At the Chicago Federal Reserve Bank’s 31st Annual Automotive Insights Symposium, Chicago Federal Reserve Bank CEO Austan Goolsbee has addressed the question of President Donald Trump’s tariffs on Mexico, Canada, and China, which have been delayed in the first two countries for the time being.
Stressing that the views were his and not those of the entire central bank, Goolsbee warned that the implications of the Trump tariffs could include significant impacts on supply chains and, as a result, the economy.
“Until recently, economists paid little attention to supply chains,” Goolsbee said. “Then, in 2020, we all found out the hard way how much they can matter for the economy and for inflation. As we seem to be entering a new period of risks to the global supply chain, some of the lessons we learned during the Covid-19 pandemic may have a direct bearing on monetary policy decision-making in the coming months.”
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“Supply-side disruptions can have a material impact on aggregate inflation,” he continued. “They aren’t always just minor disturbances that average out at the macro level. It is dangerous to just ignore them.”
Much of the criticism of the Trump tariff plans has focused on increased product costs that businesses and consumers will experience. That, however, is a first-order effect, an immediate result of the action. Impacts on supply chains are second-order effects. They develop over a more extended time and can have a pernicious influence because it isn’t what people are directly following.
“At risk of oversimplifying, pure economic theory suggests that if there is no retaliation, a tariff is a one-time increase in costs, and therefore its impact on inflation should be — wait for it — transitory,” said Goolsbee. “It says the tariff inflation is not a sign of persistent overheating and therefore the central bank should ignore it when setting monetary policy.”
Currently, the 25% tariffs on Canada and Mexico have been postponed for a month. Whether there will be some deal to cancel them is impossible to tell. The 10% tariff on China did go into place and in return, certain U.S. exports to the country are also facing increased tariffs.
“Now, per the Executive Order, the announced tariffs, if they take effect, would impact $1.3 trillion in trade, representing 43% of US imports,” wrote Liz Ann Sonders, chief investment strategist, Charles Schwab & Co. “That's based on 2023 data. And it would be close to about 5% of US gross domestic product, or GDP.”
She added that this would raise the average U.S. tariff level from its current roughly 3% to 10.7% and could “put downward pressure on economic growth and upward pressure on inflation, all else equal.”
U.S. importers would be responsible for paying the tariffs. However, exporters would also be affected because of retaliatory tariffs.
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