One little noted but quite significant effect of tariffs is that they destroy global supply chains. From Alasdair Macleod at alasdairmacleod.substack.com:
Tariffs not only raise consumer prices, but the budget deficit feeds a decline in purchasing power for the dollar unless the deficit is funded by an increase in consumer savings.
This article details why the inflationary consequences of Trump’s tariff policies are severely underestimated, with important consequences for the dollar and the Fed’s interest rate policies. The implications are that an economy which is already tipping into recession is only seeing the beginning of its difficulties.
Inflation outlook is being badly misjudged
One area of speculation over the consequences of President Trump’s tariffs is the effect on consumer prices. Optimists comfort themselves by saying the cost of tariffs will be shared by foreign manufacturers, importers, wholesales, and retailers thereby minimising consumer price inflation.
Therefore, they say, with CPI remaining subdued and the economy trending into stagnation, interest rates can decline over the rest of the year. Undoubtedly, margins will be squeezed. But this view does not allow sufficiently for the higher costs faced by US manufacturers importing raw materials and other inputs not readily available in the US.
Furthermore, Trump falls into the trap of the broken window fallacy, by ignoring the consequences of destroying global supply chains. The obvious benefit of tariffs which he sees is the repatriation of manufacturing to the US. The hidden cost is in the destruction of supply chains, the consequences of which are far higher manufacturing costs than generally realised due to the loss of their efficiency at reducing manufacturing expense.
Additionally, the displacement of imported goods restricted by tariffs will lead to higher prices from US manufacturers through lack of imported competition. In an economy insulated from global production, domestic manufacturing falls very quickly behind global standards. Then there is the twin deficit phenomenon.
