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Uncertainty Of Future Tariffs Continues To Hamstring Economy
On April 2 President Donald Trump declared "Liberation Day," announcing a new tariff strategy aimed at allegedly correcting trade imbalances and protecting U.S. workers and industries.
It was the wrong medicine for misdiagnosed illness. Internal U.S. economic problems are caused by legal incentives for financial speculation and disincentives to produce goods people need. Tariffs won't solve that problem.
The tariff rates Trump introduced were ignoring economic realities. The whole economic concept behind was based on some advisors weird theory. It was obvious that the whole Trump strategy implemented through tariffs would fail.
China and other pushed back against U.S. tariffs by introducing some on their own. The markets reacted appropriately. The values of the U.S. dollar, U.S. stock markets and U.S. treasuries decreased.
By April 9 Trump was forced to pull back. He paused the tariffs for most countries for 90 days but increased tariffs on China.
China responded in kind.
Three days later Trump announced another retreat. Smartphones and computers were excluded from the previously introduced tariffs.
Speculators may well have liked the uncertainty Trump's irresponsible tariff tactics introduced into financial markets. But for markets of real goods uncertainty is a venom that blocks all activities. It soon became obvious that the tariffs would cause huge problems for the U.S. economy.
Trump tried to press China to concede to U.S. terms in some new trade deal. But China rejected all talks until tariffs were reestablished at the previous levels.
That concession was made. Talks over the weekend in Geneva saw the U.S., again, pulling back.
The editors of the Wall Street Journal don't hold back in their comment:
Rarely has an economic policy been repudiated as soundly, and as quickly, as President Trump’s Liberation Day tariffs—and by Mr. Trump’s own hand. Witness the agreement Monday morning to scale back his punitive tariffs on China—his second major retreat in less than a week. This is a win for economic reality, and for American prosperity.
Make that a partial win for reality. The Administration agreed to scrap most of the 145% tariff Mr. Trump imposed on Chinese goods on April 2 and later. What remains is his new 10% global base-line tariff, plus the separate 20% levy putatively tied to China’s role in the fentanyl trade, for a total rate of 30%. In exchange, Beijing will reduce its retaliatory tariff to 10% from 125%. The deal is good for 90 days to start, as negotiations continue.
And therein, I believe, still lies the big problem.
The editors conclude:
The 30% tariff is still exceptionally high for a major trading partner, but the 90-day rollback spares both sides from what looked like an impending economic crackup. U.S. consumers were facing widespread shortages, while China feared growing unemployment.
For now, nothing will change with those symptoms.
It is not only the very high 30% tariff (for mostly products with very low profit margins) that will prevent Chinese factories from resuming production and U.S. retailers from restocking their shelves.
The poison that still paralyses everything is the uncertainty and insecurity that comes with the 90 days limit of the deal and with no perspective of what might follow. Who will post orders for, let's say return-to-school items, if it is unknown what price will have to be paid for them?
Paul Krugman agrees:
The prohibitive tariff has been paused, not canceled. Nobody knows what will happen in 90 days. I’ve long argued that the uncertainty created by Trump’s arbitrary, ever-changing tariffs is at least as important as the level of those tariffs. Well, the uncertainty level has arguably gone up rather than down.
This retreat probably hasn’t come soon enough to avoid high prices and empty shelves. Even if shipments from Shanghai to Los Angeles — which had come to a virtual halt — were to resume tomorrow, stuff wouldn’t arrive in time to avoid exhaustion of current inventories.
I guess it’s good news that Trump slammed on the brakes before driving completely off the cliff. But if you think that rationality has returned to the policy process, that the days of government by ignorant whim are now behind us, you’ll be sorely disappointed.
I agree with that take.
@Roger #206
Das has a knack for turning 2 sentences into 3 part logorrhea.
Anyone with a lick of human understanding could see, much earlier than 2005, that securitization would result in NINJA mortages and were going to be a problem. I started participating in the iTulip.com discussion web site in 2003 based precisely on the analysis that the mortgages were going to be a problem – and the question was: would the US oligarchy/leadership recognize and defuse this problem, or would they kick the can down the road? The answer to that, we all know.
As for your statements about “economic democracy”: utter nonsense. There is absolutely NOTHING democratic about how China has progressed. Note I am not saying that this was all diktat from above, rather, what China did was to give its provinces the capability to print their own money and then to reward successful efforts while papering over (with printed debt) the losers.
