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Demand Shock or Supply Shock?

Posted on by Philip J Palin

Wednesday morning on Bloomberg Surveillance (see video link below), Frances Donald, chief economist with the Royal Bank of Canada, highlighted the potential risk of “… dysfunctions in the supply chains that leads to more problematic developments this year.” She emphasized, “… when you start to mess with supply and demand dynamics within supply chains, when you have ships that stop coming to shore, it is not a one month fix. Sometimes it can take months or years to recalibrate supply and demand.” In response to one question, Ms. Donald offered that there will be supply shortages in the United States based on what has happened over the last month — made better or worse by what is still ahead.

I spent the last ten days in Europe. I expected to be asked to explain or even justify US policy.  Not really.  The Europeans with whom I met understand what is happening and why.  They are amazed at the self-harm being done, but are not in denial regarding what has happened — thus far.  I am still processing what I heard last week.  But here’s a “concise” take-away that I have circulated with some of my discussion partners.

Demand will still decide.  Products will be produced (or not) and flow (or not) depending on expressions of effectual demand.  Where demand can return costs-plus, there will still be flow.  When and where demand cannot return that plus, there will not be flow. Ten percent higher tariff-related costs will not, alone, shift flows much. Twenty-percent?  Probably depends on the product.  Forty-percent?  Well, we (Europeans) will sell much more to other places and people… and probably much less overall.  Americans have been very robust consumers.  We will miss them.  

So far, I have certainly received more nuanced characterizations. But no one fundamentally disagrees with this reductionist summary.

I have not yet heard back from one German business leader who asked all of us around the table, “Are we in denial? Have we decisively shifted into an autarkic global reality, but are emotionally unable to read the writing on the wall?  Or are we carefully watching foolish posturing that still has a chance of being substantively reversed and we want to reward — and rewarded by –the reversal?  Will we know by the end of this year?” 

No one volunteered an answer to these questions.  Everyone I could see pursed their lips.

US Demand Persists in March

Posted on by Philip J Palin

According to the Bureau of Economic Analysis, “Personal income increased $116.8 billion (0.5 percent at a monthly rate) in March… Disposable personal income (DPI)—personal income less personal current taxes—increased $102.0 billion (0.5 percent) and personal consumption expenditures (PCE) increased $134.5 billion (0.7 percent). Personal outlays—the sum of PCE, personal interest payments, and personal current transfer payments—increased $136.6 billion in March. Personal saving was $872.3 billion in March and the personal saving rate—personal saving as a percentage of disposable personal income—was 3.9 percent.”

Bloomberg summarized, “US consumer spending jumped in March while a key measure of inflation decelerated…” US consumers spent more on almost every major category of goods and services, with a big surge in automobile purchases (see first chart below). Suspicion also surged that the principal tail-wind for this increased consumption is widespread expectation of tariff-related price increases. Freight volumes and values were well off January bottoms and consistent with same-month results over the last decade (with the dramatic exception of March 2020). April flash-results have not — yet — been in free-fall (here and here and here). Bloomberg called the March outcomes “a welcome reprieve before tariffs are expected to broadly drive up prices.”

Below I display a couple of long-tailed charts. The blue line tracks total inflation-adjusted Personal Consumption Expenditures. The red line tracks real PCE for Food-at-Home. There are many indicators (here and here) suggesting consumer confidence is low, moving lower, and expectations are for choppy or worse economic conditions ahead. The surge in automobile purchases can be interpreted as reflecting these expectations. My personal assessment of what’s ahead — if current tariff policies persist — shares this pessimism. But despite all the turmoil, uncertainty, and very real challenges, through the end of March robust demand continued to pull robust flows of goods (and services).

Obvious but underestimated?

Posted on by Philip J Palin

I have been surprised by how others have been surprised by how supply chains are responding to tariff turmoil.

In mid-December I included this almost throw-away-line in a note to selected clients:

The most heavily tariffed imports will likely become rare, consumer prices on rarities will spike, and US exports will shrivel from retaliation. If so—inflation surges. If so—consumption declines. If so—jobs disappear.

