By Wei Hongxu
Recently, U.S. President Donald Trump has once again brought up the issue of tariffs. He announced that starting in March, he would impose a 25% tariff on Canada and Mexico. Additionally, he stated that tariffs on Chinese imports would increase by another 10%, bringing the total tariff on Chinese goods to 20%. This move has caused the capital markets, which had previously relaxed after Trump delayed tariff hikes, to become tense once again. It has also triggered a ripple effect in international markets. How will Trump’s tariff policy impact the economy? What is the outlook for the U.S. economy? These questions are once again raising concerns and uncertainties in the market.
In reality, whether Trump delayed tariffs as he did earlier or reinstated and increased them now, tariffs remain a political tool for him. U.S. Treasury Secretary Scott Bessent stated not long ago that the Trump administration “was working to bolster the private sector’s contribution to job creation, partly by slashing regulations, extending tax cuts and rebalancing the U.S. economy through tariff policies”. In this context, tariff policy can be seen as one of the key pillars of Trump’s “Make America Great Again” agenda. Of course, this is different from Trump’s earlier focus on restoring trade balance in the U.S. In this new phase, the flexibility of tariffs targets a broader range of goals, including revitalizing the economy, encouraging investment to return, reducing the budget deficit, and more. Tariff policy is now intertwined with issues like immigration, investment, and the war on drugs, demonstrating its flexibility. However, this also increases the uncertainty surrounding the policy. Tariffs may be delayed or reduced if certain goals are met, or they may be increased if other issues worsen. This is why Trump’s tariff policy seems to be in a constant state of flux, which is also why the market feels so confused.
The uncertainty surrounding Trump’s tariff policy is closely tied to the evolving structural contradictions within the U.S. economy and society. A senior researcher at ANBOUND has previously pointed out that Trump’s obsession with the trade war is driven by three main factors. First, the geopolitical tools available to him are not very effective, with tariffs being one of the few easily usable options. Second, based on the theory of “buyer-seller market imbalance” (2010, ANBOUND), Trump firmly believes that being the “buyer”, he has the upper hand. Third, Trump views the impact on inflation as limited, hoping to leverage the external effects of tariffs to resolve internal contradictions within the U.S. economy. In this sense, the fluctuation of Trump’s tariff policy is closely tied to the current economic situation in the U.S., and this is also leading to the increasing politicization of the American economy.
After a period of sustained prosperity during the Biden administration, the U.S. economy is increasingly showing signs of sluggish growth. The latest data reveals that the U.S. real GDP annualized quarterly growth rate for the fourth quarter of last year was 2.3%, unchanged from the initial estimate. However, compared to previous quarters, it indicates a continued slowdown. Following a 2.8% growth in 2024, the latest forecasts show that U.S. GDP will grow by just 2.3% this year, as slowing job growth has dampened consumer demand. Data from January shows a 0.2% decline in personal consumption expenditures (PCE), and after adjusting for inflation, real PCE fell by 0.5%, marking the largest monthly decline in nearly four years. These figures suggest that, after the retreat of “Bidenomics”, Trump 2.0 faces increasing challenges in maintaining sustained economic growth in the U.S.
In fact, the senior researcher at ANBOUND has been warning about the fragility of the U.S. economy as early as 2024. Especially concerning employment and inflation, it has been pointed out that one should not only look at the seemingly impressive overall data to analyze and understand the issues within the U.S. economy, which is far from as healthy as the data suggests. The new U.S. Treasury Secretary Bessent has recently acknowledged that the underlying vulnerability of the U.S. economy is much greater than what the economic indicators show. He pointed out that while U.S. GDP growth is strong and unemployment is low, factors like interest rate volatility, sticky inflation, and job growth heavily reliant on the public sector are hindering economic development. Bessent attributed “sticky inflation” primarily to the excessive government spending and regulatory barriers that occurred under former President Biden’s leadership. He said, “The previous administration’s over-reliance on excessive government spending and overbearing regulation left us with an economy that may have exhibited some reasonable metrics but ultimately was brittle underneath”. He also highlighted that, over the past 12 months, 95% of job growth has been concentrated in public and government-related sectors, such as healthcare and education, where wages grow more slowly and productivity is lower compared to the private sector. At the same time, employment in manufacturing, metals, mining, and information technology sectors has shrunk or stagnated during the same period. “The private sector has been in recession”, Bessent said. “Our goal is to re-privatize the economy”.
