Off again, On again
Clarifying my view after multiple recent court rulings on Trump tariff policy
It didn't take long. A little more than an hour after I hit the send button on yesterday’s post, the US Federal Court of Appeals put a temporary stay on the stunning May 28 ruling of the Court of International Trade (CIT) that had challenged the constitutional legality of Trump’s core reciprocal tariff plan. How this ends, is anyone’s guess. After another round of appeals, it seems quite likely that the Supreme Court will have the final say.
There can be no appeal, however, to the economic verdict, which ultimately will be adjudicated in the real economy and financal markets. In an effort to clarify my thinking in the aftermath the legal whipsaw over the last 24 hours, I feel compelled to reiterate three key points:
Tariffs. I am operating under the assumption that some major elements of Trump’s tariff policies will remain intact in one form or another. Hopefully, they won't be as severe as threatened earlier, but they will nonetheless impose meaningful taxes on most US imports, with an especially steep penalty on those coming from China. Fortunately, the CIT’s May 28 ruling categorically repudiated Trump’s fallacious emergency justification for tariffs. But I suspect he will find other ways to stay with this core thrust of his political beliefs — most likely wrapped around alleged national security concerns as provided by Section 232 of the Trade Expansion Act of 1962. I still suspect that tariffs surviving the current legal skirmishes are likely to be onerous enough to have negative impacts on global trade, with especially adverse implications for the US and China.
Uncertainty. Two major court rulings on tariffs in 24 hours speak for themselves: Trade policy uncertainty, currently at a record high, is likely to stay sharply elevated for the foreseeable future. In this climate, companies have no idea how to scale and source inputs for their multinational production platforms. The planning exercise has become an oxymoron, with serious consequences for the real economy. A protracted period of policy uncertainty essentially freezes business decision making on capital spending and hiring, with negative repercussions for income generation and consumer demand; consumer purchasing power should be further constrained by tariff-related price shocks. Uncertainty remains the enemy of decision making.
Twin deficits. The main thrust of yesterday’s post is that the US trade deficit is here to stay — irrespective of anything Trump does on tariffs. From that perspective, the reckless fiscal policy of Trump 2.0 is big, but hardly beautiful. It will push an already anemic net domestic saving rate into negative territory for the first time since the GFC and its immediate aftermath. That will increase America’s reliance on surplus saving from abroad in order to fill the growing void. A protracted trade deficit is the other side of this coin, upping the ante on US demand for capital inflows at precisely the time when Trump’s America First campaign has put a stake in the heart of globalization and major US alliances. I stand by my view this could well be a rude awakening for still complacent financial markets.
Economic forecasting is tough enough — far be it for me to try and guess the eventual outcome of what promises to be a very contentious legal battle on US tariff policy. But the enduring analytics of tariffs, uncertainty, and twin deficits continues to paint a worrisome picture of what lies ahead on the economics and financial markets fronts.