Following a tumultuous first half of the year in trade and financial markets, it’s clear that never-ending changes in tariffs are a feature and not a bug of trade policy coming out of Washington.
The extend-and-pretend deadlines on tariffs—most recently those that were to have taken effect on Wednesday but have been delayed—have turned into a perpetual moving of the goal posts that investors now discount.
One can observe that on display vividly as the White House threatened to lift copper tariffs by 50% and pharmaceutical products by as much as 200%. While that temporarily caused copper prices to spike, it had effectively zero impact on broader equity valuations, interest rates or the value of the dollar on Tuesday afternoon.
One gets the sense that although sector tariffs remain a risk to the economic outlook, corporate margins and commodity prices, investors do not believe that they are going to turn over the economy at current levels or the long-term effective rate.
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There is a real lesson there for the businesses that populate the real economy. And it’s why equity valuations in recent months have been rising despite the threat of tariffs.
Eventually, though, the laws of economic gravity will pull those valuations back to earth as firms’ margins are compressed, inflation increases and real disposable incomes fall, especially in lower-income households.
The effective tariff rate, which stands near 11% for all trade partners, will most likely settle into a range between 15% to 17% with risk of a move to 20% or above.
The two data visualizations provided here illustrate the scope of the trade taxes that will affect businesses and the overall economy.
With such uncertainty swirling around the economy, it is incumbent upon firms of all sizes to budget for an elasticity of trade taxation until a clear policy is articulated.
