Consumers in the US will shoulder the biggest negative impact of the slate of tariffs being announced by President Donald Trump, according to a new report.
GlobalData’s US Elections Briefing (Fourth Edition): Trump Tariffs notes that, at the time of writing, financial market reactions appeared to suggest that Trump’s campaign of tariffs will produce few practical results. It asserts that this was complacent, however, forecasting an increase in the effective average external tariff of the US by up to 10% in a base case forecast. Indeed, markets have reacted more negatively to developments in the last week, such as the delayed tariffs of Canada and Mexico finally being enacted.
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The report predicts that the impact on US exports coupled with the inflationary impact of tariffs on imports will contribute variously to a fall in real household incomes by 1ppt, a fall in real GDP of 0.5ppt and a rise in inflation of 0.5ppt in the long term.
“Our economic modelling forecasts suggest that in the US itself, the upfront negative impact will affect consumer demand more than inflation or overall growth,” GlobalData states. “In China and Europe, Trump tariffs could have the incidental positive effect of sharpening policy stimulus.”
Indeed, the report suggests that in Europe and China, the impact of Trump’s tariffs will be mitigated by monetary and fiscal stimuli.
Of Europe, it says: “We expect the tariff storm impact to be worse for growth than for inflation, allowing space for more domestic policy stimulus,” while in China it contends that the outcome “depends on the balance between domestic stimulus and the intensity of the tariff storm”.
Trump tariff goal inconsistencies
As Trump has variously outlined, there are three main goals to his programme of new tariffs, but GlobalData – among others – notes that these do not align with each other.
Trump has stated that, through his use of tariffs, he is seeking to reindustrialise the US with manufacturing jobs ostensibly lost through off-shoring, generate revenue to offset planned tax cuts and extract concessions from trading partners.
However, the report outlines that retaliatory tariffs from trade partners are likely to weaken other currencies against the dollar and erode or nullify any competitiveness gain, tariff-driven inflation is likely to raise the cost of living domestically and Trump’s plan for continued reciprocal tariffs is likely to create instability for his fiscal and reshoring goals.
“Tariffs are a blunt instrument for achieving the desired effect of reversing deindustrialisation since the root cause of the problem is repressed domestic demand in Europe and, above all, China,” the report says. “Tariffs’ pain-before-gain effects may yet give Trump pause – especially if the US equity market weakens, but other radical options exist to achieve the tariff campaign’s goals, including exchange rate realignments and tax reform.”
