While financial markets are welcoming President Donald Trump’s pause on higher tariffs for dozens of trade partners, American imports taxes are still at an historic high and a US recession is still a risk, economists say.
Mr Trump on Wednesday reduced tariffs on countries that were earlier hit with higher levies to a 10 per cent baseline rate, with the exception of China which faces a 125 per cent import duty. Yet the average US tariff rate is still rising to 24 per cent, up almost 22 percentage points since Mr Trump started his second term, according to Bloomberg Economics.
“That means the overall impact on the US economy isn’t expected to be much different from the earlier announcements,” Bloomberg Economics’s Rana Sajedi, Maeva Cousin and Tom Orlik wrote in a note. They cited estimates used by the US Federal Reserve in 2018 to predict the increased tariffs may lower American growth by more than 3 per cent and add almost 2 per cent to core inflation — “a shock that will play out over two to three years.”
Higher import taxes raise costs for domestic consumers and businesses and reduce real disposable incomes and profit margins, while retaliatory measures by other countries threaten to damp US exports. The tariffs also tend to make investment more expensive, economists say.
“Even if some tariffs are dialed back, it’s still very likely that the overall rate will remain dramatically higher than anything seen in decades,” said Tiffany Wilding, economist at Pacific Investment Management Co, one of the world’s biggest bond investors. “Even if the 90-day reprieve turns into a longer stint, we still think US recession odds are 50/50.”
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PIMCO estimates that each 1 percentage point increase in the average effective tariff rate shaves off about 0.1 point of US growth while adding a similar amount to inflation.
As a result, the increase in effective US tariffs (if they’re implemented and maintained) “likely will send the US into a recession and raise near-term inflation dramatically,” Ms Wilding added. The estimates don’t include potential offsets via income tax cuts or lump-sum government payments.
“While these estimates are highly variable, it’s clear the US economy hasn’t seen a shock like this since the 1920s and 1930s,” Ms Wilding added.
Alex Joiner, chief economist at IFM Investors, expects China-US trade to “grind to a halt” as a result of the 125 per cent tariff on shipments from the country.
“How China responds will probably set the tone,” Mr Joiner said, adding it would be a “bold move” on Trump’s part to move back to the punishing tariff regime announced last week. “Things can still get worse from here. And markets can still sell off further.” - Bloomberg
