Can the US consumer survive a trade war?

The Federal Reserve Bank of Boston recently forecast that both the imposed 10% tariff hike on China and the proposed 25% tariffs on Canada and Mexico would, at most, contribute a 0.8% increase in inflation relative to baseline. 

This estimate is even less severe than it might seem at first glance: The Fed’s model assumes that consumers would not change their buying preferences, which, in some cases discussed below, they likely would.

Nasty, brutish and … short?

Similarly, a study by the Peterson Institute for International Economics — one that is highly critical of the announced tariffs — forecasts that, assuming Canada and Mexico impose retaliatory tariffs, U.S. inflation would rise 0.9% from baseline in 2025 before tapering off.

It is interesting to note, however, that their model depicts far more drastic outcomes for both Canada and Mexico, which would suffer a respective 3% and 4.1% boost to baseline inflation in the same year.

Before the invention of total war in the 19th century, a vast array of wars — including trade wars, in which “war” was more than a metaphor — could broadly be described as limited engagements over specific and finite claims (say, over border territories).

Put another way, wars were lost not by suffering annihilation, but rather by being the first to cry uncle.

The ongoing trade war between the U.S. and China, which is a conflict between two major powers for global supremacy, shares most in common with the modern total wars that we have come to know and despise. That is not to say that diplomacy has no potential here to deescalate trade disputes, but rather that U.S. wariness over China runs much deeper than the manufacture of consumer goods.

But what about Canada and Mexico, our neighbors and allies (since 1812 and 1916, anyways)? Should consumers really be bracing themselves for a protracted trade conflict with these two countries, or are these tariff threats simply means by which certain policy aims can be achieved? 

If the latter, how likely is it that the U.S. will be successful? Success appears more than plausible, given the rapidity with which both countries’ leadership acceded to U.S. demands over border security in exchange for a one-month delay — and, as previously mentioned, the disproportionate jolt to inflation that Canada and Mexico would likely sustain.

A near miss, or a sure thing?

Yet even assuming that tariffs against Canada and Mexico are meant for the long run, how will they affect consumers?

There are two theories — theories being the operative word here, since the U.S. has not wielded tariffs of this magnitude in some time — on whether Trump’s tariffs will result in significant inflation for consumer goods.

The first is the popular consensus that yes, they will: Importers will pay these tariffs and will pass on the price increases to the consumer.

The second, most recently and vigorously articulated by economist Stephen Miran, predicts that the U.S. dollar will rise against the Mexican peso (or the Chinese yuan or the Canadian dollar) in near proportion to the tariff rate, giving Americans more purchasing power for imports and greatly offsetting the risk of inflation.

As I stated in the article linked above, Miran’s argument is complex and well worth reading — all the more so because Trump has since nominated Miran to chair his Council of Economic Advisers.

There is the risk, however, that even if Miran’s model could pan out in theory, it would be prevented from doing so in practice. 

“Greedflation” is the contentious idea that corporations hid behind the inflationary environment of 2020-22 — which was primarily caused by stresses on global supply chains, massive government stimulus and, after Russia’s 2022 invasion of Ukraine, skyrocketing energy prices — to justify price increases that were mostly motivated by increasing profits.

Many economists believe that the general public’s picture of inflation as a running bull allowed companies to pad their margins, even if they were relatively insulated from the direct causes of inflation. But discerning which price hikes were caused by “real” inflation and which were caused by simple greed would be a messy, if not impossible, task.

Concerning inflation, tariffs are both a genuine risk and a convenient excuse. Yet not all industries will be impacted equally. Below, I will focus on different sectors that are vulnerable to upcoming trade disruptions, as well as some that should be more or less shielded from upset.

Consumer goods

At the risk of extending this prologue, I should note that tariffs can accomplish one of two goals. Like any other tax, tariffs can raise money for the U.S. government. But they can only do so in proportion to consumers’ refusal to change their buying habits.

