Quick Bite | Trump Tariff Policy

It is way too early to be sure of a Trump victory in the US election given it is still almost 4 months away, but it is not too early to start thinking about what it might mean for investment markets. The first aspect of a potential future Trump administration we consider is his tariff policy. Former President Trump vows to implement the toughest trade restrictions in modern history if he’s re-elected later this year.

What is his tariff policy and what effect would it have on the economy and markets?

The Republican platform adopted last week embraces trade protectionism. It says the party will support baseline tariffs on all foreign-made goods and phasing out essential items imported from China. Trump has spoken of an across-the-board 10% tariff on all imported goods, paired with a 60% tariff on all Chinese imports. These numbers dwarf any from modern experience.

In the 2000s, a so-called China shock swept through the US economy, lowering consumer prices while causing massive losses of manufacturing jobs. Trump’s proposed tariff regime would be, in effect, an attempt to reverse it. Trade experts believe the price of imported manufactured goods would rise significantly if Trump returns to the White House and enacts the aggressive program he has described on the campaign trail. They are not persuaded that a manufacturing renaissance would follow.  

Analysis from the Peterson Institute for International Economics calculates that his proposed tariffs would cost a middle-earning household $1,700 per year, meanwhile, Goldman Sachs economists modelled Trump’s tariff proposals and found they would add 1.1% to the US inflation rate and subtract 0.5% from GDP growth.

We have some sense of what consequences tariffs might have because Trump imposed them on China during his years in the White House. He imposed tariffs on China in 2018 and 2019 where the average tariff rose from about 3% to 21%, giving us an opportunity to see what happened to prices. The result was higher prices for American consumers as Chinese companies only slightly reduced their prices. We can probably expect a similar result in the future.

Economist Paul Krugman argues that Trump’s economic program, combining higher tariffs with tax cuts for corporations and high-income individuals, would disproportionately harm lower-income families, who spend a higher share of their income on goods. Income tax cuts mainly benefit the affluent, thus widening the economic disparity.

While Trump might be using tariff threats to gain concessions, the overall impact would likely see Americans, particularly the working class and poor, bearing the burden of these tariffs. If imports were reduced, the USD could rise in value, potentially lowering import prices, but retaliatory tariffs from other countries could complicate this outcome.

Source: New York Times