What Bessent said is not merely a political attack against the Biden administration. According to official statistics, in 2024, the total non-farm employment in the U.S. exceeded 159 million people, an increase of 2.32 million from 2023. However, the main contributors to job growth were concentrated in five sectors: education and healthcare, government, trade and transportation, leisure and hospitality, and infrastructure. Together, these sectors accounted for more than 2.1 million new jobs. The sector with the most significant growth was education and healthcare, which added 970,000 jobs over the year. In contrast, the manufacturing sector saw a decline. In 2024, manufacturing employment dropped by 87,000, with 24,000 of those jobs lost in computer and electronics manufacturing. Even more puzzling is that, despite the surge in AI investment, the information services sector saw a decrease of 8,000 jobs. This might be one of the reasons why Silicon Valley has seen increasing support for Trump. This structural shift in employment raises questions about whether the Biden administration might have “played it smart” by increasing public sector jobs, especially temporary positions, to boost employment figures.
In this regard, the highly “politicized” employment policies of the Biden administration, while pushing various indicators towards an impression of “prosperity”, have also deepened the structural contradictions in U.S. employment and economic performance. The ongoing decline in manufacturing and the job losses it brings have, in fact, boosted support for Trump’s “Make America Great Again” campaign. This can be seen as a key factor contributing to his potential return to power. Therefore, it is natural for Trump in his “2.0” phase to focus on using his economic policies to win over voters. For Trump, promoting the return of manufacturing through tariff barriers not only helps reduce the trade deficit but also creates jobs, serving as a crucial method for transforming the U.S. economic structure. Previously, when meeting with Apple CEO Tim Cook, Trump emphasized that he wanted to impose “comprehensive tariffs” to achieve the goal of bringing manufacturing back to the U.S. It was not just Apple. Trump had similar plans for pharmaceutical industry giants as well. According to insiders, Trump had met privately with the CEOs of companies like Eli Lilly, Merck, and Pfizer, warning them that tariffs were coming and urging these companies to shift their overseas production back to the U.S.
It should be noted that the Biden administration’s approach of increasing public sector jobs is also one of the reasons why U.S. inflation has been slow to ease. The latest data shows that the U.S. January PCE price index rose by 2.5% year-over-year. While this meets expectations and is a slight decrease from the 2.6% reported in December, the month-on-month inflation level has risen again. The January PCE price index increased by 0.3% compared to December, matching the previous month’s increase. Inflation in the services sector remains high. In January, core service prices, excluding housing and energy, increased by 0.2% month-on-month, while goods prices, excluding food and energy, rose by 0.4%, marking the largest monthly increase since early 2023. The overall core inflation, excluding estimated prices, which the Federal Reserve has particularly focused on in recent months, also rose by 0.2% in January.
Given that Trump had just taken office in January, the persistent inflation in January is less likely to be attributed to the “threat” of Trump’s tariff policies and more to what Trump himself would call the “Biden effect”. This is closely related to the Fed’s decision last year to lower interest rates despite inflation’s persistence. Trump had repeatedly criticized Fed Chairman Jerome Powell for making “inappropriate” rate cuts, which he argued were aimed at helping Biden’s re-election campaign. Trump’s overwhelming victory last year was largely attributed to how “Bidenomics” during the Biden administration fueled inflation in the U.S. To address inflation, Trump will undoubtedly continue to use political means, adjusting both economic and trade structures as part of his broader strategy.
Importantly, for Trump, the impact of tariff policies on inflation carries a lot of uncertainties. In particular, he hopes to reduce fiscal spending and the deficit through new departments under Elon Musk, which could help ease inflationary pressure. This would also lead to cuts in public sector jobs, which could suppress demand. Apollo Global Management has pointed out that layoffs related to efficiency measures in government departments could reach 300,000, and when including affected contractors, the total number of job losses could approach 1 million. The firm is concerned that in the short term, the economy and markets could face downside risks. This “counterattack” against the Biden administration will certainly have an impact on inflation and consumer demand. It will also bring changes to employment and economic structures, aligning with Bessent’s goal of boosting private sector growth.
In this context, whether it is through tax cuts, spending reductions, or tariff increases, these policies are essentially part of a broader fiscal tightening process, leading to an overall reduction in the fiscal deficit. Tariffs may play a role in balancing the effects between tax cuts and spending reductions. Therefore, the level of tariffs not only reflects changes in trade and employment but also depends on inflationary trends, fiscal balance, and the state of the fiscal deficit.
Final analysis conclusion:
While “Bidenomics” brought prosperity to the U.S. economy, it also led to an increasingly fragile economic structure. U.S. Treasury Secretary Scott Bessent stated that the underlying vulnerability of the U.S. economy is greater than what the economic indicators show. The Trump administration is working to strengthen the private sector’s contribution to job creation, with measures including regulatory cuts, extending tax cuts, and using tariff policies to rebalance the U.S. economy. This means that in the future, Trump’s economic policies will become increasingly politically driven, with tariffs serving as one of the tools to achieve his political goals.
Wei Hongxu is a Senior Economist of China Macro-Economy Research Center at ANBOUND, an independent think tank.