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There’s no understanding of what the tariffs might look like after those pauses, but at the current rates, the Yale Budget Lab said this week they would increase prices by 1.7 per cent – the equivalent of a cost of $US2800 (about $4320) per US household – and reduce US economic growth by 0.7 percentage points.
With the reciprocal tariffs yet to come, that could be regarded as a conservative assessment of the trade wars’ damage.
The inflation data and the lingering euphoria generated by the weekend’s de-escalation of US-China trade hostilities finally saw Wall Street’s S&P 500 index recover the losses it had incurred since “Liberation Day”, to be up 0.1 per cent for the year. It is still, however, 4.2 per cent below the February peak reached before Trump unveiled his “reciprocal” tariff ideas.
While sharemarket investors have reacted enthusiastically to events at the weekend and the inflation data – as if the trade war has ended – the reality is that even at the current rates, the effective average tariff on US imports is still 17.8 per cent, according to the Yale Budget Lab.
That is the highest rate since 1934 and almost 7.5 times the 2.4 per cent average US tariff before Trump decided to wage his trade war on the rest of the world.
While the impacts might have been delayed by the pulling forward of imports ahead of their introduction, the higher tariffs will inevitably flow through to higher inflation and lower growth.
At the start of this year, working on the assumption that US inflation would continue to cool, financial markets were pricing in as many as four Fed rate cuts this year, starting in March. Now they are pricing in two, with the first in September, although some of the major Wall Street banks don’t expect any movement from the Fed until December at the earliest.
Trump’s wild decision-making and the consequent volatility within financial markets complicate efforts to assess their implications for the economy. It’s obvious that they are not positive, but not so obvious how deleterious they might be, or when their impacts will show up.
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That has the Fed keeping rates on hold. The US central bank will have to wait until it sees their final shape, after the pauses in the reciprocal tariffs and the tariffs on China have ended, before it can start to come to grips with their near- and long-term economic effects.
The Fed would be very conscious that, if it were to cut US rates prematurely, it might add to the inflationary pressures generated by the tariffs and might transform what could be a “one-off”, or transitory, effect into a structural increase in inflation.
Trump seems oblivious to the risk of a stagflationary recession – an economic slump occurring while inflation and interest rates remain high – even though, if one were to develop, it would be the direct result of his policies, after Biden handed over an economy that was in good shape.
Predictably, after the release of the inflation data, he took to social media to again criticise the Fed and its chairman, Jerome Powell (with his usual idiosyncratic use of capitals).
“No inflation, and Prices of Gasoline, Energy, Groceries, and practically everything else, are DOWN!!!,” he wrote.
“THE FED must lower the RATE, like Europe and China have done. What is wrong with Too Late Powell?”
“Too Late Powell”: After the inflation data, Trump slammed Fed chair Jerome Powell yet again on social media.Credit: Bloomberg
He said the Fed’s policies were “not fair to America, which is ready to blossom” and “just let it happen, it will be a beautiful thing”.
If not for Trump’s destructive and self-destructive trade policies, America would be “blossoming”, or at least would have an economy growing quite solidly with falling interest rates. The rest of the world would be in better shape, too.
Trump made no reference to his tariffs in his post, but his administration’s backdown from a full-scale confrontation with China is an implicit, albeit belated, admission that tariffs will hurt the economy.
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Even with the massive reduction in the rate on imports from China, from 145 per cent to 30 per cent, when added to the pre-existing tariffs on China (a legacy of Trump’s first trade war in 2018-19), the effective average rate would be above 40 per cent.
That will have price effects, even though – unlike when the rate was 145 per cent – there will still be some imports from China, albeit more expensive ones.
The trade moratorium negotiated at the weekend may defer and reduce, to some degree, the damage Trump’s trade war does to the US economy, depending on what happens when the 90-day pauses end. That’s why sharemarket investors have been celebrating, perhaps prematurely, this week.
It will be interesting to see how the markets, the Fed and Trump respond when that damage finally surfaces.
Trump will probably blame Powell and the Fed, the Fed will have to choose between fighting inflation or protecting growth and employment, and investors will just cut their losses and run.
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