Tariffs not always inflationary
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TARIFFS NOT ALWAYS INFLATIONARY
As President-elect Donald Trump prepares to take office next month, market participants are bracing for a round of tariffs against a range of imported products that many say could be inflationary. The economic theory is that a tariff amounts to a tax on the customs value of an imported product, and that tax would be normally passed on to the consumer in terms of higher prices.
But Pramod Atluri, principal investment officer, of the Bond Fund of America, which is part of the Capital Group, believes tariffs do not always lead to inflation.
"If you look back at the first (Trump) administration, there's a lot of the same expectations as what we're seeing now," he says in an interview. "The expectation was that imposing tariffs was going to lower overall growth, will be a tax on the consumer, inflation was going to be higher, and there will be a stagflationary impulse."
But he notes that in the first few years of Trump's government, inflation didn't really become a problem and growth held up well.
Atluri points to a number of offsetting factors that could balance out the impact of tariffs, such as the strengthening of the U.S. dollar. That is deflationary, he says, because it raises the costs of U.S. goods for foreign countries, keeping global demand down.
Higher tariffs could raise the price of some goods which could hurt consumer spending, he notes, but if it leads to more onshoring and higher wages in the U.S., that could offset some of that.
"I think we should have a healthy dose of scepticism that we really know these policies ahead of time. The devil will be in the details of how policy will ultimately play out," Atluri adds.
Jeffrey Roach, chief U.S. economist at LPL Financial, echoes Atluri's sentiments in a research note.
He writes that it's not always the consumer that fully bears the brunt of tariffs.
Roach cites a National Bureau of Economic Research paper, which said foreign countries bore "close to half the cost of the steel tariffs." But he points to two very important considerations to include in the analysis: exclusions and item-specific markets.
The LPL economist says during Trump's first presidency, he granted exclusions to over 2,200 products based on businesses' defence that the tariff causes considerable harm, or the foreign product is not available in the United States.
"Ironically, Biden kept most of Trump's tariffs and put additional tariffs in place in May of this year."
Roach further notes that tariffs imposed in early 2018 had an impact on producer prices more than consumer prices as wholesalers did not fully pass along the cost of importing.
(Gertrude Chavez-Dreyfuss)
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