Weasel words are worth special attention: “likely” and “If so” acknowledge other alternatives. Depending on how high the tariffs go on how many product categories — and, especially, for how long — the potential network effects are impossible to fully, confidently predict.

Still, while predictive analytics are challenging, I did not give these general outcomes much more explanation because… well, it seemed so obvious.

It should not surprise that rapid and significant price increases — whatever the cause — will suppress consumption. Decreased consumption will prompt reduced production and eventual shedding of production costs (such as labor). When jobs disappear this further constrains consumption. There are other cascading outcomes, obviously (or maybe not).

For my supply chain-obsessed clients these implications are obvious. After the shared experience of pandemic-impacted supply chains (2020-2022), I sort of assumed these broad principles of cause-and-effect were now well known. Maybe not.

We seem to have an opportunity to re-learn these principles.

Tariffs can constructively shape demand and supply dynamics. But at some point — far below sudden 145 percent increases — tariffs are demand-destruction devices — especially when and where replacement sources do not have near-term surge capacity.

So, it should be obvious that imports will surge ahead of tariffs and collapse once tariffs are imposed (here and here and here plus one more published late on April 27 and updated on the 28th).

Given the volume and value of goods imported into the United States (see chart below), it should be obvious that significant tariffs will disrupt the ability to fulfill demand for goods (here and here and here). The meaning of “significant” is product-specific and consumer-sensitive, but the farther (and faster) above 12 percent any tariff goes, multiplier effects on disrupted consumer behavior often emerge. There is also an escalated disruption multiplier for product-categories where imports fulfill more than one-fifth of current consumption. (One more added on April 28.)

Even where meaningful import-replacement capacity exists, prices will increase given the sudden disruption of preexisting demand-supply equilibria (here and here). This does seem to be “obvious” to most Americans (here and here).

Depending on the duration of higher tariffs and the speed with which import-substitution capacity can be increased, consumption will obviously be disrupted. Demand disruption will usually cause labor market volatility (please remember 2020). Demand destruction — as products are not available and/or price increases diminish consumption and/or economic anxiety suppresses consumer behavior, etc. — will eventually impact hourly wages and overall employment — which in turn impacts overall economic activity (please remember the Great Recession). The potential scope and scale of these impacts are admittedly less obvious. But the Tax Foundation estimates that implementation of all the tariffs announced through April 10 would reduce the US labor force by the equivalent of more than 640,000 full-time jobs. (More and more and more and more.)

The current tariffs are meant to advance several goals. The “universal” ten percent tariff is intended to raise federal government revenue. The sector-specific tariffs (e.g., steel, aluminum, automobiles) are intended to mitigate US dependence for critical materials on foreign sources. The reciprocal tariffs (now paused for 90 days) are intended to motivate bilateral negotiations that will increase the purchase of US exports and attract foreign enterprises to build manufacturing facilities in the United States. More US manufacturing jobs are intended. These are obviously good intentions.

The best intentions are often complicated by unintended consequences.

March retail trajectory

Posted on by Philip J Palin

Yesterday the US Census Bureau reported:

Advance estimates of U.S. retail and food services sales for March 2025, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $734.9 billion, up 1.4 percent (±0.5 percent) from the previous month, and up 4.6 percent (±0.5 percent) from March 2024. Total sales for the January 2025 through March 2025 period were up 4.1 percent (±0.5 percent) from the same period a year ago. The January 2025 to February 2025 percent change was unrevised from up 0.2 percent (±0.2 percent). Retail trade sales were up 1.4 percent (±0.5 percent) from February 2025, and up 4.6 percent (±0.5 percent) from last year. Motor vehicle and parts dealers were up 8.8 percent (±1.8 percent) from last year, while nonstore retailers were up 4.8 percent (±1.4 percent) from March 2024.

Many observers treated this significant sales increase as reflecting consumer expectations of higher prices or emerging product unavailability. For example the Associated Press wrote, “U.S. shoppers stepped up their shopping last month, fueled by a spending spree on big ticket items, particularly cars, before President Donald Trump’s expansive new tariffs started kicking in. But analysts were quick to point out that the data wasn’t a sign of strength but underscored the extreme economic uncertainty that shoppers face and how they want to get ahead of higher prices.” (More and more and more.)

