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.
