It’s Friday and we have more news on tariffs. Initially, it was announced that collection of the tariff duties would be delayed by one month, but then the White House press secretary stated that they would take effect tomorrow.
So, what’s going on?
As we have discussed since Nov. 7, 2024, prepare for some crazy headlines. However, let’s keep things in perspective. I don’t believe we will see universal tariffs in place for the Trump term; this is all about negotiating a deal with other countries. Can we possibly see tariffs put into place to strong-arm countries into deals? Yes. However, this is all a short-term ploy to get better deals. Trump doesn’t want people to think he’s bluffing, so he may follow through with his threat, but it would only be a short-term event.
For example, the Tax Foundation just updated their position on the effects these tariffs would have if actually implemented. “We estimate the 25 percent tariffs on Canada and Mexico and 10 percent tariffs on China proposed to go into effect as early as February 1, 2025, would:
- Increase taxes by $1.2T (2025-2034)
- Reduce GDP by 0.4%
- Reduce employment by 344k jobs
- Result in an average tax increase of $830 per US household (2025)
Trump is not going to do tariffs that big with our major trading partners. This morning, Sarah and I recorded an episode of the HousingWire Daily podcast discussing this situation before the White House even made the announcement.
Below is my core belief as to why I don’t see a universal tariff policy being the staple of President Trump’s economic policy: If tariffs were a major economic policy, they would simply be implemented as soon as possible because you would need them to be in place for many years to foster real change.
Instead, this situation resembles a complicated dance of trade negotiations. It primarily aims to facilitate discussions, secure exemptions for specific groups and create more favorable deals. Tariffs are not standalone measures imposed by one country; instead, other nations will react with their own tariffs. This can lead to an escalation into a full-blown trade war, which ultimately benefits no one.
Moreover, it can significantly disrupt global currencies, notably smaller economies. The U.S. dollar strengthened considerably after reports of upcoming tariffs, which the president does not want, as a stronger dollar makes it harder to export goods.
Additionally, it’s important to remember that during 2018 and 2019, we experienced many negative job revisions, as business investment declined to zero, and the stock market dropped by roughly 20% in late 2018.
So what was the bond market reaction when the White House said tariffs are coming tomorrow? The 10-year yield rose just a few basis points and not near the yearly high of 4.81%, but rose from 4.51% to 4.57% as I am writing this right now.
I understand that headlines can be confusing: one moment, you hear one thing, and just 10 minutes later, you hear something completely different. It’s important to remember that we have over 336 million people in America. Almost 50% are workers, but 100% are net consumers. (Even though babies don’t make purchases themselves, their parents buy things for them.) In a consumption-based economy, this is an important variable to consider when considering tariffs, especially if your currency is too strong.
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