President Trump’s theatrical announcement of swingeing tariffs on all territories of the world (including at least one uninhabited archipelago), are the subject of much media comment today. The EU, China and other countries have said they will retaliate. If so, Trump will no doubt hit back with counter measures. We cannot know how extreme this tariff war will become or how long it will last.

Trump’s tariff announcement has reminded me of other important economic events originating in the United States over the period since the early 1970s, including:

• Richard Nixon taking the US dollar off the gold standard on 15th January 1971 (‘The Nixon Shock’);
• Federal Reserve Chair Paul Volcker’s interest rate increases starting in October 1979 to tackle persistent inflation (‘The Volcker Shock’);
• The Plaza Accord of 22nd September 1984 to depreciate the US dollar in relation to the French, German, Japanese and British currencies;
• The Lehman Shock of 15th September 2008 when Lehman Brothers filed a Chapter 11 petition.

There was no doubt at the time of these events that important economic events or decisions originating in the United States would have far reaching implications for the world as a whole. That was also true of regular interest rate decisions by the US Federal Reserve and the periodic booms and recessions that the world has experienced since the end of WWII. Virtually all of these things could be said to have been ‘made in America’. They all shook the world economy to its foundations in the same way that shifting tectonic plates can cause earthquakes.

The question before us now is whether Trump’s tariff announcement will have a similar world shaking impact? I suspect the answer is no, for a number of reasons.

Firstly, the tariffs have been crudely calculated solely by reference to the US trade deficit with individual countries, despite this being dressed up as an apparently complex formula. It appears that no consideration has been given to the fact that some goods are bound to be more easily replaceable than others. This is typical of the Trump’s White House operation, which appears to act in haste on the basis of extremely simple concepts that happen to appeal to Trump personally. It is completely at odds with the sophisticated internal analysis that preceded the implementation of the Nixon and Volcker ‘Shocks’ in 1971 and 1979 respectively.

Secondly, the tariffs and counter measures by the worst affected countries are likely to increase inflation and reduce the buying power of American consumers. They have already reduced share prices considerably, which directly affects the majority of US adults who hold shares. We may soon see a ‘tariff recession’ in the United States. Other countries will also suffer, of course, but the US will be most affected (apart from possibly Mexico and Canada given their high reliance on exports to the US).

Thirdly, if the tariffs do ‘succeed’ in the sense of inducing foreign companies to invest more in the US, it will take years to develop the new factories and the number of new jobs likely to be created will be small, given the nature of modern manufacturing that is very reliant on digital technology and robots.

Fourthly, and most importantly, the rest of the world is more able now than in the past to move on and expand trade relations and the associated supply chains independently of the United States. It has already been announced that China, Japan and South Korea are planning to coordinate their retaliation to Trump’s tariffs. There will be short term pain to be sure, for example in Germany, Japan and South Korea with their substantial car exports to the US. But Trump’s tariffs will not threaten the world’s economy as a whole.

Given all of the above factors, I doubt that Trump’s ‘Tariff Shock’ will move the world’s tectonic plates in the way that previous decisions by US Presidents and the Federal Reserve did. It is more likely to be a short term disturbance that will leave the US economy weaker in the long term.

Michael Ingle – michaelingle01@gmail.com

Categories: Uncategorized

Tags: economy, tariffs, Trump