In any case, March retail results confirm a continued ability and willingness to consume — even after the consumption rate has rather consistently climbed for four years (see chart below). As demonstrated by the similar slopes displayed below, retail sales track (lead? follow?) other consumption indicators. In the post-pandemic period to date consumption has ranged roughly four to five percent above sustained pre-pandemic trends. Will this continue as tariffs have their effects? How will tariffs impact consumption shifts between product categories? Will reduced consumption in some categories mostly result in higher consumption in other categories? Might reduced consumption in particular categories have sufficient impact on overall wages-earned (people employed) to suppress overall consumption? How do we differentiate between lagging indicators and what could be characterized as “loss leaders?”

Pre-tariff US economic conditions are strong. The administration expects to preserve and build on this strength — even if there are some “transition problems.” Others are concerned these strengths — and other advantages — are being squandered.

Full value or fickle tariffs

Posted on by Philip J Palin

The following was contributed by a reader who has asked to remain anonymous. Many thanks — and apologies — to William Shakespeare.

Let me not to the supply of demand
Admit impediments; trade is not trade
Which alters as politics commands,
Or bends with the remover to remove.
O no, it is a value-fixèd mark
That looks on tempests and is never shaken;
It is the star to every wand’ring bark
Whose worth’s unknown, although his height be taken.
Trade’s not time’s fool, though rosy lips and cheeks
Within his bending sickle’s compass come.
Value alters not with his brief hours and weeks,
But bears it out even to the edge of doom:
If this be error and upon me proved,
I never gave fair price for full value.

Resilience: Cause or Effect?

Posted on by Philip J Palin

Shallow men believe in luck or in circumstance. Strong men believe in cause and effect. (Ralph Waldo Emerson, The Conduct of Life, 1860)

Gravity’s effect is variable, but its influence (as far as I know) is unavoidable. Friction has both beneficial and problematic effects depending on context or purpose. Supply chains constantly manage gravity and friction. We pull. We push. We lift. We load. We wrap. We slide. We hold. We leave behind. We do whatever we can to keep flow going.

Supply Chain Resilience seeks to understand the cause of any slowing or stopping. If we can, we will correct the cause. But especially when causes are not well-understood or not quickly correctable, resilience involves transferring, avoiding, reducing or even accepting effects and continuing to flow the best we can.

As a long-time supply chain manager once told me, “Moving is living, stasis is death.”

I have seen this predisposition win again and again despite earthquakes and aftershocks, tsunamis, cyclones, pandemic, blackouts, wildfires, and riots. Pausing and probing are common. Shipping volumes and velocity are re-fashioned by due diligence and care. Different routes, altered schedules, longer cycle times, revised cargoes, and many more adaptations are undertaken — all designed to result in fulfilling demand the best as supply conditions will allow.

Dramatically Increased tariffs and related turmoil are already disrupting flows. Given the cost-related magnitude and rapid rate of change, full effects will unfold perniciously, accumulate, and multiply. When, where, and precisely why a toxic concentration of absence or congestion will climax is often the result of complex, almost unpredictable network behaviors.

The tariffs — and tariff-makers — are the cause of the problem. Whether the cause is justifiable prompts disagreement. There are cogent arguments for, against, and otherwise. In any case, the tariffs are causing serious disruption — and further destruction is reasonably anticipated. Channels are closing. Nodes are being cut off. Pull persists, but push is being pushed away. Feedback loops are being distorted, noise is increasing, signals are diverted, neglected, and sometimes lost. Demand is being silenced. Even worse, demand is being disrupted. Supply is being stopped.

This is not unprecedented. It happens everyday at lower end scope and scale. Everyday supply chain managers overcome these threats. At higher end scope and scale — such as the Triple Disaster in Japan or the Covid Pandemic — I have seen smart, creative, courageous supply chain strategists and practitioners overcome enormous challenges. Global to local supply chains are experiencing pain. The pain will get worse. But there is cause to anticipate resilient potential.

