In a speech last week that was billed as a major economic address but often strayed far from the topic, Trump reiterated his commitment to new tariffs and promised to “impose tariffs of 10 to 20 percent on countries that have ripped us off for years.”

Numerous reports from Wall Street economists warn that Trump’s plans could significantly slow economic growth and drive up consumer prices. But there is considerable debate about what the former president would – or even could – do with tariffs if he won a second term.

Here’s a look at how investors are trying to understand Trump’s ideas on trade and what those plans could mean for the markets.

A big change

At first glance, Trump is proposing a radical overhaul of U.S. tariff policy that goes far beyond what he did during his first four years in the White House.

According to the Tax Foundation, Trump imposed tariffs on goods worth about $380 billion starting in 2018, mostly from China.

The Biden administration kept most of these tariffs and imposed additional duties on about $18 billion worth of Chinese imports.

In the current election, however, Democrats have not signaled support for additional tariffs. Trump, on the other hand, has advocated a system of “universal basic tariffs,” which his campaign website describes as a “domestic production rewards system.” Trump proposed setting tariffs at 10% and using the revenue from them to reduce the deficit or finance new tax cuts.

Elsewhere, Trump has indicated he would support tariffs of at least 60 percent on Chinese imports to restrict trade with the world’s second-largest economy.

Currently, the average effective tariff rate – measured as a share of import duties – is about one percent on imports from countries outside China and eleven percent on Chinese imports, according to stock market research institute Wolfe Research.

A threat to growth

Tariffs are not imposed on other countries but on domestic companies that import products. Economists say these companies typically pass most of the costs on to consumers through price increases.

In the short term, there is widespread agreement that general tariffs would raise consumer prices and slow economic growth because they would effectively tax households and thus restrict consumption.

Even then, some economists argue that the benefits to certain companies, such as steelmakers, could be offset by disadvantages for others, such as automakers forced to pay more for steel. Exporting companies could be hurt by countries imposing retaliatory tariffs.

Analysts at TD Securities estimate that a 10% tariff across the board would increase inflation by 0.6 to 0.9 percentage points. Combined with Trump’s plans to restrict immigration, the tariffs would reduce growth by 1 to 2 percentage points and potentially push the economy into recession, they calculate.

Other economists have reached similar predictions. Standard Chartered estimates that Trump’s tariff plans would increase prices by 1.8 percent within two years.

Most economists expect that tariffs would lead to a rapid increase in consumer prices but not to permanent price increases. The Federal Reserve may therefore ignore the initial impact on inflation – although some analysts believe this could prompt the central bank to slow its rate cuts.

A burden on the markets

Trump’s previous tariffs had micro and macro effects on the stock market.

His threats to impose tariffs on Mexican imports drove down the stock prices of automakers with production facilities across the border. Analysts said his tariffs contributed to declines in stock indexes in 2018 by creating uncertainty about the economic outlook.

Once again, Wall Street is looking at the potential winners and losers of Trump’s proposals.

Analysts at Jefferies have said higher tariffs could help steelmakers such as Cleveland Cliffs and US Steel by hurting importers such as Lululemon Athletica and Best Buy through falling profit margins.

However, given the breadth and magnitude of Trump’s tariff proposals, investors are primarily focused on their potential macroeconomic impact.

On paper, Trump’s tariff plans would put a greater burden on the economy than the Democrats’ plans to let tax cuts for high-income households expire at the end of 2025, according to Wolfe Research. That’s because the actual tax increase would be larger and it would hit low- and middle-income households, which are more sensitive to cost changes.

However, many investors are skeptical that Trump will really raise tariffs as much as he has promised. They are more confident that he will extend tax cuts and reduce corporate regulation, especially if Republicans also win control of Congress. That could lead to a repeat, at least on a small scale, of 2016, when a Trump-led Republican victory sparked a major rally in stocks.

A possible way

From a practical perspective, it is easy for a president to raise tariffs.

He or she can unilaterally raise tariffs on certain imports for a variety of reasons, such as when a country violates U.S. trade laws. Therefore, most analysts believe that Trump would have little problem raising tariffs on Chinese imports, given China’s trade practices.

Many are skeptical that existing laws would allow him to impose a 10% blanket tariff without congressional support. But Trump could take a “flood the zone” approach, imposing tariffs on imports from a range of countries, using the legal justification that best suits each case, says Andy Laperriere, head of U.S. policy research at Piper Sandler.

While some analysts do not believe Trump would do anything that could seriously shake up the stock market, others believe that Trump’s boasts about the stock market’s strong performance during his first term were more opportunistic in nature than a statement of his priorities.

In addition, Trump now has more Republican allies who share his views on trade, potentially giving him the backing to go further than before.

In a second term, he will be surrounded by people who either agree with him on tariffs or have accepted that he will do just that, Laperriere said.

Write to Sam Goldfarb at [email protected]