The Uncertainty is the Thing

Non-partisan think tanks from UPenn, Yale, and others weigh in

Trump picked a fight with the world, whereas each other country is in a battle only with the US. This asymmetry is just one of the reasons that things are unlikely to go the way Trump thinks they will. Meanwhile, all the uncertainty created “on the daily” has already frozen decision-making and caused a slowdown in international capital flows.

Wharton issued its report, The Economic Impact of Tariffs, on April 10, and updated that thinking in an article on April 22. The Peterson Institute weighed in, as did Yale’s Budget Lab, and the Harvard Business Review. Here’s what they said:

• After consumption shifts, the average tariff rate will be 18%, the highest since 1934. “Consumption shifts” refer to consumers shifting purchases to products from lower tariff countries. (Yale Budget Lab)

• The tariffs will raise about $5 trillion over the next 10 years, which can be used to pay down the federal debt. It’s the equivalent of raising the corporate tax rate from 21% to 36%. (Penn Wharton Budget Model)

• However, tariffs are twice as damaging as increasing the tax rate. Over the next 30 years, they will decrease GDP growth by 6% and wages by 5%. (Penn Wharton Budget Model)

• Tariffs will raise prices for Americans by 3% overall. (I doubt this given the proportion of goods coming from China - I think it will be more on the order of 10% at least). Clothing and textiles are most affected - prices will rise by 87% and 65%, respectively. (Yale Budget Lab)

• The US sectors hit hardest by tariffs will be agriculture, mining, and manufacturing because of their reliance on foreign demand for exports. (Peterson Institute)

• The US will also be affected because it is fighting the trade war on many fronts. “The U.S. has started a trade war with every other country, but each other country is engaged in a trade war with only the U.S. Incorporating this asymmetry into your assessment quickly erodes the assumption that the U.S. holds all the cards.” (Harvard Business Review)

• Foreign governments, which are major holders of US bonds and treasuries, are selling those bonds as inflation and uncertainty rise. This will make it more expensive for the US to float those bonds (ie to borrow the money it needs). (Penn Wharton Budget Model)

• And, likely the most damning effect of these tariffs - they increase economic policy uncertainty, causing people and businesses to postpone investment, hiring, and consumption decisions. As JP Morgan wrote, “Roughly half of the GDP decline from higher tariffs is attributed to a negative sentiment shock related to rising trade policy uncertainty.” I certainly see that impact in my work - the uncertainty is freezing decision-making as companies scramble to buy time - with inventory, with new manufacturing partners (but not in the US - too uncertain), and the like.

^^^Translation: no one knows what he is going to do next. All that uncertainty is rattling the stock markets, Americans, and foreign countries that used to trust the US. No longer. That damage has been done.