Dark-side economics loom on the horizon

For people concerned with trade, this is the most astonishing time since World War II. The US administration's tariffs have the potential to hit trade flows harder than the terrorist security crisis of Sept 11, 2001, the financial fallout of the global financial crisis, and the freezing of supply chains during the COVID-19 pandemic. Given the huge uncertainty and the day-by-day changes to US tariffs, it is timely to recap what we know and what we do not know about this shock. This uncertainty is a result of the highly personalized decision-making that Donald Trump has brought to the presidential office, with his tendency to announce policies, then backtrack and change them.

In early April he announced an ad hoc regime of high tariffs on most of the world's production, especially focused on East Asia, announced on so-called Liberation Day. This resulted in anxiety and volatility in global equity, bond and foreign exchange markets, with considerable loss of value. US President Donald Trump then backtracked completely from the global fight, and decided instead to re-focus on a bilateral tariff war with China. China has partly reciprocated. At the time of writing, US tariffs are as high as 245 percent on some Chinese goods and China's on US imports are as high as 125 percent, together with export restrictions on certain technologies imposed by both sides. Following domestic consumer outrage, the US administration has now made some exceptions for consumer electronics.

As a discipline, economists may disagree about many things. But the vast majority agree that the US tariffs will stimulate domestic production within the US, but at the expense of increasing production costs and allocative inefficiency, thus reducing productivity and causing enduring price rises.