President Trump has announced an enormous increase in US tariffs. But is this a negotiating tactic that will see tariffs fall over time, or a permanent feature of the new global trading system?
It was most investors’ worst case scenario. But what other major shocks could these moves lead to? Paul Diggle and Luke Bartholomew discuss the design of Trump's tariff regime, the possible economic impact , and how things might get better (or even much worse).
Some highlights:
- Shaky economic foundations. Trump’s new tariff regime includes a global baseline tariff on all the US’ trade partners of 10%, with additional tariffs based on the size of each country’s goods trade deficit with the US. However, both the justification and the way these tariff rates were calculated are highly questionable.
- Economic consequences. Expect a stagflationary shock to the US economy that will push up inflation and reduce growth. But there's a lot of uncertainty about the size of these impacts, and a full-blown US recession is entirely plausible.
- Fiscal and monetary policy. Trump has talked about tariff revenue being recycled into domestic tax cuts. There are challenges for monetary policy, amid difficult trade-offs faced by the Federal Reserve (Fed) in managing inflation and growth. That said, the Fed may need to aggressively ease policy if a US recession becomes a reality.
- Global trade and financial risks. There’s potential for further rounds of tit-for-tat retaliation, leading to even higher tariffs and a breakdown in the existing global system of trade. Other extreme scenarios include a crisis in the ‘plumbing’ of the financial system and the possible end of central bank independence.
Listen to the latest episode of our Macro Bytes podcast for further insights.