US Protectionism Reaches Highest Level in a Century as Tariff Agreements Take Effect

Strategic Insights -

The Trump administration's latest tariff agreements will push the average effective tariff rate on goods entering the US to around 18%, up from 2% at the start of the year. This move marks an unprecedented four months of upheaval, with the US imposing daily threats of import taxes, capital controls, and financial sanctions on its trading partners. Despite the noise surrounding Trump's trade war, the US economy and labour market have not fallen into recession, with interest rates continuing to fall in most advanced economies and equity markets reaching record highs in the US, UK, and Europe.

Key Takeaways:

  • The effective tariff rate on goods entering the US will jump from an average of 2% to around 18% due to the latest tariff agreements.
  • The US economy has not fallen into recession, with interest rates continuing to fall in most advanced economies.
  • Equity markets have rebounded to record highs in the US, UK, and Europe, with some arguing that Trump has won the first battle in his trade war.
  • The US will generate $450-500 billion in federal tax revenues from the tariffs, equivalent to 1.25% of the US economy.
  • The dollar is nearing its strongest week in three years, while the greenback remains about 9% weaker against major currencies this year.
  • The US stock market has outperformed all main peers since April 21, reflecting the "Goldilocks" state of an economy that is "not too hot, and not too cold".
  • The International Monetary Fund has upgraded growth forecasts for most developed world economies, including the US, acknowledging that the landing spot for American protectionism is likely to be lower than first feared.
  • Economists are divided over whether the resilience of the US and world economy means the tariff pain has simply been delayed or whether other factors will lead to an alternative outcome.
  • The White House points to the 2018 tariffs episode as "proof" that levies have no lasting effect on prices, despite concerns that American households and businesses will suffer the brunt of higher import taxes and supply chain disruption.
  • Few trade experts or diplomats expect Trump to stick to his word on the set tariff rates, with concerns that he may use the tariff stick against countries over policy disagreements.

Statistics:

  • The effective tariff rate on goods entering the US will jump from 2% to around 18%.
  • The US is expected to generate $450-500 billion in federal tax revenues from the tariffs, equivalent to 1.25% of the US economy.
  • The dollar is nearing its strongest week in three years, having recovered 1.5% from the trough hit at the end of June.
  • The greenback remains about 9% weaker against major currencies this year.
  • The US stock market has outperformed all main peers since April 21, with a 3% annualised GDP expansion in the second quarter.
  • The International Monetary Fund has upgraded growth forecasts for most developed world economies, including the US.

Sources:

  • Mehreen Khan, The Trump administration's eleventh-hour tariff agreements will raise US protectionism to the highest level in a century ( Financial Times, August 1, 2023)
  • Mark Dowding, chief investment officer at RBC BlueBay Asset Management, quoted in Mehreen Khan, The Trump administration's eleventh-hour tariff agreements will raise US protectionism to the highest level in a century ( Financial Times, August 1, 2023)
  • Will Denyer, at Gavekal Research, quoted in Mehreen Khan, The Trump administration's eleventh-hour tariff agreements will raise US protectionism to the highest level in a century ( Financial Times, August 1, 2023)
  • International Monetary Fund, quoted in Mehreen Khan, The Trump administration's eleventh-hour tariff agreements will raise US protectionism to the highest level in a century ( Financial Times, August 1, 2023)
  • US Federal Reserve, quoted in Mehreen Khan, The Trump administration's eleventh-hour tariff agreements will raise US protectionism to the highest level in a century ( Financial Times, August 1, 2023)
  • Freya Beamish, chief economist at TS Lombard, quoted in Mehreen Khan, The Trump administration's eleventh-hour tariff agreements will raise US protectionism to the highest level in a century ( Financial Times, August 1, 2023)
  • Pierre-Olivier Gourinchas, chief economist at the IMF, quoted in Mehreen Khan, The Trump administration's eleventh-hour tariff agreements will raise US protectionism to the highest level in a century ( Financial Times, August 1, 2023)