Thursday, December 22, 2016

Economy: How Dangerous Is Trump`s New Trade Tariff?

(Drivebycuriosity) - If we believe CNN, President Elect Trump is considering imposing a 5% tariff on all imports into the United States. Business Insider comments this step could "put the economy on a path to 'global recession'" (businessinsider ). I think a new tariff is a bad idea , I would prefer zero trade barriers, but it would be no big deal either. Here my analysis:

A new 5% tariff would raise prices of imported goods about 5%. That could harm especially low income families in the US because they would have to pay more for many goods. But we also have to consider the exchange rate implications.

The effect of a new 5% tariff on import prices is comparable with a devaluation of the US Dollar of 5% because this would lift prices of goods priced in Euro, British Pound, Yuan and other foreign currencies about 5%. But this year we experienced a sharp raise of the Dollar. For instance the Euro lost about 5% in the recent 12 months. The new tariff would just equalize the Dollar revaluation. If Euro & Co. are falling deeper the price effect of the new tariff would be diminished.

Prices aren`t changing every second, as the currency rates do. The prices for imported goods didn´t necessarily fall as much as the values of the foreign currencies, in many cases exporters - and importers like Walmart - benefited from the dollar revaluation and earned higher profits. A new tariff might skim some of these profits which would reduce the influence on the US prices of foreign goods.

If Trump stays with a new 5% tariff - and does not imply further trade barriers - the effect on the global economy might be negligible.

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