Were we wrong about Trump's tariffs?

Key Concepts

• Tariffs: Taxes imposed on imported goods.
• Supply Chains: The network of organizations, people, activities, information, and resources involved in moving a product or service from supplier to customer.
• Exemptions: Specific allowances or exclusions from a rule or policy.
• Evasion: The act of avoiding or escaping something.
• Avoidance Effect: Businesses reorganizing their operations to circumvent tariffs.
• Pass-through: The extent to which tariff costs are transferred to consumers.
• Margins: The difference between the cost of a product and its selling price.
• Consumer Sentiment: The general attitude of consumers towards the economy.
• Most Favored Nation (MFN) Status: A trade principle that requires a country to grant the same trade privileges to all other countries with which it has MFN status.
• Counterfactual: A situation that is contrary to what actually happened.
• Protectionism: An economic policy of restraining trade between countries through tariffs, quotas, and other restrictions.
• Thermostatic Response: A tendency for political parties to adopt policies opposite to those of the preceding administration.
• Concentrated Interests: Specific groups that benefit from a policy and actively lobby for its continuation.
• Government Revenue Stream: Income generated by the government, in this case, from tariffs.

Tariffs and Their Impact on the US Economy

This discussion analyzes the impact of the significant rise in US tariffs, described as the biggest since the 1930s, and questions whether initial predictions of severe economic trouble were accurate.

Initial Predictions vs. Current Reality

• Initial Concerns: Predictions, including those made by the speaker, anticipated serious trouble ahead due to President Trump's tariffs, with some forecasts showing a significant spike in negative economic impact.
• Current Situation: Seven months later, the US economy has not crashed, leading to a re-evaluation of the initial predictions.

Reasons for Lower-Than-Anticipated Impact

The actual economic impact has been less severe than initially feared due to several factors:

1. Lower Actual Tariffs Imposed:

   • While tariffs were announced as significant, the actual rate imposed, calculated from border revenue, is considerably lower than what was initially projected.
   • Data Point: A chart illustrates that the actual imposed tariff rate (red line) is significantly lower than the predicted spike (top line) after Liberation Day announcements.
   • Explanation: This reduction is attributed to:
     • Exemptions: The administration granted numerous exemptions, meaning tariffs only apply after a certain threshold is reached. These exemptions were negotiated over time.
     • Evasion: Some degree of tariff evasion is occurring.
     • Supply Chain Adjustments: Businesses have reorganized their supply chains to avoid tariffs.

2. Slow Pass-Through to Consumer Prices:

   • Tariffs have not been passed on to consumers to the same degree or as quickly as anticipated.
   • Explanation: US businesses have been absorbing a significant portion of the tariff costs within their profit margins.
   • Data Point: A Goldman Sachs estimate indicates that 51% of tariffs so far have been absorbed by businesses in their margins.
   • Reason for Absorption: The chaotic and unclear nature of the tariff policy has led businesses to wait and see, absorbing costs in the interim.

Sustainability and Future Implications

• Sustainability of Margin Absorption: The question arises whether businesses can continue to absorb these costs.
• Impact on Stock Prices: While importers are directly affected, stock prices are largely driven by tech firms, potentially masking the impact on tariff-affected businesses.
• Gradual Increase in Consumer Costs: The amount being passed on to consumers is gradually increasing over time.
• Inflationary Impact: Tariffs have had an impact on inflation, though perhaps not as severe as initially predicted.

Political and Business Perspectives

• Governor Andy Basher (Democrat, Kentucky): Described tariffs as the "worst economic policy" he's seen in his lifetime.
  • Impact on Businesses: Highlighted the negative effects on businesses, particularly in manufacturing states like Kentucky, due to complicated supply chains and uncertainty in input costs.
  • Example: A construction project was stalled due to uncertainty about input costs, potentially ranging from $1 billion to $1.3 billion.
• Business Leader Silence: Business leaders are reportedly remaining quiet to avoid backlash, despite concerns about the impact of tariffs.

Gloomy Outlook on Tariffs

A more pessimistic perspective suggests that tariffs are problematic for the US in the medium term for several reasons:

1. Difficulty in Removal:

   • Once companies adjust to tariff protection, they are reluctant to give it up as it represents a cost to them.
   • Removing tariffs typically requires building domestic consensus by offering relief to some groups and gains in foreign markets to others, a process that is complicated by the current tariff landscape.

2. Lack of Retaliation and Negotiation Leverage:

   • The absence of significant retaliation from other countries means there is less leverage for negotiating tariff reductions.
   • Argument: Tariffs abroad remain low, limiting negotiation possibilities.

3. Arbitrary and Unpredictable Policy:

   • President Trump's actions, including the removal of Most Favored Nation (MFN) status, have made US tariff policy arbitrary and unpredictable.
   • Impact: This lack of an anchor or discipline creates randomness, acting as a constant weight on the US economy.

Visible Economic Damage

Despite the lack of a catastrophic crash, there are visible signs of economic damage:

• Slowed Growth: In the first half of the year, US economic growth was at an annual rate of 1.1%, the weakest half since 2012 (excluding the pandemic).
• Inflation Bump: There has been an increase in inflation, roughly in line with predictions if actual tariffs were half as large as initially anticipated.
• Lost Opportunity: The long-term harm will be measured by the counterfactual of what growth could have been sustained over many years, representing immense lost opportunity.

The Political Economy of Tariffs

• Difficulty in Reversal: It is argued that it will be very difficult for any subsequent administration to bring tariffs down.
• Concentrated Interests: Once tariffs are in place, concentrated interest groups lobby energetically to keep them, fearing the return of competition.
• Government Revenue Stream: Tariffs create a significant government revenue stream, making it politically challenging to replace this income if tariffs are removed.
• Shifting Political Landscape: The Democratic Party, traditionally more protectionist, is now seen as the more pro-trade party, a significant shift.
• Consensus on Difficulty: There is a consensus that returning to the previous trade environment will be challenging.

Conclusion

While the immediate economic collapse predicted by some has not materialized, the current tariff policy is seen as having a visible short-term impact on growth and inflation. The long-term consequences, particularly the lost opportunity for sustained growth and the political entrenchment of protectionist measures, are considered significant and difficult to reverse. The arbitrary nature of the policy and the absorption of costs by businesses, while delaying consumer impact, are not sustainable in the long run. The political economy of tariffs, with concentrated interests and government revenue considerations, further complicates any potential rollback.