There is also cause for deep concern. The world’s largest economy is attempting to radically — rapidly — reform global trade by rationing access to US consumers. The tariffs will work (or not) by purposefully curtailing US consumption of products made outside the United States and spurring global consumption of products that are or may someday be made in the United States. Watch the curve on the chart of real Personal Consumption Expenditures. The angle of future ascent or descent will reveal a great deal.

The tariffs are the intentional use of surgical trauma to pursue a particular vision of enhanced economic wellness. For the United States, this is a whole-network trauma. For the rest of the world these network-effects are somewhat less all-encompassing, but still a serious body-blow.

Whole-network supply chain disruption/destruction is unusual. The pandemic came close. Otherwise, in my experience, even the deepest supply chain wounds have been able to depend on increased flows from other parts of the network. The March 2011 earthquake, tsunami, and nuclear accident was a a whole-network event for Tohoku, but its recovery was expedited by proximity to Tokyo and acceleration of flows from around the world.

Intentional whole network disruption/destruction of supply and demand is even more unusual. My only significant, sustained experience of this dynamic has been in the aftermath of Brexit (here too) and in the context of the war in Gaza (here and here). Brexit was — and remains — disruptive, especially to the British economy. Brexit’s supply chain disruptions were, however, caused by an explicit choice confirmed by democratic and due-process measures over several years. Destruction of Gaza’s already fragile demand and supply network was suddenly imposed by unilateral actions undertaken by decision-makers external to Gaza.

In the case of both Brexit and Gaza, perceptions of intention have had significant influence on how supply chains (and their operators) adapted to change. In the case of the United Kingdom exiting the European Union — for good or ill, right or wrong — intention was eventually perceived as deliberate and orderly. Supply chain operators have focused on making the best of a bad situation. In tragic contrast, Gazans and many others perceive the purposeful destruction of their supply chains to be punitive, perfidious, and worse. In the case of Brexit, perceptions finally prompted creativity and forward-leaning investment. In the case of Gaza, I have mostly witnessed deepening despair and paralysis.

There is a huge difference between: “This threat is real” or “I am being specifically targeted”. A natural disaster can prompt creativity and collaboration. A disaster discerned as avoidable and insidious incites blaming, scapegoating, and varieties of self-destruction. Before my experience with Gaza, I underestimated the practical power of this distinction. I tried to treat intentional harm as no worse than seismic aftershocks. I was wrong. Perceived malign intent is much more of a constraint on Supply Chain Resilience than any seismic recurrence.

During the presidential campaign Mr. Trump was explicit regarding his goals for tariff revenues and using tariffs to spur reindustrialization of the US economy. As with Brexit, his tariff policy benefits from its connection to this democratic process. As with Brexit, it was a close vote. Unlike Brexit, the presidential election involved issues extending well beyond any one policy. As with early implementation of Brexit, there is a perceived lack of deliberate and orderly implementation. There is a growing perception of arbitrary, contradictory, incompetent tariff implementation. Brexit implementation did, however, at long-last improve and is now the accepted reality. (Added on 4/16: Advice to shell-shocked Americans from Brexit Britain)

Still, Brexit would probably not win another referendum. Continuation of the current tariff strategy may well depend on how consumers — who also vote in November 2026 for the US House and one-third of the Senate — come to view tariffs. Well-intentioned and worth the trouble — or — punitive and perfidious? Even before voters have their say, supply chain operators are even now assessing causes, effects, and implications for future flows.

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When two things occur successively we call them cause and effect if we believe one event made the other one happen. If we think one event is the response to the other, we call it a reaction. If we feel that the two incidents are not related, we call it a mere coincidence. If we think someone deserved what happened, we call it retribution or reward, depending on whether the event was negative or positive for the recipient. If we cannot find a reason for the two events’ occurring simultaneously or in close proximity, we call it an accident. Therefore, how we explain coincidences depends on how we see the world. Is everything connected, so that events create resonances like ripples across a net? Or do things merely co-occur and we give meaning to these co-occurrences based on our belief system? Lieh-tzu’s answer: It’s all in how you think.

