Disarray under Trump's reign may have already impaired the economy; potential may no longer exist for recovery.
In a surprising move, President Trump seems to be dialing back some of his extreme economic policies, causing both relief and concern among investors. His sudden openness to easing tariffs on China and statements about not intending to fire Federal Reserve Chair Jerome Powell have been met with a mixed response, given his unpredictable approach to economic decision-making.
On Tuesday, Trump signaled a shift on two significant issues causing uncertainty: the possibility of easing tariffs on China and the absence of threats towards Powell. However, this abrupt change in tone doesn't erase the tumultuous impact emanating from the White House, which could potentially push the US, and other economies, into a recession.
According to Wendy Edelberg, senior fellow in Economic Studies at the Brookings Institution, the ongoing uncertainty created by the White House is more damaging than the tariffs themselves. "It's another lurch," she said in an interview with CNN.
Wall Street breathed a sigh of relief when US stocks surged following the President's statements, despite ongoing concerns about the sustainability of the 145% tariffs on China. However, before investors can break out the champagne, it's important to remember that US stocks are still down by 11% since Trump took office in January, due to constant changes and mixed messaging from the White House.
Even if all Trump's revised tariffs were unwound today, the US would still face a significant economic hit. According to Kent Smetters, professor of business economics and public policy at the University of Pennsylvania's Wharton School, at least 1% of GDP would be lost due to policy uncertainty alone.
At the heart of the issue lies the unpredictability of Trump's tariff agenda, which fundamentally alters global trade and slams the brakes on economic growth. Tariffs lead to skyrocketing prices and higher long-term inflation expectations, with the heaviest burden falling on lower-income consumers.
Moreover, the uncertainty caused by Trump's approach has eroded confidence in the US, leading to a loss of trust among America's closest allies and trading partners. This confidence crisis has paralyzed businesses globally, creating a rising tide of anxiety that's reflected in the Federal Reserve's recent "beige book" report.
In essence, Trump's haphazard approach to tariffs has caused significant harm to both the US economy and the global trade landscape. Despite generating substantial federal revenue, the long-term costs have outweighed these gains. If the White House wishes to restore confidence and boost economic growth, a more predictable and collaborative approach may be necessary.
The Economic Impact of Trump's Tariffs: A Closer Look
The Impact on U.S. Economy
- Economic Growth and GDP: Research from the Wharton Budget Model predicts that tariffs implemented by President Trump will reduce long-run U.S. GDP by about 6% and wages by 5%.
- Household and Wage Effects: The tariffs impose a lifetime loss of approximately $22,000 on a typical middle-income household.
- Revenue versus Economic Costs: Though tariffs are expected to raise significant federal revenue, the reduction in GDP and wages due to tariffs is more than twice as severe as that caused by an equivalent revenue increase via corporate tax hikes.
- Inflation and Prices: Tariffs have contributed to elevated prices and higher long-term inflation expectations.
- Job Market Consequences: While tariffs on steel and aluminum aim to protect domestic producers, the actual impact is mixed. Earlier tariffs supported only about 1,000 steel jobs but caused losses of around 75,000 jobs in steel-using industries.
- Investment and Capital Flows: Reduced economic openness due to tariffs leads to lower domestic investment and a less dynamic economy.
The Impact on Global Trade
- Trade Uncertainty and Risk: Trump’s aggressive tariff stance and unpredictability have raised global trade policy uncertainty to unprecedented levels, leading to a loss of confidence among investors and trading partners.
- Global Retaliation and Trade Tensions: Tariffs prompt retaliatory measures from trade partners, influencing economic relationships worldwide and contributing to slower global growth and increased friction in international trade.
- Short-term Gains versus Long-term Costs: The overall consensus among economists is that such trade barriers slow economic growth, raise costs for consumers and businesses, and ultimately undermine U.S. economic dynamism and security.
- The eventual easing of tariffs on China, as signaled by President Trump, has been met with a mixed response from investors, given the unpredictable approach to economic decision-making inherent in his administration.
- Wendy Edelberg, a senior fellow in Economic Studies at the Brookings Institution, suggests that the ongoing uncertainty created by the White House is more damaging than the tariffs themselves, stating, "It's another lurch."
- Despite US stocks surging following the President's statements about easing tariffs, they are still down by 11% since Trump took office in January, due to constant changes and mixed messaging from the White House.
- According to Kent Smetters, a professor of business economics and public policy at the University of Pennsylvania's Wharton School, at least 1% of GDP would be lost due to policy uncertainty alone, even if all Trump's revised tariffs were unwound today.
- The unpredictable tariff agenda of the Trump administration has eroded confidence in the US, leading to a loss of trust among America's closest allies and trading partners, and creating a rising tide of anxiety that's reflected in the Federal Reserve's recent "beige book" report.