Feb 5, 2025
Economist and former Treasury Secretary Larry Summers isn’t known for sugarcoating his views on policy — and he’s making no exception when it comes to President Donald Trump’s sweeping new tariffs.
“This is a self-inflicted wound on the American economy,” Summers said in a recent interview with CNN’s Manu Raju. “I’d expect inflation over the next three or four months to be higher as a consequence, because the price level has to go up when you put a levy on goods that people are buying.”
Advertisement
While Trump agreed to pause tariffs on Mexico and Canada for 30 days on Feb. 3, the planned measures remain substantial: the U.S. will impose a 25% tariff on imports from Canada and Mexico, with Canadian energy resources facing a reduced 10% tariff.
Summers warns that these tariffs will ultimately raise costs for American consumers.
“This is what economists would call a self-inflicted supply shock," he explained. "It means less supply because we're taxing foreign suppliers, and that will mean higher prices and lower quantities.”
‘Push the economy downwards’
Tariffs don’t just affect the prices of imported goods at the checkout — they also increase costs for businesses that rely on foreign materials. Summers explained that any company using inputs from Canada or Mexico will face a “cost shock” — and they won’t absorb it quietly.
“They’re going to pass it on to consumers,” he said.
That ripple effect may spell trouble for the broader U.S. economy.
Advertisement
“When consumers are paying those higher prices for the imported goods, they're going to have less money to spend on other things, and that's going to tend to push the economy downwards as well,” Summers said.
Summers has long warned that Trump’s policies could fuel inflation. In a November interview with CNN, he predicted that if Trump followed through on his campaign proposals, “there [would] be an inflation shock significantly greater than the one the country suffered in 2021.”
A 2019 study from the Journal of Economic Perspectives by economists from the Federal Reserve Bank of New York, Princeton University and Columbia University analyzed the effects of Trump’s tariffs through late 2018.
Their conclusion was clear: “Our results imply that the tariff revenue the U.S. is now collecting is insufficient to compensate the losses being borne by the consumers of imports.”
Must Read
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — are you doing the same?
- Thanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don't have to deal with tenants or fix freezers. Here's how
- Robert Kiyosaki says this 1 asset will surge 400% in a year and begs investors not to miss this ‘explosion’
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
Tariffs as leverage?
While the economic consequences of tariffs seem clear, Trump is using them as a bargaining chip to advance his policy goals — particularly in addressing illegal immigration and fentanyl. But can tariffs help achieve those objectives?
Summers is skeptical.
Advertisement
“I don't think so,” he told Raju. “Think about what giving into a bully does? It invites more bullying … On the playground or in international relations, bullying is not an enduringly winning strategy.”
Despite Summers’ doubts, both Mexico and Canada have taken action as part of an agreement with the U.S. to delay the tariffs.
Mexican President Claudia Sheinbaum recently announced on X that 10,000 National Guard troops will be deployed to the northern border to combat drug trafficking, particularly fentanyl.
Meanwhile, Canadian Prime Minister Justin Trudeau said the country will be “reinforcing the border with new choppers, technology and personnel, enhanced coordination with our American partners and increased resources to stop the flow of fentanyl.”
Trudeau also said Canada will appoint a “Fentanyl Czar,” officially designate cartels as terrorist organizations and establish round-the-clock surveillance on the border.
You May Also Like
- Turning 50 with $0 saved for retirement? Most people don’t realize they’re actually just entering their prime earning decade. Here are 6 ways to catch up fast
- Inside a $1B real estate fund offering access to thousands of income-producing rental properties — with flexible minimums starting at $10
- Vanguard’s outlook on U.S. stocks is raising alarm bells for retirees. Here’s why and how to protect yourself
- Here are 5 easy ways to own multiple properties like Bezos and Beyoncé. You can start with $10 (and no, you don’t have to manage a single thing)
Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
