How The U.S. Economy Could Be Impacted By Tariffs

Summary

A lot of different views as to whether the trade war with China and tariffs will ultimately serve the purpose of getting China to back down from its more aggressive practices around intellectual property theft or force technology transfer.

We’re already starting to see a breakout of the goods that have been most directly impacted by tariffs, whether it’s in indexes like the Consumer Price Index or Personal Consumption Expenditure.

The greater impact is through the confidence channels.

By Liz Ann Sonders

Transcript

Liz Ann Sonders: Let’s talk what everyone’s talking about, the trade war with China and tariffs. A lot of different views as to whether ultimately this will serve the purpose of getting China to back down from its more aggressive practices around intellectual property theft or force technology transfer. We won’t know whether this is the appropriate method to solve that problem, but what we have to do here at Schwab is just objectively analyze the impact that tariffs are having, and will potentially have, on the economy on measures like inflation.

So, on that subject let me start with inflation. We’re already starting to see a breakout of the goods that have been most directly impacted by tariffs, whether it’s in indexes like the Consumer Price Index or Personal Consumption Expenditures - to see whether it’s having an impact, and it is indeed. In fact, the overall impact, the consensus, is that so far we’re looking - by summer - at about a quarter percentage point impact on measures like the CPI, and if the additional proposed tariffs on an additional $300 billion in Chinese goods kicks in, you would probably add another eight-tenths of a percentage point to inflation statistics, and that is meaningful given that we’ve been in a somewhat low-inflation environment.

I think the greater impact is through the confidence channels. What we saw at the outset of tariffs being placed on imports of Chinese goods was a diminution in some business confidence measures, and in turn, things like capital spending intentions. The hope was that we could extend this economic expansion years into the future by adding this next capital spending cycle, but it’s hard to envision a scenario where, if there’s not a comprehensive deal with China, that you can reignite those animal spirits, bring that business confidence up, and kick back in that capital spending cycle. So, that’s the indirect effect that this is going to have.

In addition, this latest round of tariffs, as well as the additional proposed tariffs, more directly go right to consumer goods. So, if we do see those additional tariffs kick in, I would call it more meat on the bones in terms of impact that this is going to have on the economy felt by consumers; and with the U.S. economy nearly 70% driven by consumer spending, that’s an impact that could have meaningful implications for overall economic growth.

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.