There is still significant uncertainty on how exactly those tariffs will be implemented. Meanwhile, consumer and business confidence keep deteriorating, increasing downside risks to growth and upside risks to inflation.
Uncertainty will remain beyond April fool’s
For April 2, we expect Trump to announce some sort of asymmetric reciprocal tariff scheme and 25% tariffs on food and potentially other items like pharma, which might include some exclusions for Canada and Mexico. We expect roughly a one-month delay in implementation, leaving space for negotiation, with about a third to a half of the announced measures not getting implemented (at least, not for an extended period).
A more hawkish scenario, with negative risks
Therefore, our base case is that the effective tariff rate will increase by about 2.0pp (on top of the 2.7pp from the 20% China tariffs). Of course, risks around our base case are huge since there is very little clarity on how the Trump Administration will define “reciprocity”. In a bearish scenario, tariffs could increase significantly. Reciprocity of tariffs and (actual or perceived) non-tariff barriers such as VAT differentials, plus 25% tariffs on specific sectors including autos, food, and potentially pharma, could increase the US effective tariff rate by more than 10pp to levels not seen in several decades.
Auto tariffs are bad, even for the US
Tariffs on autos are imposed under the (wrong) prediction that it will create more jobs as companies relocate production into the US and/or consumers substitute away from imported cars into domestic ones. In addition, they are a source of revenues. However, this argument doesn’t pass the test of sound economic theory. The point is clear: if free trade is welfare improving, protectionism is welfare reducing.
Tariffs via executive orders are easy to reverse
Additionally, tariffs are administrative measures implemented via executive orders, which can be quickly reversed. Companies will not commit resources for the long term based on short-term fragile administrative incentives. Instead, they will react to the heightened uncertainty by delaying irreversible investment decisions as the option value of waiting is now higher. Yet another growth-negative channel impacting the economy.
You can’t have the cake and eat it too
Lastly, the more “successful” tariffs are to create jobs as people consume more domestic substitutes, the less tariffs revenues will be collected. Moreover, once general equilibrium effects are being considered, the tariff revenues will likely be offset (at least partially) by lower fiscal revenues as the economy decelerates.
