Note: Travelling week.
Fed Minutes Signal More Caution on Cuts if Inflation Progress Stalls The meeting summary showed that all 19 officials approved this month’s quarter-point cut
(…) The Fed’s next meeting is Dec. 17-18. Officials have said the decision to cut rates at that meeting could be a close call, though they have left the door open to one last rate reduction this year.
Separately, the Fed’s staff revised up its assessment of the economy’s capacity to produce goods and services, or what economists refer to as “potential output,” due to recent gains in productivity. Higher potential growth driven by improvements in productivity, if sustained, could allow for an increase in output without resulting pressure on prices.
What Trump’s New Tariff Threats Mean for the U.S. Economy If president-elect follows through, consumers and businesses are likely to see prices rise on everything from fresh fruit to electronics
(…) Import-reliant businesses—especially automobile manufacturers—could face significantly higher costs that they would then pass on to consumers. Farmers and other exporters could face retaliatory tariffs. (…)
Tariffs of 25% on Canada and Mexico, and 10 percentage points added to existing tariffs on China, with those countries imposing retaliatory tariffs, would raise U.S. consumer prices by 0.75% next year, according to the Budget Lab. That estimate drops to 0.65% if households substitute purchases toward domestically produced or lower-tariff imported options. That would amount to more than $1000 in lost purchasing power per household, in 2023 dollars.
If the tariffs against Chinese goods were layered on top of the 60% Trump has already threatened, versus existing tariffs, the estimated inflationary effect would be higher. Beyond raising the prices that Americans pay for goods, higher inflation could lead the Federal Reserve to cut interest rates less than expected in the year ahead. That would keep rates on credit card balances and other loans higher than they otherwise might have been. (…)
Domestic industries that compete with lower-cost foreign manufacturers can experience greater demand for their products, while the government takes in additional revenues.
But consumers and other purchasers of imported goods aren’t able to buy as much, and both economic theory and the historical record show that they tend to lose more than the winners gain. Moreover, when a country imposes tariffs against another country, the other country often responds with tariffs of its own. (…)
American consumers will feel price increases not only after the tariffs are imposed but also in the run up, as stores and businesses rush to preorder nonperishable goods, said Kimberly Clausing, an economist at UCLA School of Law. Lumber from Canada is an example of how that would play out. (…)
The Peterson Institute for International Economics, a think tank in Washington, D.C., estimates that under Trump’s new possible tariffs, prices would rise by 1%. It additionally estimates that by 2026 gross domestic product would be 0.6% lower than it otherwise would have been, and that total U.S. employment would be 1% lower. (…)
Employment in agriculture would be hard hit, too, according to the analysis, coming in 3.1% below where it would have otherwise been. Employment in durable manufacturing—the building of cars and other long-lasting goods—would be 5.4% lower.
Automakers, in particular, might be at risk. They have become reliant on a network of factories and parts suppliers that span the U.S., Mexico and Canda since the North American Free Trade Agreement came into effect 30 years ago, followed by its successor, the United States-Mexico-Canada Agreement.
Tariffs of 25% on imports from Mexico and Canada could add $3,000 on average to the price of a car, according to analysts at Wolfe Research. The firm estimates that about $97 billion worth of auto parts are imported to the U.S. from the two countries each year, and four million vehicles are shipped in—about three million from Mexico and one million from Canada.
Added costs from the potential levies also would hammer the bottom lines of General Motors, Ford Motor and Jeep-maker Stellantis, which all produce vehicles south of the border and rely on parts shipments from there. Evercore ISI estimates a 50% reduction in earnings per share for GM and Stellantis, and 25% for Ford. Shares of all three companies fell on Tuesday, with GM’s stock shedding about 9%.
The National Retail Federation said the timing of the proposed tariffs in January would have an outsize impact on fresh fruits and vegetables, of which the U.S. sources less at that time. U.S. importers will pay 25% more on $10 billion worth of Mexican avocados, tomatoes, raspberries, strawberries and peppers alone; and a 25% tax on $10 billion worth of Mexican beer, tequila and mescal imports, said David French, senior vice president for government relations at the industry group. (…)
Trump’s Trade Chief Advocates ‘Strategic Decoupling’ From China Jamieson Greer has been nominated as US Trade Representative
Jamieson Greer, who’s been nominated as the US Trade Representative, played a key role in imposing tariffs on China during Trump’s first term. As former chief of staff to Robert Lighthizer, who was Trump’s trade representative then, Greer shares a tough stance on Beijing. (…)
Greer recommends that Congress pass laws to protect US companies from economic coercion or retaliation by China. This could include allocating tariff revenue to support affected workers and firms, as well as giving the president the authority to take action against foreign companies that take advantage of Chinese retaliation by backfilling into the Chinese market.
