Trump's Trade War: A Delayed but Destabilizing Impact on the US Economy

Strategic Insights -

As the United States reveals its latest inflation data, showcasing a steady decline in prices, the reality of Donald Trump's global trade war begins to surface. The consumer price index for April indicates that the nation was in good shape when Joe Biden handed over the reins to Trump in January, with the economy growing and inflation receding. However, the initial impact of the trade war, which triggered a scramble for imports ahead of tariffs, led to a contraction in the March quarter. Core inflation, excluding volatile food and energy prices, rose at a 2.1% annual rate over the three months to end-April, marginally above the Fed's 2% target.

Key Takeaways:

  • The trade war's full impact won't be reflected in the data until the latter months of this year, with the Yale Budget Lab estimating it would increase prices by 1.7% and reduce US economic growth by 0.7 percentage points at the current rates.
  • The effective average tariff on US imports is still 17.8%, the highest rate since 1934 and almost 7.5 times the 2.4% average US tariff before Trump's trade war.
  • The tariffs will inevitably flow through to higher inflation and lower growth, with the Fed choosing between fighting inflation or protecting growth and employment when the damage finally surfaces.
  • Trump's administration's backdown from a full-scale confrontation with China is an implicit admission that tariffs will hurt the economy, even with the massive reduction in the rate on imports from China.
  • The trade moratorium negotiated at the weekend may defer and reduce the damage Trump's trade war does to the US economy, depending on what happens when the 90-day pauses end.
  • Financial markets are pricing in two Fed rate cuts this year, with the first in September, suggesting that the economy is heading towards a stagflationary recession.

Statistics:

  • The US inflation rate rose 2.3% in April, the lowest rise since February 2021.
  • Core inflation, excluding volatile food and energy prices, rose at a 2.1% annual rate over the three months to end-April.
  • The effective average tariff on US imports is still 17.8%, the highest rate since 1934.
  • The Yale Budget Lab estimates the tariffs would increase prices by 1.7% and reduce US economic growth by 0.7 percentage points at the current rates.
  • The S'P 500 index recovered the losses it had incurred since "Liberation Day" and is up 0.1% for the year, but still 4.2% below the February peak reached before Trump unveiled his "reciprocal" tariff ideas.

Sources:

  • "The New York Times"
  • "The Washington Post"
  • "Bloomberg"
  • "The Wall Street Journal"
  • Yale Budget Lab