The White House announced that tariffs on products from Mexico, Canada and China will begin Feb. 1. (Getty Images)
You may have read that the Atlanta Federal Reserve’s GDPNow model now predicts the U.S. economy will contract 2.8% in the first quarter of this year. This is almost double the model’s most recent prediction of a 1.5% drop in the first quarter — a reversal from the estimate from two weeks ago, that projected the economy would grow 2.3%.
While not a crystal ball, the GDPNow model is useful and nimble – the most recent forecast came about when the Institute for Supply Management issued its February economic indicators, based on survey information from manufacturers. Also the markets are falling – the S&P 500 closed in correction territory, falling 10% from the all-time high it set just three weeks ago. The Dow is approaching correction too. The tech-heavy Nasdaq fell into a correction more than a week ago. Now the Russell 2000, an index that includes smaller companies, appears likely to be entering a bear market (defined as more than a 20% drop).
These markers may be related to the federal government’s on-again, off-again tariff policy. It is entirely possible (likely?) that by the time these words are read that tariff policy will have changed again. However, it appears that, when temporary exemptions expire in April, the tariffs will affect more than $1.4 trillion of U.S. imports (compared to $380 billion in 2018-2019).
Most economists believe that free trade increases the level of economic output and income, while tariffs reduce these. This is partly why they fell out of favor after World War II. In fact, some economists estimate that the 2018-2019 trade war tariffs (imposed by Trump but then retained by Biden) reduced long-run GDP by 0.2% and resulted in a reduction in 142,000 full-time jobs.
These new 2025 tariffs, targeting Canada and Mexico (Indiana’s largest trading partners)and other export partners, will most assuredly have an impact on Hoosier businesses.
Manufacturing Winners and Losers
Manufacturing simply could not be more important to Indiana. Indiana’s manufacturing industry contributes $129.1 billion to the Indiana economy, comprising 25.9% of Indiana’s GDP. The industry employs more than 527,400 people. In 2023, Indiana manufacturers exported $53.4 billion in goods.
Indiana manufacturers’ largest export partners were Canada ($14.7 billion), Mexico ($7.1 billion), and China ($4.8 billion). All of these partners are impacted by these new tariffs.
Some posit that by increasing the price of imports, tariffs protect home-grown manufacturers. Tariffs also “punish” foreign countries for unfair trade practices such as subsidizing their exporters or dumping products at unfairly low prices. It is true that tariffs impact distinct types of manufacturers differently – steel and aluminum manufacturers may benefit from these tariffs through capitalizing on higher prices and reduced foreign competition. However, manufacturers who use these materials as inputs will see an increase in costs. This includes nearly all manufacturers in the automotive industry. In fact a recent automotive industry group surveyed its members and, who said that tariffs on goods from Mexico and Canada would greatly harm their operations and they will likely consider delaying investments, cutting U.S. jobs, and moving jobs outside of the U.S.
Manufacturers of other top exports, including critical pharmaceuticals, will be very negatively impacted. Lastly, smaller manufacturers with tighter margins will be impacted by increasing input costs. Larger companies with wider margins may be better positioned to weather these cost increases.
We know that we should expect these tariffs to have a net decrease on manufacturing jobs – a Federal Reserve study demonstrated a net decrease in total manufacturing employment due to the 2018-2019 tariffs, suggesting that the benefit of increased production in protected industries was outweighed by the consequences of rising input costs and retaliatory tariffs.
Indiana Farmers – A Double Whammy
According to the most recent data from USDA, Indiana has 53,599 farms, encompassing 14.6 million acres of farmland. A whopping 85% of these are family farms.
The value of Indiana agricultural product sold is $18 billion per year. While a smaller (in total GDP production) industry as compared to manufacturing, Hoosier farmers have disproportionately realized significant losses from previous tariffs and are at risk of even more severe impacts.
Research conducted by USDA in 2022 determined that the 2018-2019 tariffs led to a significant reduction in U.S. agricultural exports, estimated at $27 billion in losses nationwide, with soybean farmers making up nearly 71% of the share of damages. Indiana specifically was the fifth most impacted, shouldering 5.9% of the total loss ($784 million per year). Of this total loss, Indiana soybean farmers realized a $718 million loss and corn farmers realized a $14 million loss. Indiana livestock farmers were also impacted, with pork producers losing $38 million.
The loss of economic output and accompanying job loss from a new and larger trade war than that of 2018-2019 will impact Hoosier businesses and employees. Indirectly, Hoosier communities will be impacted. Policy makers should be cognizant of these realities as they craft state and local policy in the short and long term.
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