similar jobs. 

• Industries heavily reliant on immigrant labor, such as agriculture and construction, may experience wage suppression due to the availability of undocumented workers willing to accept lower wages. This dynamic can lead to reduced earnings for native workers in these sectors. Conversely, some analyses argue that immigrant labor can complement native workers by filling essential roles, thereby enhancing overall productivity without significantly depressing wages. 

• An increased labor supply from undocumented immigration can help reduce prices by mitigating labor shortages, which might otherwise lead to wage-driven inflation. For example, the Federal Reserve has noted that immigration contributes to labor force growth, supporting economic stability and moderating inflation pressures. 

Policies aimed at reducing undocumented immigration can lead to labor shortages in sectors like agriculture and construction, resulting in inflation with higher consumer prices for goods such as produce, dairy, meat, and for services such as construction and facilities maintenance. 

• In the European Union. many leaders propose migration curbs. However, some economists argue that such measures may not align with economic fundamentals because immigration can alleviate labor shortages, support economic growth, and reduce inflation. 
• In Australia, high levels of immigration have been associated with wage suppression and reduced inflation, influencing central bank policies and economic dynamics. 
• In Japan, there is almost no immigration allowed and there is practically zero inflation. 
• In India and China, economic and political conditions are not conducive to attracting immigration. The vast supply of local labor supports economic growth without excessive inflation. 

The effects of illegal immigration on wages and inflation are complex and context-dependent. Immigrants and undocumented workers can exert downward pressure on wages in certain low-skilled sectors, playing a roles in supporting economic growth without increased inflation. 

Is inflation good or bad?

Whether you like inflation (higher prices across the board) or not is up to you. Many believe that deflation is worse that inflation, especially for business owners. Whether inflation is "good" or "bad" for you, the economy, or the country is an opinion and as such is contextual and debatable. Now, whether prices increase or decrease over time is a measurable fact. Numbers don't lie in that regard. The future has not been created yet and no one knows whether or not Trump's tariffs and deportations will lead to inflation and higher prices for all of us. 

If we have to bet, we would say that Trump's tariffs and mass deportations will in fact cause significant inflation. However, we have been wrong many times before, especially in many things Trump. Most recent mistake about Trump was thinking that buying shares of the Trump Media & Technology Group company (Ticker: DJT) would be a good "investment" for us to make us a quick buck and brag about it. We were wrong and are down 30% on our DJT stock "investment". We thought that Trump would make us money, and so far the man has made us lost money on his trademark media and technology company. So far it has been Elon Musk the one printing money off Trump's back. We'll see what future the Trump Musk bromance can create for us as they aim to take America back, whatever that may mean today or in the future. 

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