 Lieh-tzu: A Taoist Guide to Practical Living

Most pernicious tariffs

Posted on by Philip J Palin

Below is an interview from this morning’s Bloomberg Surveillance. Henrietta Treyz of Veda Partners says that the sector-specific tariffs (previously discussed here) are the “most pernicious”: causing the most harm in a surprising way. Derived from the Latin per-nicies meaning by- or through-death. She expects the current automotive, steel, and aluminum tariffs to be joined in the spiral by other strategic sectors “before the summer.”

Warwick: Hurry up and Wait

Posted on by Philip J Palin

Below is a helpful Bloomberg interview (under 8 minutes). David Warwick outlines fundamental tariff-related issues facing supply chain decision-makers. While the Tech supply chain is front-and-center, very similar issues face most other sectors. Warwick is wonderful at concisely capturing the challenge now complicating supply chains. I am less impressed by his hope that common sense will yet prevail and continued flows will be reasonably facilitated. My concise take on a very complicated context: Import costs have suddenly increased by more than ten percent (much more on products from China or those related to strategic sectors such as steel and aluminum; see more here). Tariff turmoil will continue to seriously disrupt supply, demand, physical movement, and financial options for the remainder of this year… and probably beyond. While an average twenty-five percent US tariff rate may now be avoided, fifteen to twenty percent remains plausible. Tactical and strategic options differ for each product category and each enterprise. But adapting wisely to this already changed context — and the prospect of further trade constraints — is absolutely in the self-interest of every enterprise and in the public interest as well.

Uncertainty versus Perfidy

Posted on by Philip J Palin

Many have complained of uncertain tariff policies (here and here and here). Houthi attacks on Red Sea shipping are uncertain. This October’s water levels on the Mississippi, Rhine, and Yangtze rivers are uncertain. June energy prices are uncertain. Commerce persists and constantly adapts to such uncertainty. Uncertain derived of Latin certus: not fixed, not resolved, not decided…

Commerce finds perfidy much more disruptive. The Romans especially disdained per fidem dēcipere — deception through manipulation or betrayal of trust… faith… fidelity.

Commerce expects — fundamentally depends upon — the readiness of most people, most of the time (i.e., the market) to sufficiently value their own wants and needs that they recognize the benefit of securing supplies and services through exchange of mutually accepted value.

Effective, recurring, profitable commerce requires suppliers and service-providers valuing their own long-term self-interest enough to fulfill their customers expressed needs and respect their customers limitations. Many years ago I considered my own egg-producing operation. After calculating costs, I have always appreciated the ability to buy eggs from others (even at recent price-levels).

Civilization has emerged from non-violent cultivation of such mutual benefit. In 1776 Adam Smith wrote:

He will be more likely to prevail if he can interest their self-love in his favor and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind proposes to do this: give me that which I want, and you shall have this which you want, is the meaning of every such offer…

The more uncertain the context, the more commercial good faith and mutual benefit matter. Unpredictable and/or predatory parties increase costs, delay progress, and can ultimately sabotage even otherwise obvious mutual benefits.

Commerce has found longer, more time-consuming, more expensive ways to avoid the Houthis. Commerce has spent most of two centuries and huge sums working to minimize the impacts of floods and droughts on major inland waterways and otherwise transport goods with confidence. The potential for successful perfidy in fossil fuel flows has been reduced by diversifying sources and increasing competition. Energy market mechanisms have evolved to facilitate price fluctuations and mutual benefit. Persistence and patience have generated shared progress.

The United States is the world’s largest economy. US consumption expenditures are more than double any other integrated market. The Congress has delegated to the President of the United States substantial personal authority to set tariffs. President Trump recognizes tariffs as a powerful tool to get what he wants from other nations and generate funds for the US treasury too.

In 2024 the effective US tariff rate was about 2.4 percent. Given what was announced on April 2, we are now looking at about ten-times that level. Tonight reciprocal tariffs will be implemented. According to the Office of the United States Trade Representative these tariffs “will range from 0 percent to 99 percent, with unweighted and import-weighted averages of 20 percent and 41 percent.” Today, Peter Navarro, the President’s senior advisor for trade and manufacturing warned, “This is not a negotiation. For the US, it is a national emergency triggered by trade deficits caused by a rigged system. President Trump is always willing to listen. But to those world leaders who, after decades of cheating, are suddenly offering to lower tariffs — know this: that’s just the beginning.”

