As firms and households await the expected increase in import taxes through a flurry of executive orders over the next several days, it is important to note just how challenging it will be to estimate their impact on growth, employment and inflation.
Modeling such a shock to the economy depends upon several basic assumptions that do not always take into account factors like currency fluctuations, retaliation through the trade channel or the construction of nontariff barriers.
A simple exercise that assumes tariffs of 25% across the board and 60% on Chinese goods implies that the U.S. economy over the next decade would be approximately 2% smaller than it otherwise would be.
While this impact would not be as severe as the one Brexit had on Britain, where the economy ended up being at least 5% smaller, the new round of tariffs is a reminder that they are a choice.
They are not the result of market-driven outcomes.
For our simple shock model, the assumptions we used are based on the conversations around possible executive orders, but they are not the final word.
For information on moves businesses can take to mitigate the impact of tariffs visit the RSM US website.
We urge all to read the relevant executive orders when they are published and then get to the hard work of estimating the deadweight losses that the tariffs will cause.
The tariffs will affect growth, employment and inflation across the economy, as well as individual industries. There is also the social cost to those who will bear the burden of adjustment to the sharp shift in trade and finance policy.
