By Jonathan Levin / Bloomberg Opinion
Donald Trump’s allies tell us that tariffs are principally a negotiating tool rather than a tax on consumers: If you threaten America’s trade partners with new duties, they’ll immediately cave and provide more favorable terms for the exports we produce domestically and sell into their markets.
Key to that logic, however, is the idea that the U.S. has all the leverage, and that just isn’t true in the current macroeconomic environment.
When Trump fired his first shot in the 2018 trade war with China, core inflation was running at around 2.3 percent and 30-year mortgage rates were around 3 percentage points lower than today. That meant Trump had sufficient cushion to pursue his goals without unduly punishing American households and sacrificing political support. This time, the U.S. is coming off the worst inflation in 40 years and still struggling with mortgage rates that have rendered housing unaffordable. Our trade counterparts know that the U.S. has a limited tolerance for additional economic pain.
Will the backdrop get much better by Inauguration Day on Jan. 20? Unlikely, and it may even get marginally worse.
Consider the latest inflation data published Wednesday. The core consumer price index — which excludes volatile food and energy — rose 3.3 percent in October from a year earlier. In the 12-month period, consumers have struggled with 14 percent inflation in their motor vehicle insurance; 7 percent inflation in their vet bills; and ongoing increases in housing costs (mostly, it seems, from rollover rents that have been slower to adjust to post-pandemic rental costs than new leases.) At a high level, the core CPI inflation measured year over year has been vacillating between 3.2 percent and 3.3 percent for five months now, and a casual observer could be forgiven for concluding that the disinflation process has stalled. The optics just aren’t great.
In general, I have been more optimistic than many about disinflation, and I do think that it would have resumed in 2025 in the absence of new policy shocks. A lot of the lingering upside pressure is centered on housing and insurance categories that are slow to adjust, and there’s little sign of new inflation pressures from supply chains or the labor market. In general, inflation is like a convalescing patient that would probably make a full recovery but remains vulnerable to new shocks.
And the memory of the worst of it is still very fresh. “[Consumers] are very, very fed up with price levels as is, even after having seen some relief in prices,” Kayla Bruun, lead economist with Morning Consult, told me in a live stream on Wednesday. Morning Consult’s Price Sensitivity Index — which measures’ consumers’ willingness to walk away from a purchase due to surprisingly high prices — has climbed meaningfully in recent years.
Among imported goods specifically, electronics, apparel and furniture all stand out as categories where high net shares of consumers suggest they would forgo purchases rather than accept higher-than-expected prices. It isn’t particularly clear how companies might respond if their input costs jumped and consumers balk at attempts to pass those through to prices, but none of the potential outcomes — weaker margins or higher inflation — seem desirable. The first would demand some adjustment in euphoric stock prices, while the latter outcome would keep borrowing costs high, impede the consumption story that has kept the economy humming and almost certainly ding Trump’s popularity with the voters who entrusted him to put the country on a better economic path.
All told, while I strongly doubt that large and sweeping tariffs ever make for good policy, I can appreciate their role in negotiations; at least in normal times. The Trump team is right to assume that exporting nations would typically bend over backward to maintain access to the world’s largest economy. But America is flashing signs of vulnerability, and the nations that we trade with can plainly see as much.
Inflation-weary Americans aren’t going to give Trump a long leash to wage a forever trade war under current circumstances. So even if this is a fight that the new administration is committed to having, perhaps they’ll do the American people the favor of waiting until the circumstances are better suited to delivering a decent outcome.
Jonathan Levin is a columnist focused on U.S. markets and economics. Previously, he worked as a Bloomberg journalist in the U.S., Brazil and Mexico. More stories like this are available on bloomberg.com/opinion. ©2024 Bloomberg L.P.
Talk to us
> Give us your news tips.
> Send us a letter to the editor.
> More Herald contact information.
