Aberdeen: Trump is still coming up with sector-specific tariffs
Paul Diggle, Chief Economist at Aberdeen, comments on the tariffs that US President Donald Trump presented yesterday.
There is a meaningful risk that the announcements yesterday, as dramatic as they were, do not represent 'peak tariffs'. We still think additional sector specific tariffs are coming, including on semiconductors, copper, lumber and pharmaceuticals.
Indeed, these products were mentioned in the executive order, specifying that the reciprocal tariff policy does not apply to them, therefore leaving open that specific rates will be coming soon. On the other hand, that does seem to mean that sector-specific tariffs and reciprocal tariffs aren’t additive.
Additionally, the Executive Order provides the President with the right to modify tariff rates in the event of retaliatory measures, meaning rates on some trade partners could be pushed higher still.
There is still scope for US tariffs to eventually settle at a lower level, and this is probably still a widespread expectation.
The 10% global baseline is likely a floor, but structuring the reciprocal tariff as an additional rate on top of that at least leaves some chance of it then coming down.
So far, the administration appears far more tolerant of market weakness than in Trump’s first term. Indeed, low bond yields and a weaker dollar may be actively helpful market moves give the administration’s preferences.
The net impact on the US economy will almost certainly be stagflationary, although the magnitudes of the price level increase and GDP hit are hard to pin down.
The shock to growth and inflation is sensitive to whether tariffs are perceived as temporary or permanent, the scope for firms to absorb price rises in their margins, currency moves, and how financial markets react, among other things.
A crude rule-of-thumb is that every 1 percentage point increase in the US weighted average tariff rate translates into a 0.1 percentage point rise in the price level and knocks 0.05-0.1 percent off GDP. This would suggest that the full increase in US tariffs yesterday and in recent weeks could add 2% to the price level and push GDP down by 1-2%.
There is a potential for some offsetting economic benefits if the roughly $0.6 trillion (~2% GDP) which could be raised by the tariffs finance tax cuts rather than deficit reduction. However, if the revenue is “used” in this way, it would make negotiating away the tariff increases in the future more difficult.
The Fed faces a difficult trade-off. Policy makers have previously talked about tariffs having only a 'transitory' impact on US inflation, but given the recent sharp increase in inflation expectations it may be difficult for the Fed to look-through this impact.
