Economists warned of disastrous economic harm when US President Donald Trump announced his steep “reciprocal” tariffs on dozens of nations in April.
Their fears have not yet been realized.
The US economy, which accounts for the majority of global growth, has defied expectations in a number of ways, with inflation remaining low, consumer spending and employment remaining strong, and the stock market reaching record highs.
Even so, economists caution that the US and global economies may be experiencing the calm before the storm, despite the fact that some analysts have been taken aback by Trump’s tariffs’ limited impact.
If they don’t agree to trade deals with the Trump administration by the deadline of August 1st, tariffs of 25 percent to 40 percent will beimposed on scores of US trade partners, including close allies like South Korea and Japan.
According to Joseph Foudy, an economics professor at the New York University Stern School of Business, “when you start seeing tariffs at 20 or more, you reach a point where businesses may stop importing altogether.”
According to Foudy, “Firms simply delay major decisions, delay hiring, and economic activity declines.”
According to the statement, “trade uncertainty is as costly as actual tariff rates.”
Even nations that can agree on a deal in time are likely to be subject to significantly higher taxes.
Minimum tariff rates of 20% and 30% are set in Trump’s preliminary agreements with Vietnam and China, which were announced in May and early July, respectively.
Trump was reportedly urging a 20% tariff on the European Union, which is the US’s largest trading partner, to end any agreement with the bloc and start levying a 30% duty on August 1.
The European Commission’s president, Ursula von der Leyen, warned that Trump’s proposed 30% tariff would “disrupt essential transatlantic supply chains, to the detriment of businesses, consumers, and patients on both sides of the Atlantic.”
Harmful growth
According to Steven Durlauf, a professor of economics at the University of Chicago, “the few tariff agreements that have been reached represent nontrivial changes in US trade policy and will harm growth,” so their actions, even if they are much less extreme than threatened, will matter.
Many businesses built up their stockpiles of inventories in advance of rising costs, but economists are all in agreement that the effects of the tariffs in place so far have not been fully felt.
The effective US tariff rate is currently 16.6 percent, with the rate set to increase by 20.6% from August 1, according to The Budget Lab at Yale Department of Economics, which includes a baseline 10 percent duty on nearly all nations and higher levies on cars and steel.
Even if Trump doesn’t significantly raise tariffs on August 1, economists predict a slight increase in inflation over the upcoming months, with higher prices likely to stifle growth.
According to an analysis released last month, even the most recent US tariffs could reduce global gross domestic product (GDP) by 0.5% in the short term and by more than 2 percentage points in the long term.
Since there were significant increases in exports to the US in anticipation of higher tariffs, and businesses are anticipating significant changes in their prices, it is too soon to anticipate significant effects on them. So it’s not surprising that we’ve only seen a limited amount of effects so far, according to Bernard Hoekman, director of global economics at the Robert Schuman Center for Advanced Studies at the Florence, Italy, on Al Jazeera.
However, if the US raises average tariffs to 20 to 30%, it will have a much bigger impact.
Trump and his allies have repeatedly refuted the cautionary advice of economists regarding his tariffs, arguing instead that the steady stream of encouraging data demonstrates that the general consensus on the subject is flawed.
In response to a recent report from his Council of Economic Advisers (CEA), which found that prices of imported goods dropped by 0.1 percent between December and May, Trump wrote on Truth Social. “The Fake News and the so-called “Experts” were again.
“Tariffs are making our country go awry,” says the statement.
Some economic analysts criticized the CEA report’s methodology, claiming that it neglected imports’ stockpiling and covered a period that was “way too short to draw any definitive conclusions.”
Despite the economic headlines’ strong headlines, economists have also cited warning signs in the data.
According to Wells Fargo economists Tim Quinlan and Shannon Grein, discretionary spending on services in the US decreased by 0.3% in the year to May, indicating a potential storm of the future.
Quinlan and Grein said, “That is admittedly a modest decline, but what’s scary is that this measure has only decreased in recession or immediately after recession,” according to Quinlan and Grein.
The Trump administration’s relative health of the economy up until now was seen as a vindication of its economic plans, according to Professor Durlauf of the University of Chicago.
First, there is a common misconception that actual agreements won’t address tariff threats. Second, the system needs some time to work through the effects of tariffs on prices and output, according to Durlauf.
Source: Aljazeera
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