This has absolutely nothing whatsoever to do with democracy, nor is this capitalism in any normal sense. Nobody voted to make millions of e-scooters or electric bikes that were then discarded in huge piles of junk, or the many, many other failures at huge scale which this method inevitably results in (ghost cities are another example). Guanxi – or bribes – were a far bigger factor in the decision making than anything else.
Then there’s the commentary on the US dollar: “Demand for dollars” – define this more precisely.
Do you mean central bank dollar holdings? This is the correct definition of a significant part of US dollar “demand” – but it mostly exists so that Central Banks can ensure liquidity underlying trade. I say mostly because nations like the UK and Japan hold disproportionately more dollars for reasons other than trade liquidity but there is no question that the vast majority of central bank dollars are for trade liquidity purposes.
Do you mean Eurodollars? This is another, certainly larger at any given time, part of US dollar “demand”. But it is literally dollars created out of thin air by banks OUTSIDE the US in order to “facilitate trade”. This is pure banksterism.
Any other forms of “demand for dollars” are either very small in relation, or a figment of fools’ misunderstanding of reality. US assistance to governments and NGOs, whether USAID or outright subsidies, are large in absolute terms but tiny compared to the above 2. Central bank holdings of dollars is less than $4 trillion – you can see the details here. Eurodollar numbers are no longer published, but that market size was $15T in 2015. The M1 US monetary measure was, more or less, updated to reflect Eurodollars in 2020 and jumped over $12T as can be seen here
In comparison, USAID’s budget of $40 billion is nothing. Total US foreign aid was $55B in 2023, also nothing.
So let’s now look at tariffs from this, correct, understanding of how dollars really work in the international finance arena.
The summary is that:
1) The US does not, strategically or literally, have to import enormous quantities of non-discretionary goods like food and energy. The trade surplus nations do: China, Japan, the EU.
2) Tariffs – it is far from clear that they guarantee less “dollar demand”. Less “dollar demand” would only occur if the exporters were able to forgo trade entirely with the US – and I don’t believe they can in the medium or long term.
Detail:
Tariffs: on the one hand, should be expected to reduce trade. Less trade = less eurodollars + less central bank reserves for trade liquidity = less “demand for dollars”.
But tariffs have to be paid in dollars. And while Mercouris is 100% correct in that China can stimulate demand to offset reduced trade with the US, faster than the US can stimulate production to replace the lost incoming traded goods – this is only a short term analysis.
In the medium term, it is far less clear that dollar trade liquidity PLUS dollar tariffs is a net negative for “demand for dollars”. For example: if any part of the tariffs are absorbed by the exporter – then dollar demand could very well go up, not down. Only if you assume – which neoliberal wankers do – that all of the tariffs will be absorbed by the US consumer, would the net negative situation occur. I personally discount this completely because in the real world, it never works that way. Structural changes result in a rebalancing of the seller/consumer tradeoff – it never goes 100% to the consumer unless it is a monopoly situation.
But more critically, and in the long term, exporters are structurally handicapped to fight tariffs particularly the big exporters today. This is because the big exporters today need their trade surpluses.
Let’s not forget that the reason China trades a lot, as does Japan and the EU, is because all 3 entities need to import enormous quantities of food, energy and the input commodities to make the products for export goods as well as for internal development/consumption. All 3 – one growing, the other 2 not – want massive export and current account surpluses precisely in order to enable their massive imports.
Or put in other words: China, the EU and Japan MUST have surpluses in order to survive. It is not discretionary.
And while the US is not 90% of the world economy, any more, as it was after World War 2 – the US is by far the biggest single consumer both as a single nation and per capita in the entire world.
And unlike the EU – which is another huge demand sink – albeit lower per capita – the US does not actually HAVE to import a lot.
I’m not saying the US is 100% self sufficient in everything – it is not.
Nor am I saying the US can go cold turkey on imports right now – equally it cannot yet.
But the US does not need to import lots of food or lots of energy RIGHT NOW. It does not need to import lots of pretty much anything else should it choose to mobilize the human, capital and commodity resources within its own borders – although this would take time.
Posted by: c1ue | May 15 2025 14:23 utc | 208
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