Well….

奥别濒濒鈥�.

03 Apr 2025 2 min read

US President Trump unveiled a massive tax increase for US companies and consumers. Tariffs were set at 0.5 x bilateral trade deficit / US imports. This is a predictable formula, completely unrelated to trade openness. The uninhabited Heard and Macdonald Islands get a 10% tariffs (will the penguins retaliate?). This may cause investors to question the competence of the administration鈥檚 trade policy.
Trump has tended to retreat rapidly from tariffs that visibly hurt US consumers. Having a 10% near-universal tariff questions how far retreats go. If there is no retreat, markets will price a US recession. If there is a retreat, markets will assume US growth will weaken.
Trade under revised NAFTA is exempt. Negotiations for the patronage of exemptions now begin. Russian President Putin appears to have a strong bargaining position 鈥擱ussia鈥檚 USD3bn of exports to US, which should earn a 41% tariff, are already exempt.
The direct effect of such taxes raises US price levels by 1.7% to 2.2%鈥攖he change in effective tariff rates multiplied by share of imports. Second-round effects matter. Will US manufacturers raise prices? Will US retailers indulge in profit-led inflation? A 10% tariff increase means around a 4% consumer price increase, but retailers may use the narrative to raise prices more.