Photo: Michael Nagle/Bloomberg via Getty Images
On a personal note, I want to let you know this is my 500th column, which means I’ve been babbling on for about ten years. I hope you have found it occasionally interesting and/or useful. Regardless, I have not run out of gas yet and will continue on with it.
This week’s topic—you guessed it—is tariffs, and I’m going to look at them in terms of medium- and long-term impact. The usual caveat applies: My comments are based on what has happened so far and on what Trump says will happen in the future. We all know, particularly after last week’s reversal, that this is an unrealistic assumption, but there really is no better one. And that illustrates the core problem the world faces—uncertainty. The title of this column suggests a disquisition on Heisenberg or a look at Schrödinger’s cat, but I’m not sufficiently erudite for that and will take a simpler approach.
In examining Trump’s tariffs, we have to look at the “what,” but also the “how.” Both are confusing. The what is the tariffs themselves, currently 10 percent on the world and 145 percent on China, the former being last week’s reduction from the reciprocal numbers imposed on a country-by-country basis on April 2, many of which were substantially larger than 10 percent. It is too early to draw definitive conclusions, but we can see four outcomes with some confidence, all of them bad.
First and most important is the collapse of trust. Trump has informed the world, friend and foe alike, that the United States is no longer a reliable partner, both economically and politically. This is already leading to countries seeking to develop new trade relationships, often through the traditional approach of free trade agreements. This is not good news for us, as we will find ourselves on the sidelines “just watching,” but it is good news for the world because it means global economic integration and the growth that goes with it will continue.
Second, prices will go up. The only questions are how soon and how much, and there the answer will vary by industry and company. Smart manufacturers saw this coming and have been stockpiling for months. It will take time to use up their inventory, although you can expect prices to rise anyway as companies see an opportunity to capitalize on consumers’ expectations and fatten their profit margins in the short term. As usual, big companies will fare better because they have more options and more market power. The main victims will be small businesses, which rely on imports as the core of their business. The mystery is how much of the tariff is passed on to consumers. There is no rule about that, but in general, the lower the profit margin, the more tariffs are passed on.
Third, expect shortages. We are already seeing retailers cancel shipments that have not yet left port (mostly Chinese ports) in order to avoid five or six-figure tariff bills. Watch footwear and apparel as well as some consumer electronics and some models of automobiles. The biggest impact will probably show up this summer. Eventually, companies create new value chains and find new avenues of supply, but the key word there is “eventually.” The tariffs go into effect long before adjustment can occur.
Fourth, the biggest impact will be in the financial world, where confidence is the key element. We all watched the stock market’s gyrations over the past two weeks, but savvy investors, and the president and his advisors, were watching the bond market, 10-year Treasuries in particular, as they are an important indicator of borrowing costs and where interest rates are going. Watch to see if yields continue to go up, but, more important, watch to see if investors and foreign governments start turning away from them as well as other U.S. government debt instruments. There are already hints this may be happening. If the trend grows, it will be a sign of declining confidence in the dollar and in the United States as the safest haven for investors. That will increase interest rates, increase borrowing costs, add to inflation, and permanently weaken our role in the global economy. Once confidence is lost, it takes years to restore it, if it can be restored at all.
The “how” is equally distressing. The way Trump has rolled out his decisions, beginning with Canada and Mexico in February, is a textbook example of “arbitrary and capricious.” Tariffs have been on, off, up, down, postponed, and restored. As of Friday night, smartphones, computers and other electronic components became exempt, but as of Sunday morning, that was only temporary, pending new tariffs on chips. Initially, there were to be no exemptions, and now exemptions may be considered. The result has been massive uncertainty which leads investors either to sit on their money and wait for the dust to settle or to go elsewhere. U.S. companies seeking to adjust their supply chains and foreign manufacturers considering moving to the United States have no idea whether the tariffs will stay or go, increase or decrease. Nobody is going to make a substantial investment under those circumstances. Remember what I said before: Investors look for rule of law, policy stability, and an objective, efficient, and transparent dispute resolution mechanism. Trump’s actions undermine all of those, defeating his goal of bringing manufacturing to the United States, driving foreign governments and companies away from us and diminishing our global role. He will soon discover that his belief the United States is an indispensable market for the world is a fantasy. They do not need us more than we need them.
William A. Reinsch is senior adviser and Scholl Chair emeritus with the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies in Washington, D.C.
