We asked Dr Ira Kalish, Chief Global Economist at Deloitte and one of the most highly regarded speakers at the World Retail Congress for his instant analysis of the likely consequences of the unprecedented tariff increases. Ira will also be delivering a keynote presentation on May 13th. 

Dr Ira Kalish, Chief Global Economist, Deloitte

What has been the impact of President Trump’s tariff plan and what do you see happening to the key indicators such as interest rates? 

President Trump said that his tariff plan would generate significant revenue for the US government, would compel companies to invest more in production in the US, would revitalize US manufacturing, and would generate wealth for the country.  Critics might said that significant tariffs would boost consumer prices, thereby creating higher inflation and compelling the Federal Reserve to adjust monetary policy; increase production costs for US companies, thereby reducing their global competitiveness; undermine consumer purchasing power, thereby leading to slower spending growth; and damage relations with allied countries.    

There was a financial market meltdown during the days that followed the announcement impacting US, Western Europe, Japan, Canada and many other equity markets as well as oil and natural gas prices.   

Bond yields fell as well. Yields in most other developed economies were down sharply as well.  This reflected an expectation that central banks will be more aggressive in easing monetary policy in the coming year.  That, in turn, reflected expectations of a substantial economic downturn.  Indeed, futures market’s implied probability 1that there will be two US interest rate cuts this year fell from 35 percent one month ago to just 4 percent now.  Investors now see a 75 percent chance of four more Federal Reserve rate cuts this year.  One might infer that investors are now expecting a recession soon.  Also, the drop in US bond yields likely reflected a flight to safety on the part of global investors.  US Treasury bonds are still seen as the world’s safest asset, especially at a time of uncertainty and risk.   

Regarding the Fed, the Chair of the Federal Reserve, Jerome Powell, gave a speech a few days after the tariff announcement in which he said 2“it is now becoming clear that the tariff increases will be significantly larger than expected.  The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”  He noted that uncertainty remains high as we don’t yet know how long the tariffs will remain in place and what degree of retaliation will take place by other countries.  He said “inflation is going to be moving up and growth is going to be slowing but to me it is not clear at this time what the appropriate path for monetary policy will be.”  He added that “while tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent.”  In other words, it remains unclear what the Fed will do.   

Interestingly, the five-year breakeven rate for US Treasury securities, which is a measure of bond investor expectations for average inflation over the next five years, fell by ten basis points in the two days following the tariff announcement.  Thus, despite the introduction of high tariffs, which are normally inflationary, investors evidently expect lower inflation to ultimately prevail, perhaps after a temporary hike in inflation, likely due to a sizable decline in demand.   

 

How will the US consumer be impacted? 

The tariffs that were introduced are without precedent in modern times.  One might compare this to the Smoot-Hawley tariffs that were introduced at the start of the Great Depression, and that exacerbated the Great Depression.  Yet the new US tariffs represent a bigger increase in tariffs than the Depression-era boost in tariffs.   

In fact, the Yale Budget Lab has estimated that the new tariffs, added to existing tariffs, will boost the effective average tariff rate of the United States to 22.5 percent, which is the highest level since 1909.  In addition, they estimate that, if the tariffs are fully passed through to consumers, the average US household will see its purchasing power reduced by US$3,800. 

 

How do you expect those countries most impacted by these tariffs to react? 

One reason that investor sentiment declined late last week is that China retaliated against US tariffs.  The Chinese government announced that it will impose a 34 percent tariff on all imports from the United States.  This is far more aggressive than anything China has done previously.  In addition, China imposed new restrictions on exports of rare earth minerals and launched an investigation of a large US-based chemicals company.  It is likely that China’s action is meant to set the stage for negotiations with the US.   

The 34 percent tariff launched by China is the same as the 34 percent tariff announced by the US.  Meanwhile, China imported US$143 billion in goods from the US last year.  The high tariffs will likely lead to a reduction in imports from the US, with trade being diverted elsewhere.   

The high US tariff on imports from China could lead China to attempt to boost exports to other countries, perhaps by lowering prices.  This is a concern for the EU.  As such, it is reported that the European Commission is preparing to impose emergency tariffs on China should there be a surge of imports from China.   

In recent years, many global companies have shifted some processes from China to neighbouring countries in Southeast Asia.  This shift, often known as China plus one, was a reaction to US tariffs on China as well as fears of further worsening of US-China relations.  It is a strategy undertaken by companies based on the US, Japan, and Europe.  Yet now this strategy is under question given that the US is imposing severe tariffs on several Southeast Asian nations, especially Vietnam.  Indeed, Vietnam has been a major destination for producers of electronics, apparel, and other consumer products.   

 

What does this mean for business leaders? 

One question that arises is whether the US administration will keep these elevated tariffs in place for a prolonged period.  In the past three months, the administration has backtracked on some tariff proposal and reversed course on others.  Investors and business leaders have become wary of making investment decisions based on tariff expectations.  It is likely that uncertainty has taken a toll on business investment and business confidence.  Business leaders will want to know what the trading environment will look like, not only in the next several months, but in the next several years.  Only with that knowledge can they make sensible long-term investment plans.