This means if China blocked an American firm from selling in its market, the US might compensate that company. It could also lead to Washington taking action against firms from Brazil or elsewhere if they start selling more soybeans or other goods to Beijing to replace US sellers who have been shut out.
Greer calls for expanding export controls on China to cover a wider range of critical industries, such as aircraft, transportation equipment and legacy semiconductor manufacturing equipment.
This would be a step up from current US export controls, which mainly focus on advanced semiconductors. (…)
Greer calls for Congress to allow the US government to review outbound investment into China across a wide range of sectors with economic and strategic significance. He says the executive branch should have the authority to block such investments if they pose a threat to US economic or national security.
Greer suggests that Congress should consider expanding incentives for critical sectors, similar to those in the CHIPS and Science Act or the Inflation Reduction Act. The targeted industries include pharmaceuticals, robotics, medical devices, aircraft, automotive, energy products, telecommunications and electronics. (…)
Greer also advocates for strengthening restrictions to prevent Chinese firms from selling products to the US government, and recommends that Congress direct the Treasury to set up a China-specific sanctions regime focused on issues such as international security and human rights.
Trump Wields a Tariff Bludgeon The threat of a tax on imports will be his all-purpose lever in foreign and even domestic policy.
The WSJ Editorial Board:
(…) The first political point to note is that Mr. Trump’s tariff justification isn’t economic or based on the traditional claims about cheating or “dumping” products in the U.S. That would typically require studies that find economic harm or a national-security threat.
The tariff here is in service of Trump’s campaign promise to reduce illegal migration and fentanyl smuggling. He vows to take unilateral executive action without any explicit legal rationale. Mr. Trump is threatening the countries, including two neighbors and allies, with economic harm if they don’t help him solve a domestic U.S. problem.
This is an extraordinary use of tariffs, but Mr. Trump is going to use this threat often in his second term. He tried a version of this in his first term to coerce Mexico into assisting him in better policing the border, and he liked the result. Mexico went along with the Remain in Mexico program that held migrants on the Mexican side of the Rio Grande while they awaited asylum rulings.
The hopeful interpretation now is that Mr. Trump is merely using tariffs again as a negotiating strategy to get these countries to help. If they act to reduce the flow of drugs and people, he’ll lift the tariff threat and claim political victory at home.
The problem is that this strategy isn’t cost free and there can be collateral damage. Start with the U.S. auto industry, which depends on cross-border trade to remain competitive. Vehicle components and raw materials move back and forth across North American borders as cars are assembled. A 25% tariff on each border pass would raise prices and cost American jobs. It’s no accident that shares of Ford Motor (-2.6%) and General Motors (-9%) fell sharply on Tuesday on the tariff news. Mr. Trump may not care about stock prices, but what about his new working-class coalition?
There is also the potential risk of retaliation. Mexican President Claudia Sheinbaum on Tuesday offered to talk to Mr. Trump about fentanyl and migration. But she also said she is prepared to respond with tariffs on U.S. exports. Mexico has shown in the past that it can be politically shrewd choosing the American goods and areas it targets with tariffs. Think swing Congressional districts and states.
“One tariff would be followed by another in response, and so on until we put at risk common businesses,” Ms. Sheinbaum said. She has her own economic nationalists to please.
There’s also the not-so-small matter that Mr. Trump’s tariffs, if imposed, would shatter the U.S.-Mexico-Canada Agreement that he negotiated and signed in his first term. The pact’s terms say it can’t be reviewed until 2026, and then the parties have another decade to negotiate new terms or abandon it.
In 2019 Mr. Trump said the USMCA would be “the best and most important trade deal ever made by the USA.” If he blows it up based on his own short-term political needs, he’ll send a message around the world that his—and America’s—treaty word can’t be trusted. U.S. trading partners and allies everywhere will get the message, and China will be courting them with promises of a more reliable export market. Using trade to punish allies is especially short-sighted if you want their help against Chinese mercantilism.
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It’s also possible that Mr. Trump views tariffs not merely as a tool for ad hoc negotiation but as a lever to remake the entire global trading system. In that case he’ll try to build high tariff walls in an attempt to force U.S. and foreign companies to build nearly everything in America. The economic and political harm from that strategy is for another day, but investors can’t rule it out and members of Congress would be wise not to give him that power.
As we wrote during the campaign, tariffs were the main economic risk of his candidacy. Mr. Trump campaigned as the Tariff Man, and he aims to impose them early and often. Get ready for what could be a wild ride.