On a longer scale, tariffs can protect and even revitalize domestic industries. Yet, as one factor among many, this goal is dependent on consumers purchasing U.S.-made products with domestically sourced inputs. Overall, these two aims are not mutually exclusive, but they are zero-sum.

Automobiles

Automakers were quite vocal about the impact of tariffs in their most recent round of earnings calls. Ford CEO Jim Farley expressed his confidence that his company could weather “a few weeks of tariffs” against Canada and Mexico. 

But Farley cautioned that, if tariffs were left in place for longer, they “would have a huge impact on our industry with billions of dollars of industry profits wiped out and adverse effect on U.S. jobs.” He concluded that “tariffs would also mean higher prices for customers.”

Cox Automotive rightly notes that the domestic auto market is deeply enmeshed with operations in both Canada and Mexico, and states that “of the 50 best-selling models in the U.S. market, which accounts for about 60% of the market volume, half would be directly impacted by the tariffs.” Cox adds that “no mainstream automaker will be immune from the pain.”

According to analysis from Bank of America, the auto industry is the most reliant on imports among U.S. manufacturers, with imports accounting for 24% of its total revenue. Behind fuels ($284 billion), auto parts ($264 billion) account for the bulk of intermediate goods imported to the U.S.

If there is a consumer-facing sector for which the panic surrounding tariffs would be justified, it seems to be the auto industry. Domestic models are too reliant on imported materials, while affordable Chinese-made cars have been shut out of the market since October 2024, when then-President Joe Biden raised tariffs on Chinese electric vehicles to 100%. Consumers have few alternatives, other than to purchase cars of Korean (currently under no tariffs, except for light trucks) or Japanese (under a 2.5% tariff) make.

As a side note, domestic light trucks — the core segment of legacy OEMs — should benefit from Trump’s deregulatory stance, under which emissions standards will be loosened and EV mandates will be reversed or struck down.

Trump’s threat of 25% tariffs on Canadian and Mexican imports is, in all probability, being used to extract favorable terms from the countries. If implemented, it is likely that these tariffs would either be less than 25% or would be only for the short term — perhaps because inflation would force one of the two sides to cry uncle.

China is a different story, as tariffs against many Chinese goods — including Chinese steel and aluminum used in Mexican automotive plants — have been in place since either Trump’s first term or Biden’s administration. A trade war of modest intensity with China appears to have bipartisan support, so U.S. consumers should not expect to Build Their Dreams anytime soon.

Food and beverage

The outlook for food and beverages is less clear-cut than that of automobiles, since consumers generally have domestic, tariff-exempt alternatives.

First, however, the big one: Roughly half of all Oreos sold in the U.S. are produced at Mondelez’s plant in Salinas, Mexico, and then imported. Vegans might want to consider private-label substitutes.

Fresh produce is another segment that will see a shake-up if lasting tariffs against Mexico do become reality. Unsurprisingly, about 90% of avocados sold in the U.S. are imported from Mexico. On a larger scale, around one-fifth of fruits and one-quarter of vegetables consumed in the U.S. come from Mexico, per analysis from Texas A&M. 

Besides avocados, the most vulnerable items would be limes, peppers, cucumbers, and offseason berries and tomatoes. Consumers’ solution here might be to eat more produce in line with their seasonality and locale. But Mexican agriculture’s reliance on the U.S. market is a double-edged sword when it comes to tariffs: With roughly 80% of export sales going north of the border, avocados represent Mexico’s fourth most valuable agricultural export, behind beer, tequila and berries.

Beer is an interesting segment, since the U.S. is not lacking in domestic production. Constellation Brands, which owns Modelo and Corona, does not own any breweries whatsoever in the U.S. Yet 82% of its total company sales and 95% of its operating income come from selling beer to the U.S.

Consumers could conceivably replace these products with domestic options, or they could branch out into the exciting worlds of craft beer or Trappist brews — that is, assuming Belgium does not get slapped with tariffs.

