Over the course of the last 50 days, jitters of a new trade war have been coming out of Washington, with most economists fearing a full lock-down of the US Economy, by the end of the year. But despite the Trump administration’s belief of curbing American reliance on foreign goods, there’s an isolated silver lining, that most of America’s trade allies, will shift towards other markets.
In his first term, President Trump imposed tariffs and other trade restrictions on the PRC. While it was known to be a much more political move to gain the support of rural and agrarian America, it had lasting impacts, well into the Biden Administration. Back then, a Moody’s Analytics report found that the restrictions allowed for a loss of 0.3% of real GDP, and a 300,000 decline in an already turbulent US jobs market.
Now usually, in a trade war, economies turn inwards, meaning they rely more on domestically produced goods, and the prospect for multinationals to export is now shifted to production in final markets, which in the short run, decreases their competitiveness in local markets. This time around, The Trump Administration is targeting Mexico, China, and Canada, 3 of its largest trading partners, with a variety of baseline tariffs. According to an estimate, this will reduce long-term GDP by 0.2%, while also cutting jobs by about the same volume as in 2019.
And while supporters of this move think that this will benefit end-consumers and strengthen the resilience of the US Economy. It will just about do the opposite. The increase in federal tax revenue by these tariffs (worth about 150 Billion in 2025 alone), could end up costing American consumers 1000 dollars on average, an increase in taxes. With F&B items, and Fast-Moving Consumer Goods (FMCGs), being the highlight of the impact, Americans will now have to pay significantly more for basic raw materials, and food items being a cheaper commodity, primarily from Mexican imports. In terms of raw material imports, the manufacturing sector is expected to take a hit, with Steel and Aluminum being expanded to a tariff of 25% each, while semiconductors (used in chip manufacturing) would be the highest impacted good, worth a tariff above 25%.
In terms of raw material imports, the manufacturing sector is expected to take a hit, with Steel and Aluminum being expanded to a tariff of 25% each
Now, back before this White House assumed office, the Federal Reserve’s preferred inflation gauge, the CPI, was inching closer to its target 2% level. But there was one small alarm bell, post January 20th sudden decrease in spending in the US Economy. As you’d recall, despite 3 years of worries about a recession, the US Economy showed strength, and consumers were out of their homes and spending what they had, particularly in the auto and other big-ticket sectors more demand and jobs in the economy. But the prospect of tariffs on everyday basic items, on top of an already thriving bird flu, is putting pre-Covid fears back in place.
This of course, also fed into the stock market. With inflation cooling for most of 2024, and interest rates dropping by the quarter, investors were largely happy and satisfied about the state of the economy. The Dow and the S&P 500, both saw significant gains making up for more than the loss of the Pandemic.
But now, the Fed has a very tightrope to balance, with stagflation fears on the rise given the re-introduction of a protectionist policy. Now, as dual fears of another inflationary period loom, the Fed has to combat the self-fulfilling prophecy that is the fear of consumers expecting inflation. Consumers in an uncertain market are likely to curb spending, even before the price level rises, giving rise to even higher prices.
Essentially, back when lowering the rates, Fed Chair Jerome Powell made it clear that inflation in his eyes was transitory, and would soon meet the 2-2-2 target for inflation, unemployment, and interest rates. Now that investors are banking on further cuts this year to decrease borrowing costs, the Fed will have to consider the impact of high prices, and whether this period of slow growth could incite negative fiscal support in the future the high volume of aid contract cancellations and other such spending measures. And if unemployment is impacted further by the inflationary fears, the trade-off between high rates, lower long-term inflation-and low rates, and persistent unconventional unemployment could be too high to not consider.
Now, the Fed has given the gains of the last cut interest rates in its consecutive meetings, but given the fragility of the US Economy, its high time that the Fed re-evaluate its strategy. Low interest rates coupled with a trade war, coupled with a re-ignited inflation crisis, and a very bad debt crisis due June, could all accumulate into a very large mess shortly.
The writer is a columnist and a linguistic activist.