The ideologues of MAGA assured us that Tariff Man’s threats were pure bombast and Wall Street believed them, the reason equities and crypto went ballistic after the election of POTUS-47. Yet Trump’s tariff threats were all too real and the global markets must now pay a bitter price for history’s second worst economic own goal after Brexit.
The 25% tariff on Mexico will immediately send its economy into a deep recession since it sends $400 billion of exports to the US. This means millions of desperate, suddenly unemployed Mexican migrants will head North towards the Rio Grande in a quest to cross the border into Trump’s Gringolandia. This is the exact opposite of what Tariff Man wants.
The MAGA base will also feel the immediate impact of a 25% tax on the imported tomatoes, bell peppers, avocados, raspberries, tequila and bottles of Corona they consume. Food inflation is the ultimate regressive tax for Joe Sixpack as the CPI spikes.
The Powell Fed cannot cut interest rate since the tariffs goose inflation risk, the reason the US Treasury bond yield curve has flattened. It is too early to estimate the hit to US GDP growth but Street economists believe that it could fall from 2-1%. Trump inherited a 4% unemployment rate from Biden but will now needlessly rattle the labour market.
The impact on the auto industry alone makes these draconian tariffs on Canada and Mexico a dumb idea. Thanks to NAFTA, 80% of US auto components are imported from Canada and Mexico. So the impact on Michigan’s Big Three alone will be devastating. The cost of an average car is estimated to rise by at least $3,000 and this price hike combined with lower consumer demand means certain job losses in US assembly plants and car dealerships.
I really doubt if Trump ever learnt David Ricardo and Adam Smith’s arguments for free trade they forced us to mug-up at Wharton. He has launched the worst global trade war since the Smoot Hawley tariff rounds of the 1930’s that prolonged the Great Depression. For the Financial markets, the messiah of MAGA has morphed into a sinister econ clown, the American Erdogan.
The 10% tariff on Canadian oil imports is no Trumpian act of mercy. The US imports 4-MBD of crude from Alberta, more than from all foreign countries combined. This oil is refined into gasoline in US refineries. A 10% tax on Canadian oil imports means a sharp rise in US gasoline prices, possibly as high as 70 cents a gallon. This thoughtless tariff alone will hit inflation and economic growth across the US.
The spike in the US dollar, not just against the Mexican peso, Canadian dollar and Chinese yuan but the Euro, sterling, Indian rupee and most emerging markets/commodity currencies suggests the asymmetric economic impact of the tariffs. The brutal sell-off in Bitcoin and Ether demonstrate the scale of risk aversion in the global markets even as gold rises to $2800 an ounce. The financial markets are haunted by a very rational fear premium.
Also published on Medium.
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