Quick Take: Tariff Regime, Day 2
By Investment Committee
The Trump tariffs came in far higher than expected and, despite earlier signaling, we now know that the announced levies are unrelated to tariff rates (or non-tariff barriers) set by our trade partners. Instead, these tariffs were selected based on each country’s trade deficit with and exports to the US. Some countries have already indicated they will retaliate, while others expressed a desire to negotiate. It is very early days to draw strong conclusions. Nevertheless, the president indicated that he was open to “phenomenal” deals. So, he clearly wants to negotiate.
These new tariffs, if they are indeed implemented as described, would raise the average US tariff rate above that triggered by the Smoot-Hawley Act of 1930. Those tariffs were understood to have deepened and lengthened the Great Depression. This time around, fortunately, the US economy is in a much stronger place, as shown by this morning’s better-than-expected jobs report.
China, this morning, announced a 34% tariff, matching the US tariff rate, on imports of all US goods. Notably, China runs a massive surplus with the U.S., exporting nearly 5 times as much to us as we export to them. Trump’s tariffs on China were intended to be punitive, probably as much for geopolitical reasons as economic ones. Earlier, Canada announced a 25% tariff on imports of US steel and aluminum, matching the rate imposed on those products by the US last month. More countries will likely announce some retaliatory measures, if only to provide themselves with bargaining chips.
These tariffs translate into higher prices for consumers and businesses. Consumers, faced with more expensive goods, will not be able to buy as many of them as they could before the levies were imposed. These reduced sales will be felt largely by foreign suppliers, but with real income reduced by those taxes, overall real consumer spending will decline – on both foreign and domestic goods and services. As a significant offset, some of the buying of foreign-made goods will be shunted into U.S.-made goods and services. Still, with less purchasing power, the strength in consumer spending that has carried the US economy for the last few years will moderate somewhat. US businesses, facing higher costs of inputs such as materials and equipment will attempt to raise prices to offset, but profit margins may shrink unless they pass through the cost of the tariff, substitute domestic production, or find other ways to trim costs. Some firms, though, will certainly benefit. Those are the ones that face direct competition from now more expensive foreign imports. With the tariff levies, foreign goods will be more costly, allowing those US firms to raise prices, sell more, and garner higher profits.
Companies that face less elastic demand will fare better because consumers will make those products a priority in their budgets. Those products include insurance of various sorts, medical services (and related products), household essentials, groceries, and nicotine products. We should also expect consumers to trade down to do more with less. Off-price retailers should benefit, as should less costly dining-out options. People are likely to hang onto their cars and smartphones for longer. They may cut back on subscriptions to streaming services and apps of various sorts.
The hardest consequence of the tariffs to handicap is the impact on spending from increased uncertainty. Even if the tariffs are ultimately reduced, the uncertainty surrounding those levies will create caution among business leaders and trigger delays in decisions to invest in new capacity. Economic growth will certainly slow. Some Wall Street firms will surely forecast a recession, but much depends on how long the higher tariffs are in place, whether negotiations produce reductions in these new tariffs and many other factors. But a tough environment can also prompt investments in cost-saving technologies in place of capacity expansions. Cybersecurity will become increasingly important as global threats mount. Software upgrades may become essential (and AI may be a key enabler). Deregulation will help U.S. corporate profitability. Tax cuts may also help, although these may occur later this year. And, of course, Trump unilaterally imposed these tariffs and he could modify his stance at any time. So, there will be winners and losers, and the developments in the tariff schedule will play a large role in defining how this plays out.
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