What President Trump wants is gradually becoming clear. It remains unclear how — even if — trading partners (buyers or sellers) can deliver what the President wants. Mr. Navarro argues the world has been perfidious in trading with the United States. Suddenly and unilaterally prompting a one-fifth (or more) cost increase may well seem an act of bad faith to both buyers in the United States and sellers to those in the United States. Possibilities for mutual benefit are being replaced by mutual suspicion or worse.

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Aeneas and Dido were each tragic exiles. Together they found love. Together they were busy building a great city. But gods conspired to subvert their mutual happiness. Vergil anointed him Aeneas the True, yet Dido accused him of faithless betrayal, treachery, and treason. He left her. She cursed him, throwing herself onto the death pyre’s flames. “Dissimulare etiam sperasti, perfide, tantum posse nefas, tacitusque mea decedere terra?” (Did you hope to conceal, perfidious one, such a crime and quietly my world depart?) These seeds unfurled into generations of vicious enmity.

Trying to pierce the fog of war

Posted on by Philip J Palin

This morning the new ten percent universal — or baseline — tariff will be levied on imports into the United States. Other tariffs are already in place (here and here and here), more tariffs are promised. As headlined in the Financial Times, “US stocks shed $5.4tn in two days as Trump’s tariffs stoke recession fears.”

Recession is not the worst case feared by many (here and here and here). The President of the United States is seeking a radical realignment of the world economic system. Complex Adaptive Systems — such as global supply chains — tend to react badly to sudden, significant shocks to well-established network relationships (here and here and here).

Until Wednesday afternoon’s White House announcement, President Trump’s tariff policy lacked sufficient detail or principles or clear objectives to do more than spin wildly divergent scenarios. Policy coherence is still anemic, but it could now be worthwhile to articulate some specific hypotheses regarding the measures that have been signaled, how these measures are likely to evolve, and where that might leave us this time next year.

If the full range of Wednesday’s measures are aggressively implemented, during 2025 we will — the world will — experience the most profound and sudden economic shift ever. Because the scope/scale of the shift is so unprecedented, the consequences are difficult (probably impossible) to confidently predict.  There will be many unintended consequences. President Trump is also well-known to use shock-tactics to open negotiations where he is willing to quickly alter his opening position in exchange for a wide range of putative advantages.

I perceive that President Trump is deploying tariffs to advance three goals (two tactical goals and one strategic goal).

First, Mr. Trump wants to use tariffs to generate new revenues for the US Treasury.  He needs — we need — to reduce our dependence on excessive deficit speeding.

Second, Mr. Trump wants to use tariffs as clear-and-present bargaining chips to motivate other nations to do-deals with him (us and USA) on a wide-array of issues from terms of trade, international migration, drug interdictions, war/peace, and much more (apparently including the disposition of TikTok).

Third — and more strategically — Mr. Trump is attempting to restore a robust US goods manufacturing sector. He wants to support/ increase traditional manufacturing jobs (e.g., automobiles) and reduce US dependence on other nations for key manufactured goods (e.g., steel, aluminum, semiconductors…)

President Trump and some others believe progress can be made on all of these goals because selling to US consumers is important to every major economy in the world… and they seem confident US consumers will continue recent — amazingly stubborn — consumption patterns.  I don’t share this confidence, but readily acknowledge that outcomes depend on a whole host of factors that fall far outside my supposed expertise in Supply Chain Resilience. Until we know much more about the top rates for long-duration tariffs and what products/places end up being the most punitive tariff targets, making meaningful judgements is too much like five year old’s playing ping-pong.

Focusing mostly on these three tariff purposes, right now I hypothesize that:

  1. The ten percent universal tariff is likely to remain mostly in place for the long-term (the next four years or longer). This could plausibly generate $300 billion per year to the US Treasury.
  2. Sector-specific tariffs are also likely to remain in place for the long-term. Carve-outs, special arrangements, percentage adjustments, and more may be negotiated, but this tariff category is conceived as a means of restoring critical domestic manufacturing — to support national security, economic growth, and even some cultural goals. Once in place many sector-specific tariffs are likely to persist beyond the current administration.
  3. All the rest of the tariffs are open for (intended for) vigorous, creative, politically-expedient, self-interested, and goal-achieving negotiation.  Stand-by for wild, weird, jaw-dropping proposals, counter-proposals, and audacious victory announcements… potentially including substantive progress too.

