The United States’ widely anticipated tariff announcement on April 2 will not bring the level of certainty that businesses need to make hiring and investment decisions.
The U.S. attempt to reshape the global economy will affect not only tradeable goods, but also services and global finance as a parallel attempt to weaken the dollar continues.
Rather, it is likely to be the opening shot in an effort to rebalance the global economy that brings to an end the “American put” that has defined international economic activity for the past several generations.
The United States’ attempt to reshape the global economy will affect not only tradeable goods, but also services and global finance as a parallel attempt to weaken the dollar continues.
In addition, the retaliation by targeted economies will not be limited to agriculture, whiskey and motorcycles. It will target the prodigious surplus in tradable services—where the real money is—in finance, pharmaceuticals and technology.
This, in addition to what we expect to be a fairly significant currency war that will ensue, is what a trade war looks like.
If recent reporting by The Washington Post proves true, the U.S. average tariff rate will likely increase to near 20%—it stands at 10.25% following tariffs already implemented this year.
That increase implies that a weighted average tariff will settle in somewhere between 12% and 15% once all exceptions are known.
Economic historians will tell anyone who will listen that once trade taxes are applied to tradeable goods and services, as well as prospective taxes on capital inflows, that they will remain in place for many years, if not decades.
The Smoot-Hawley tariffs on more than 20,000 imported goods that were implemented on June 17, 1930, were partially repealed through Franklin D. Roosevelt’s Reciprocal Trade Agreements Act in 1934. They were not fully repealed until the General Agreement on Tariffs and Trade was enacted in 1948.
Read more of RSM’s insights on the economy and the middle market.
The global economy is benefiting from U.S. firms and households front-running what will be large tariffs on most U.S. imports.
As the reality of what may be up to a 20% increase in taxes on imports sets in, global production and consumption will fall back as will imports into the U.S.
U.S. imports of goods have been the driving force of the current global business cycle, with the U.S. demand for foreign goods accounting for 12% to 14% of total world imports. That comes from a U.S. population that is just 4.2% of the world population.
And it’s nothing new. The U.S. has been the consumer of last resort for at least the past two generations.
With the arrival of significant new tariffs, the certainty of the “U.S. put” for the global economy appears to be coming to an end.
