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:
- 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.
- 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.
- 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.