Trump slashes tariffs to help Americans ‘gobble’ up more this Thanksgiving

Key Concepts

• Tariffs: Taxes imposed on imported goods.
• Reciprocal Tariffs: Tariffs imposed by one country in response to tariffs imposed by another country.
• Consumer Price Index (CPI): A measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.
• Supply Shock: An event that suddenly increases or decreases the supply of a commodity or service, or dramatically affects the price.
• Stagflation: A situation where the inflation rate is high, the economic growth rate is slow, and unemployment is high.
• Inflation: A general increase in prices and fall in the purchasing value of money.
• Stagnation: A prolonged period of little or no economic growth.
• Wages: Payment for labor or services.

Executive Order Rolling Back Tariffs

President Trump has signed an executive order to roll back some of the tariffs initially announced in April. The White House has stated that coffee, tea, tropical fruits, fruit juices, cocoa, spices, bananas, oranges, tomatoes, beef, and fertilizers will be exempt from these reciprocal tariffs.

Economic Impacts of Tariff Rollback

Short-Term Impacts:

• Likely halt in ongoing price increases for the exempted goods.
• Potential for prices to decrease slightly.

Long-Term Implications:

• The rollback signifies an admission that tariffs have indeed caused higher prices for American consumers, a reality previously downplayed by the administration. This contrasts with the administration's prior assertion that Americans do not pay tariffs and that they do not raise prices.

Economic Effects of Remaining Tariffs

Despite the rollback, tariffs remain in place on a number of goods, impacting the economy in several ways:

• Persistently High Inflation: Tariffs contribute to sustained high inflation, which in turn keeps interest rates elevated.
• Supply Chain Reorganization: Across-the-board tariffs lead to a restructuring of supply chains, a phenomenon economists refer to as a "supply shock."
• Stagflation: The economy is exhibiting early signs of stagflation, characterized by:
  • Inflation: Evidenced by rising prices at the grocery store.
  • Stagnation: Marked by increasing unemployment and slower economic growth than would otherwise occur.

The Job Market and Wage Growth

A critical question is whether wages will keep pace with rising prices.

• Normal Post-Pandemic Inflation: Typically, in a scenario of post-pandemic inflation, prices rise, and subsequently, wages follow. This occurs because increased prices for goods and services make employees more valuable to their employers, leading to higher wage offers to retain them. This process ensures that wages eventually catch up with prices, making the pain of inflation temporary.
• Tariff-Driven Inflation: The dynamic is different with inflation caused by tariffs. Tariffs increase costs for employers. While employers may raise prices due to these higher costs, there is no inherent reason for them to increase employee wages. Consequently, in tariff-driven inflation, prices rise, but wages do not catch up, leading to prolonged economic hardship for workers.

Conclusion

The recent executive order to roll back specific tariffs is a significant development, acknowledging the direct impact of tariffs on consumer prices. However, the continued imposition of tariffs on other goods is contributing to persistent inflation and the early stages of stagflation, characterized by rising unemployment and slower economic growth. A key concern is that tariff-driven inflation erodes purchasing power as wages fail to keep pace with escalating costs, creating a more severe and lasting economic burden on consumers.