The economic effects of tariffs, particularly those imposed by the United States, have been a subject of extensive analysis and debate. Tariffs can initially stimulate economic activity as firms and consumers rush to make purchases before costs rise. However, this often leads to a subsequent decline in demand, negatively impacting growth momentum.
"Taxes on imports (aka tariffs) can generate revenue, shield domestic industries, or gain leverage in trade negotiations," according to RBC Wealth Management. The short-term benefits are often overshadowed by longer-term consequences such as reduced business investment and uncertainty in manufacturing sectors.
During the U.S.-China trade war, global manufacturing indices showed contraction, while services sectors were less affected but still faced challenges due to weaker consumption and investment trends. Inflationary pressures from tariffs also follow an "up-and-then-down" pattern as initial price hikes eventually subside when purchasing power diminishes.
The U.S.-China trade war's impact on inflation was evident with early acceleration followed by a decline as spending weakened. A stronger U.S. dollar helped mitigate some price pressures during this period.
RBC Wealth Management notes that "higher trade barriers might be an enduring feature of the U.S.-China relationship," but other tariffs could be more transactional under Donald Trump's second-term trade policy. This approach aims for reciprocal tariffs to level the playing field with countries imposing protectionist measures on the United States.
The potential for prolonged tariff measures raises concerns about their use as a revenue source rather than just negotiation tools. For every percentage point increase in average tariff rates, annual customs revenue could rise significantly.
As global GDP growth slows and inflation runs above central bank targets, the capacity to absorb economic shocks is diminished compared to previous years. The unpredictability of U.S. trade policy poses risks to economic stability, potentially affecting private sector sentiment and investment decisions.
RBC Global Asset Management warns that any estimates regarding the impact of tariffs "unavoidably leave considerable room for error." Nonetheless, they emphasize that tariffs are generally detrimental to both trading partners and implementing countries due to potential inflationary effects and retaliatory measures.
Trade policy remains a significant downside risk for the economic outlook. Even without new tariffs, uncertainty alone can hinder economic activity through confidence channels, prompting businesses and households to adjust their financial strategies accordingly.