Regarding meat, the U.S. is a net importer of beef from Canada and a net exporter of pork and chicken to Mexico. Steaks, prices of which rose nearly 3% from December to January, are likely set to become even more expensive. Consumers might therefore shun beef as being what’s for dinner and instead turn to white meat (or the other white meat) as a domestic surplus floods the market.

Finally, cooking oils could be impacted by tariffs, but it is doubtful that consumers would notice. According to the U.S. Department of Agriculture, Americans consumed 12.5 million metric tons of soybean oil in 2024. Rapeseed oil was a distant second, with only(!) 4.5 million metric tons consumed.

Better known as canola oil (an acronym for Canada oil low acid), rapeseed oil is largely imported from — surprise — Canada. Thus, consumption would likely take a hit if tariffs against Canada were imposed. But the U.S. is one of the world’s leading producers of soybean, with the bulk of its exports going to China.

If the trade war with China worsens, as seems likely, the U.S. could produce more soybean oil from its domestic surplus to compensate for the loss of canola oil. Both products are neutral oils with comparable smoke points (soybean oil’s is slightly higher) and nutritional values, so this substitution can be made freely. 

Electronics

In retaliation for the U.S.’ 10% tariffs on its exports, China announced in early February that it would restrict exports of five rare earth minerals that are used in a variety of electronic products. This limitation falls short of an absolute ban, and the sectors most affected — defense and alternative energy — are largely not consumer-facing.

Still, China dominates the global market for rare earth minerals, and this latest move is one in a series of restrictions that put electronics manufacturers in a vise. Earlier this year, China, which is responsible for nearly three-quarters of the global lithium supply, floated the idea of limiting exports necessary to make batteries for EVs and consumer electronics. This proposal has yet to become policy.

Apple, having long seen the writing on the wall, is well underway in divesting its operations from China. In the previous tariff cycle, Apple was able to finagle an exemption for the iPhone, though it appears to have had no such luck this time around.

Little matter, however, as Apple has been manufacturing iPhones — the product responsible for more than half the company’s revenue in the past quarter — in India since 2017. It accelerated plans to ramp up its Indian operations following Trump’s reelection, not only because it sought protection against tariffs but also because the country is home to the world’s second-largest smartphone market (behind China).

Major appliances are even more insulated from a variety of tariff scenarios. Whirlpool — which owns brands like KitchenAid, Maytag and … Whirlpool — sources 80% of its products sold in the U.S. domestically. Furthermore, 80% of the inputs used in its U.S. manufacturing are sourced domestically. The remaining 20% of inputs by cost are sourced 2-to-1 between Mexico (primarily for refrigerators) and China (mainly for microwaves).

In a speech before Republican lawmakers in late January, Trump announced plans to impose tariffs on semiconductors “in the very near future.” Taiwan is the leading supplier of semiconductors, responsible for more than half of global supply under the Taiwan Semiconductor Manufacturing Co. (TSMC). 

Taiwan does not have formal diplomatic relations with the U.S., as its independence from China is a matter of serious contention. Even so, Taiwan is exempt from the recent 10% tariff on Chinese goods.

At the time of writing, these tariffs on semiconductors have yet to materialize. It is somewhat doubtful that they will: Since receiving more than $6 billion in subsidies under the CHIPS and Science Act in 2022, TSMC has been building an enormous chip fabrication plant in Arizona. This plant is expected to begin mass production in the first half of 2025.

Trump has stated that he would like to revoke the subsidies promised to TSMC under Biden. These grants account for 10% of TSMC’s pledged investment of $65 billion in U.S. production. Taiwanese officials sped to Washington after Trump’s comments, presumably in an attempt to negotiate.

Given the importance of Taiwan in the U.S.’ rivalry with China — not to mention Trump’s self-professed love of dealmaking, as seen in the one-month delay granted to Canada and Mexico — the U.S. is likely not committed to shutting out Taiwan or its semiconductors.