An intense, new trade war unfolds

Happy Monday...

I’m just going to blurt out bullet points here. More organized thinking to follow.

—As you probably know right now—the media have done a good job tracking this—the Trump admin plans to activate sweeping tariffs of 25% on all Canadian and Mexican imports, and 10% on all Chinese imports (Canadian energy, tariffed at 10%, gets a carveout).

—These are our 3 biggest trading partners, and because most of the cost of tariffs are passed-through to consumers, there’s been a lot of useful analysis of inflationary price effects. My guesstimate is $1,500 more per household, with noticeable increases in, among others, grocery (especially fresh produce), gas, electronics, car prices.

—(From link above): “Because of the combination of these three countries, it’s going to be difficult to go down an aisle of a grocery store and not see some sort of inflationary effect,” said Jason Miller, a professor of supply chain management at Michigan State University.

—Retaliation tariffs are already rolling out. If the Trump admin follows through, this trade war could quickly escalate. The most likely result is higher prices pushing up higher interest rates (and likely keeping the Fed on pause), with negative growth and job impacts in affected sectors. The dollar could also strengthen, offsetting some of the price effects, but hurting the competitiveness of U.S. exports.

—Markets are appropriately spooked this AM, with Dow futures down over 600 points.

Why, why, why do this?! Again, much ink has been spilled, but I’m not sure there’s much beyond Trump loves tariffs, he can do them without Congress, and he believes any political downsides, e.g., through higher grocery prices, are offset by political gains. I recently wrote this:

The president has an extremely acute radar for policies that resonate with his voters and he believes tariffs are one of those policies. He may be right: one study of the trade war between U.S. and China during Trump’s first term concluded that people “more exposed to import tariffs became less likely to identify as Democrats, more likely to vote to reelect Donald Trump in 2020, and more likely to elect Republicans to Congress.”

Assuming they take effect, the most important thing now, imho, is to carefully, granularly, frequently track and promulgate every single impact of the tariffs that we in the econ-empirical-analysis community can see in the data.

Talk is cheap, but a lot else is very likely about to become more expensive, and people need to know why.