The double-edged sword of Trump’s tax cuts and tariffs

By Nigel Green

The economic strategy that’s been gaining ground under Trump 2.0 isn’t just about tax cuts. It’s about tariffs. And that’s where things are about to get messy for economic growth.

The latest announcement of a new round of tariffs, including a 10% hike on Chinese goods and an additional 25% on imports from Mexico and Canada, is more than just a headline. It’s the beginning of a real drag on the economy, one that tax cuts alone can’t counterbalance.

The US is already facing the consequences of this trade war. The recent announcement—affecting goods from China, Mexico, and Canada, which together account for 43% of total US imports—could end up strangling the very businesses that tax cuts were meant to help.

Add 10% to the cost of your everyday consumer goods from China, or 25% on materials from North America, and suddenly that cheaper tax rate doesn’t feel so impactful.

For instance, electronics, which are heavily reliant on Chinese components, have already seen price hikes due to tariffs.

Smartphones, for example, saw an increase in price by around $200 in 2024, with many consumers now bearing the brunt of higher costs. That’s not just a pocketbook problem; it’s a consumer confidence problem. If consumers are spending more on basic goods, where is the room for growth in other sectors?

Sure, tax cuts mean more cash for businesses, but let’s be real: that’s not the whole story.

Companies are facing tough decisions. Do they use their tax savings to pay down debt, or do they try to offset the pain of tariffs by increasing prices for their customers?

Many are doing both, but the end result is higher inflation, which erodes consumer spending power. That’s the kind of inflation you can’t escape.

Even corporate giants like Apple and Ford are seeing significant price increases across their product lines, directly tied to the tariff-driven cost hikes.

According to a 2024 report from the US Chamber of Commerce, 60% of US manufacturers already report lower profits due to the escalating trade war. And this is before the impact of these newly announced tariffs kicks in. That’s not a favourable environment for growth.

Tariff toll on global trade

The drag doesn’t stop at the US border. Global trade is interconnected, and higher tariffs hurt economies worldwide. Emerging markets, many of which rely on America for demand, are already showing signs of strain.

The World Bank’s forecast for 2025 now predicts a 1.5% lower growth trajectory for developing economies in Latin America and Asia due to ongoing tariff conflicts with the US. This is especially problematic for countries like Mexico, whose economy is heavily tied to American exports.

Rising tariffs on Mexican goods, particularly cars and agricultural products, will push costs higher, leading to even more inflationary pressures.

European countries, many of whom were already facing their own inflation woes, are seeing trade disruptions. The eurozone’s export-driven recovery could take a hit, especially with US trade tensions remaining a wildcard.

The interconnectedness of global supply chains means that tariffs imposed in one region impact across others, creating a perfect storm for an economic slowdown.

Yes, tax cuts can be helpful—especially for corporations that can reinvest that cash into growth. But tax cuts only go so far.

You can lower corporate tax rates, but if those same companies are struggling to import components or face higher operating costs due to tariffs, the tax breaks won’t provide nearly enough cushion. A company may have more cash on hand, but it still can’t escape the inevitable price hikes or production delays.

According to economic forecasts for 2025, the impact of the new tariffs could reduce US GDP growth by 0.5% over the next two years.

Meanwhile, the predicted benefits of Trump’s tax cuts are already being factored into the economy. They’re expected to provide only a marginal boost of around 0.2% to GDP over the same period, which isn’t enough to outweigh the damage done by tariffs.

So, let’s put it all together. While Trump’s tax cuts sound appealing on paper, the hard reality is that tariffs are likely to outweigh them.

Higher prices, lower consumer spending, and disrupted global trade all add up to a significant drag on the economy. Businesses may have more cash, but if their supply chains are pinched, their profits will be too.

The economic future is far more uncertain than the optimists might like to admit, and the fallout from rising tariffs is already setting in.

Markets may be cheering for tax cuts, but they won’t be able to ignore the likely tariff-induced slowdown for much longer.

(Author is deVere Group CEO and Founder)

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