Update from hiatus – Tariffs and all about it
Updates
Finally, I’m back to writing news. A lot has happened over the past 2 to 3 years. Apologies for not updating this website for a very long time. Here are some updates: I’ve graduated from Singapore Management University and started working full-time as a portfolio specialist at Brandes Investment Partners. I’ll explain more about my role in the next few posts. Today’s focus is on tariffs and what has happened over the past week!
Introduction
Tariffs are taxes or duties imposed by a government on imported or exported goods. They serve several purposes, such as raising revenue, protecting domestic industries, or exerting political leverage over other countries.
How Tariffs Affect International Trade
- Increased Prices: Tariffs make imported goods more expensive, which can lead to higher prices for consumers in the importing country. This can reduce the demand for these goods, potentially benefiting domestic producers who don’t face the same tariffs.
- Trade Barriers: By making foreign goods more expensive, tariffs act as a barrier to trade. This can protect local industries from foreign competition but may also lead to retaliation from other countries, resulting in a trade war.
- Revenue Generation: Tariffs can be a significant source of revenue for governments, especially in developing countries. However, in developed countries, their role in revenue generation has diminished over time.
- Economic Leverage: Countries may use tariffs to exert economic pressure on trading partners, influencing their policies or actions. This can be part of broader geopolitical strategies.
- Market Distortion: Tariffs can distort markets by encouraging consumers to buy domestic products even if they are more expensive or of lower quality than imported alternatives
Overview of Recent Tariff Announcements
Tariffs, a form of tax imposed on imported goods, have been a significant tool in international trade policy. Recently, President Donald Trump announced a series of tariffs targeting major trading partners, including Canada, Mexico, and China. This post delves into the implications of these tariffs, drawing insights from various sources, including recent reports and economic analyses.
On February 1, 2025, President Trump imposed a 25% tariff on imports from Canada and Mexico, with a 10% tariff on Canadian energy imports. Additionally, a 10% tariff was levied on Chinese goods. These tariffs are part of a broader strategy to address issues such as illegal migration, drug trafficking, and trade imbalances.
Economic Impact of Tariffs
- Inflationary Pressures: Tariffs are expected to have a significant inflationary impact. According to Capital Economics, the new tariffs could push consumer price inflation to between 3% and 4% later this year. This increase in inflation would complicate the Federal Reserve’s efforts to loosen monetary policy.
- Impact on Consumer Prices: The tariffs will likely lead to higher consumer prices. For instance, a 10% universal tariff could add 0.7% to final consumer prices, while a 25% tariff on Canada and Mexico could add 0.6%. The impact on prices will vary across different goods, with durable goods and non-durable goods experiencing higher price increases compared to services.
- Effects on GDP and Employment: Goldman Sachs estimates that a sustained 25% tariff on imports from Canada and Mexico could reduce US GDP by 0.4%. The tariffs could also lead to job losses, particularly in sectors heavily reliant on imported goods, such as automotive and manufacturing.
- Sector-Specific Impacts
- Automotive Industry: The automotive industry is particularly vulnerable to tariffs due to its reliance on cross-border supply chains. A 25% tariff on Canadian and Mexican imports could increase production costs for US automakers, adding up to $3,000 to the price of some vehicles. This could reduce demand for new cars and negatively impact sales volumes.
- Energy Sector: Tariffs on Canadian energy imports, although lower at 10%, could still have significant implications. Canada supplies a substantial portion of US crude oil imports, and tariffs could lead to higher energy prices, particularly in the Midwest.
- Agricultural Sector: Mexico is a major supplier of fresh produce to the US. Tariffs on Mexican imports could lead to higher grocery prices, affecting fruits, vegetables, and nuts. This could have a direct impact on consumer spending and overall inflation.
Retaliatory Measures and Global Trade Dynamics
- Retaliatory Tariffs
- In response to US tariffs, Canada and Mexico have announced plans to impose retaliatory tariffs on US goods. These measures could further escalate trade tensions and disrupt supply chains, leading to higher costs for businesses and consumers. However, there has been paused on the Tariffs after talks between Trump and Trudeau.
- Global Trade Relations
- The imposition of tariffs has strained relations between the US and its trading partners. The potential for a global trade war looms large, with the European Union also being considered for additional tariffs. Such developments could lead to a more fragmented global trade environment, impacting economic growth and stability.
Long Term Implications
- Stagflation Risks: The combination of higher inflation and lower GDP growth could lead to stagflation, a scenario characterized by stagnant economic growth and high inflation. This would pose significant challenges for policymakers and could lead to prolonged economic uncertainty.
- Shifts in Trade Patterns: Over the long term, tariffs could lead to shifts in global trade patterns. Businesses may seek to diversify their supply chains to mitigate the impact of tariffs, potentially leading to increased trade with other regions. However, this process could be costly and time-consuming.