I calculate the ten percent universal tariff — by itself — would generate desired revenue and not cause major economic disruptions.  It would have some inflationary effects but would probably not seriously hurt near-term US economic growth — and might support longer-term US economic growth. In combination with the other tariffs, however, I expect revenue generation will be suppressed by reduced US demand for imported goods with the obvious supply chain ramifications.

The sector-specific tariffs will prompt all sorts of macroeconomic, micro-economic, logistical, and other gyrations. Once again there will be inflationary effects and I perceive that in each of these specific sectors the tariffs will be more demand-depressing than the universal tariff. Positive macroeconomic effects are possible in five to seven years (and beyond). Increased domestic investment in manufacturing facilities is likely, with localized positive economic benefits. But lots of sourcing/shipping problems and uncertainty will be experienced in between. Within each sector the supply chain implications will be treacherous. Extended disequilibria of demand and supply will often emerge. Outside each of the targeted sectors secondary and tertiary effects are likely, but beyond the scope of evidence currently available to me.

Other tariff consequences depend on details of timing and targets that are — purposefully — unclear.  Ambiguity is a feature, not a bug of the tariffs-as-bargaining-chip approach. But the longer tariffs stay high and the more targets hit by high tariffs, the more economic — and supply chain — disruption both in the US and around the world. There will be higher inflation and demand destruction in the United States and, almost certainly, suppressed economic growth world-wide.  Less pull plus much more friction (both physical and financial) will seriously complicate push.

Late this week most economists are predicting a fast reduction in interest rates — as economic activity contracts because of tariffs. My supply chain angle is contrary to this, given the inflationary effects anticipated.  The more inflation spurred by the tariffs, the more inclined the Fed may be to keep rates higher.  In either case, anticipating future interest rate decreases can delay purchases about as much as high interest rates discourage purchases.  Equity markets tend to do better with low interest rates and strong sustained demand.  This is President Trump’s goal.  I am concerned he could be surprised by demand destruction, high inflation, and the need for higher interest rates.  Market reaction since Wednesday indicates I am not alone in this concern.

Given the scope/scale and rate of change unleashed by this tariff turmoil, anyone who claims certain clarity on specific outcomes is delusional (or trying to delude), but these new systemic risks are probably as disruptive as those unleashed by OPEC energy price manipulation in the mid-1970s. OPEC purposefully deployed supply controls.  The Trump administration is purposefully deploying what they conceive as demand controls.

Sufficient evidence is not yet available to treat the judgments outlined above as projections. These are deniable hypotheses that may help test our observations over the next several months.

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April 8 Update: Some readers find this assessment of current tariff turmoil to be “excessively careful”. Another writes, “You are minimizing the potential harm.” Yet another critiques, “Your balanced tone obscures that Trump’s approach is entirely unbalanced.”

Current harm is profound and entirely obvious. The risk of much greater harm is significant — even probable. Especially in this context, it is not helpful to claim — or even seek — certainty. In any case, I cannot honestly claim any certainty.

Many continue to sound certain that the April 2 tariffs are either ephemeral negotiating tools or the economic equivalent of August 3, 1914. One or the other may yet be demonstrated, but as my three categories are meant to indicate, there is — despite maximalist rhetoric — a reasonable possibility for something less extreme.

This morning I have finally read one other credible commentator with a similar angle. Early this morning the Financial Times published a piece by Jason Furman arguing:

While anything is possible, the most likely landing place is that he will retain the across-the-board tariff which he campaigned on and considers central to shifting the US revenue base, while maintaining a higher tariff on certain countries like China and certain products such as steel. The result would be that the US would have a 12 to 15 per cent average tariff rate. That is much lower than now — but still very high…

Following the ellipsis Dr. Furman adds, “… with inevitably bad consequences.” But perhaps “bad” as in the consequences of the Seven Years War rather than the war to end all wars and all that has cascaded from that collision.