New tariff threats by President-elect Donald Trump would likely impact state and local government finance, economists and analysts say, though exactly how remains unknown.
In campaign statements, and a post-election
Border cities like San Diego have obvious concerns about the impact of a trade war, but the ripples would extend into the South and Midwest, analysts say.
Given the source of the tariff threats, it is hard to make fine-tuned predictions of an outcome.
"I don't have a specific analysis, as that would be a wasted effort," said Christopher Thornberg, founding partner of Los Angeles-based research and consulting firm Beacon Economics. "Trump came into his first administration screaming across-the-board 10% tariffs. And did nothing of the sort."
This administration will be a "louder clone of the last one," so claims of across-the-board 25% tariffs are meaningless, Thornberg said. "This is just the bully boy pointing out that he has fists and isn't afraid to use them."
The greatest impact of the proposed tariffs, or retaliation from other countries, would be to resource-rich states and those dependent on trade with Canada and Mexico, according to Fitch Ratings. Resource rich states include those dependent on the automotive, oil and gas, and agricultural industries for income.
The threat is obvious in San Diego, home of
San Diego Mayor Todd Gloria maintains strong relationships and is in constant communication with the Tijuana, Mexico, mayor as well as state and federal officials in Mexico, "to ensure the health and strength of our binational economy and shared priorities," said Rachel Laing, a spokeswoman for Gloria.
"Mexico is California and San Diego's No. 1 trading partner, and our economies are inextricably linked," Laing said.
"Tariffs have the potential to severely impact not only our economy and jobs, but also our constituents' pocketbooks, as it will be consumers who end up paying tariffs," she said.
"It's really important to note that what we have [to base our analysis on] is what was posted on Truth Social," said Eric Kim, head of U.S. Ratings for Fitch Ratings. "This isn't policy. We can only work with what we have to create a preliminary analysis."
"Public policy change is coming to the United States – that much is clear a month after the elections," wrote Morgan Stanley's Michael D. Zezas, Ariana Salvatore and Bradley Tian in an investor outlook piece published Dec. 8. "The four policy channels that matter most to investors are tariffs, taxes, immigration, and regulation. Less clear are the sequencing and severity of changes."
They called their "base case for U.S. policy path over the next two years, 'Fast Announcement, Slow Implementation."
"In short, we expect the Trump administration to achieve meaningful changes in these four policy channels, but believe practical and political constraints will shape their implementation," the Morgan Stanley analysts wrote. "The announcement of tariff escalation aimed at China could come soon after the inauguration, but with staged implementation."
The Morgan Stanley analysts opined that sequencing and speed of implementation matter – and they think the speed will be slow given the slim majority Republicans will hold in Congress.
"So the bottom line is this: the sequencing and severity of these policy choices will matter a lot, but clarity on both is a work in progress," Morgan Stanley analysts wrote.
The impact of the tariffs depends on what the president-elect does, as opposed to what he threatened, and more importantly, what the other side does in response, Thornberg said, adding "very often it is the retaliation that hurts more than the tariff itself."
Fitch has a neutral outlook for the state and local government sectors.
What could challenge the current economic strength underpinning its sector outlooks is the imposition of a broad tariff regime as Trump proposes, which could trigger retaliatory tariffs and increase the likelihood of a sharp downturn beyond Fitch's expectations, Kim said.
"Louisiana and Texas have the highest amount of international trade exports as a percentage of GDP, with oil and gas exports being a primary driver," Kim said.
The Midwest states have the highest exposure to Canada, China and Mexico, Kim said.
The U.S. and Canada have had an integrated auto manufacturing industry without tariff barriers
New tariffs threaten to unwind much of that integration.
"A big chunk of that is the auto industry in Michigan. So much [of the manufacturing process] just flows back and forth. If the tariffs happen the way it's proposed, it could have an effect," Kim said.
Illinois, as the biggest oil refining state, would also take a hit. Illinois imports a significant amount of oil from Canada.
On the other hand, Trump tends to be supportive of the oil and gas industry, so it would be surprising for him to impose tariffs that would impact those industries, Kim said.
Indirectly, states like South Dakota, Texas, and Alaska could be exposed to retaliatory tariffs, Kim said, adding the U.S. is the biggest exporter of oil and gas, industries that are strong there.
"But, again given Trump's support for those industries, that is unlikely," Kim said.
International gateways like San Diego and Laredo, Texas, could also be pressured, said Michael Rinaldi, a Fitch senior director. "That is something we would look at further down the line. But today, it's not considered something imminent that would cause us to rethink our ratings."
The current tariff rates for China are very high, while tariffs for Mexico and Canada are less than 10%, said Olu Sonola, head of U.S. Economic Research at Fitch Ratings.
"Our assumption is that he would levy 25% tariffs on what is dutiable goods at the moment," Sonola said.
"Our analysis speaks to the uncertainty here," Kim said. "All we have is a very simple, blunt statement from the president-elect."
The Fitch analysts said it's more likely Trump is saber-rattling to gain concessions on immigration from other countries, though he also is a supporter of returning manufacturing to the United States.
"It's clearly part of what the incoming president sees as a very strong negotiating tool so that other countries take the U.S. seriously," Sonola said.
"He says X or Y country has a huge trade deficit with the U.S., so they are ripping us off here and there. And the way to reduce those deficits is to bring manufacturing back to the U.S. as much as possible," he said to explain his understanding of Trump's rationale.
Tariffs are also seen by the president-elect as a revenue generator, so he can lower income taxes, Sonola said.
It's not a sound theory; today tariffs bring in less than $100 billion annually, while income taxes bring in $2.5 trillion, he said. Total U.S. imports in the U.S. are $3 trillion, so even if he places tariffs on every import in the U.S., it would barely replace existing income tax revenues, he said.
The tradeoff for moving goods production to the higher-cost U.S. would be higher prices on the goods, Sonola said; i.e. inflation.
Tariffs are also inflationary.
"It's the importers who are responsible for paying tariffs," Rinaldi said. "The risk is they will pass that on to consumers."
"We did revise our CPI, [consumer price index_] forecast in 2024 by 40 basis points, partly from the likely imposition of tariffs," Sonola said. "And, also the ripple effect of what we think the Fed could do."
Tariffs could also result in higher inflation, though Fitch thinks the Fed could still cut rates in 2025, and expects it will cut them twice in 2026, Sonola said.
