What to know about the US tariffs?

To determine the amounts of those reciprocal tariffs, the U.S. Trade Representative’s Office used a formula to calculate the tariff rate necessary to balance trade deficits between the United States and its trading partners, according to a statement posted on the trade representative’s website.

According to the US Administration, tariffs are not a tax hike on US consumers and businesses. However, Peter Navarro, Senior Counsel for trade and manufacturing in the White House said recently that tariffs will raise USD6tr in tax revenues over the next decade! If US businesses and consumers do not pay them, and exporters to the US do not pay them either, who pays?

There seem to be a few ways to try to square this circle but, unfortunately, none of them seem to hold much water. One is the old Laffer curve idea that if you cut taxes it will generate more revenue, not less. For make no mistake, the Trump Administration sees tariffs as a tax cut, not a hike. Navarro explained last weekend that tariff revenues will be so great, and so incentivise the US auto industry, amongst others that the government will have sufficient surpluses from tariffs that it will be able to pay these out, and much more, in the form of tax cuts or incentives, such as subsidised prices for buying US-made cars. But the logic seems to have more holes that a lump of Swiss cheese.

The Laffer curve, which was originally used to explain how personal tax cuts would magically raise tax revenues was discredited long ago, right back in the Ronald Reagan era of the 1980s. If the Laffer curve does not exist, and tariffs represent a tax hike, not a cut, then tax revenues will rise, but US consumers and businesses will be worse off.

There seems to be another strand of thinking coming from the Administration when it comes to tariffs. This is that US firms, notably auto manufacturers should not lift their prices once tariffs come into effect (which is today). Avoiding price hikes will mean that foreign car manufacturers ‘pay’ for the tariffs; not in terms of paying taxes to the US Treasury, but in terms of seeing demand for their cars collapse. There have been reports dating right back to January that President Trump has stressed that he does not want to see US car companies lift prices and has threatened to act if they do. Just how this would take place is anyone’s guess.

However, when you think about it, if US car firms, and other industries do not lift prices (which seems extraordinarily unlikely, by the way), it would likely mean that they could pay less tax than before, but only because their profits will be squeezed because the tariffs on imported auto components (and other tariffs such as those on steel and aluminium) will increase their cost of production. Again, the Administration will argue that in holding US prices down, while foreign prices rise on account of the tariffs, there will be such a boom in the US auto industry that even if manufacturers’ profit-per-car declines they will be selling so many more cars that their total profits will rise, not fall.

And, if that’s the case, the revenues that go to the Administration can then be recycled back into the industry, or the wider economy as described earlier. But does this idea hold any more water? Steven Barrow, Head of Standard Bank G10 Strategy doesn’t think so, not least because it will be impossible to make US firms hold prices unchanged. In short, the circle is unlikely to be squared and tariffs will just prove the lose-lose outcome for the US and everybody else.

Probably the key question, at least for today, when when reciprocal tariffs will be unveiled, is whether markets have seen through this sort of bluster and are adequately attuned to the damage that tariffs will do. The fall in stocks, the dollar and treasury yields this year may suggest that asset prices have discounted all the bad news on tariffs and are due a big bounce, possibly today. But we don’t buy it.