LET'S TALK TARIFF

Everything you need to know about the 'reciprocal tariffs' of the US

- By Vince S. Socco

THE TARIFF increases that United States President Donald Trump announced are much ado about everything. The hikes in tariffs on imports to the USA are sweeping, broad-based, and seen to affect trade flows globally. I cannot claim to grasp the enormity of the entire matter, but this could possibly redraw the bounds of globalization as we know it.

Frankly, tariffs are a complicated lot because trade is such an intricate and complex transactional web. In fact, a whole organization — the World Trade Organization (WTO) — exists to arbiter this gargantuan ecosystem. An impact analysis will entail a great many number of permutations. The only certainty is that they result to higher prices for consumers or lower margins for the exporters and importers. Often, though, taxes — and make no mistake, tariffs are taxes — are passed onto the consumer, so it will be inflationary. A quote from President Trump himself succinctly captures this truth: "Well, maybe the children will have two dolls instead of 30 dolls. And maybe the two dolls will cost a couple bucks more than they would normally."

Tariffs are a fiscal tool that governments use to manage trade balances, protect domestic industries, or raise revenues. And though it is a fiscal tool, the impact of changes in tariffs can indirectly affect monetary policy as well. For example, tariffs can lead to higher prices or a depreciation of the currency because of a drop in trade. Consequently, this can cause monetary authorities to increase interest rates. Another instance is that higher tariffs may result to increased business uncertainty and reduced economic activity. This would lead monetary authorities to cut interest rates to stimulate the economy. The worst case is if the tariff disruptions lead to stagflation — a period of rising prices and stalling economic growth. Then, we could be in real trouble.