What must we consider with the potential impact of Trump’s trade tariffs on our businesses?
Whilst the impact for Inzenius may be positive with the move away from buying USA software for Australian-specific complex award interpreted payroll, our client’s businesses may be faced with the potential impacts of Trump’s actions on tariffs. Management may need to consider the impact on their business and be agile in taking appropriate responses.“ President Trump’s tariff moves have jolted markets and thrust business leaders into deep uncertainty”. “Managing macroeconomic uncertainty is fast becoming a necessary executive skill, and tariffs will remain a focal point” Philipp-Szlezak Carlson, Paul Swartz and Martin Reeves, HBR contributors.
In some businesses, there may be risks and opportunities simultaneously. “Executives should invest in building their understanding of tariff impacts so that developments can be continuously assessed.” Philipp-Szlezak Carlson, Paul Swartz and Martin Reeves, HBR contributors.
The Full Article in HBR
Summary
President Trump’s tariff moves have jolted markets and thrust business leaders into deep uncertainty. Developing a better understanding of tariffs’ primary and secondary macroeconomic effects, as well as any plausible long-term consequences, will allow executives to continuously assess the impact on their markets and businesses. With so much in flux, leaders need to ditch rigid plans and instead build flexible, analytical muscle to navigate this turbulent new landscape
On April 2, President Trump followed through on campaign promises to steeply hike tariffs on U.S. trading partners, taking the average effective tariff rate to around 23%, a near 10-fold increase of the rate last year. As sharp and severe selloffs in financial markets underline the global scope and radical uncertainty of this move, executives are racing to build an understanding of the global economic impact.
This is a complex and fluid policy shock, which prevents any quick or precise conclusions, as underlined by the April 9 announcement that “reciprocal” tariffs would be paused for 90 days for most countries. There will be primary effects that are difficult to estimate, as well as knock-on effects that may come to matter even more. Moreover, the draconian tariffs may be the opening gambit for fragmented negotiations, underlining the new regime of “deliberate uncertainty” that executives have to navigate now.
Amidst this uncertainty, understanding tariffs’ primary and secondary macroeconomic impacts, as well as any plausible long-term consequences, will allow leaders to continuously assess the impact on their markets and businesses.
An Asymmetric Trade War
To gauge global impacts, it pays to start with an often-overlooked fact: The U.S. has started a trade war with every other country, but each other country is engaged in a trade war with only the U.S. Incorporating this asymmetry into your assessment quickly erodes the assumption that the U.S. holds all the cards.
As the largest economy, and with its sizable trade deficit (importing far more than it exports), the U.S. should have had a strong initial starting position in a narrower trade war, as it stands to lose less from falling trade than each of its trade partners.
But by starting a trade war on all fronts—a 360° trade war—the U.S. may receive global and cumulative blowback, while other countries will only see an impact on their trade with the U.S. Fighting a narrow trade war is not the same as fighting one on all fronts, as the impacts of both supply and demand shocks accumulate.
Considering Supply and Demand Shocks
Leaders straining to see the macroeconomic impact of tariffs should start by differentiating clearly between supply and demand shocks. Both types depend on whether we look at exporters or importers, and whether an economy imposes tariffs or is tariffed.
While macroeconomic forecasts don’t have a good track record—and shocks that are outside the historical empirical range are particularly challenging—we can sketch the likely contours of these shocks by analyzing trade volumes as well as likely tariff impacts on prices, consumption, and growth.
First, consider the supply shocks, which are likely to hit the U.S. harder than most of its trade partners.
U.S. supply shock
U.S. tariffs are a tax on imports, which will be largely passed through to consumers. The resulting price increases will drive up inflation, reminiscent of post-Covid supply-chain disruption. Higher inflation will cut real incomes and weigh on consumption, and therefore GDP growth. Because the trade war is 360°, and the tariff increase is exceptionally large, the supply shock is also very large.
Under the April 2 tariffs rates, we would expect the self-inflicted supply shock to lower GDP growth by -1.4% in 2025 (down from expectations of 1.9%). This would be driven by a large increase in inflation throwing the brakes on consumption as an engine of growth.
Trade partners’ supply shock
If other nations decide to impose retaliatory tariffs, as China has done at this point and others are discussing, they too are inflicting a supply shock on themselves. U.S. exports to those countries will see price increases, and the same effects on inflation, consumption, and growth will play out.
Most economies should see a much smaller supply shock if they retaliate. We believe most would see a downgrade to growth between -0.1 to -0.3% of GDP. This more limited impact is driven by the fact they will impose tariffs only on U.S. imports if they choose to retaliate.
The demand shocks that tariffs deliver in tandem will likely hit trade partners more than the U.S.
Trade partners’ demand shocks
U.S. tariffs increase the price of exports to the U.S., which will lower demand. Depending on price elasticities of demand (how sensitive demand is to price changes), that cut could be severe or modest—but it means fewer sales coming from the U.S. This effect comes with or without tariff retaliation.
For most countries, we estimate the impact will likely be between -0.2% and -0.6% of GDP growth—a material but typically digestible hit. Yet for countries who see exceptionally large tariffs and have large exports to the U.S., such as Vietnam, the impact of the April 2 rate could prove devastating at more than -6% of GDP.
U.S. demand shock
The U.S. is also likely to see export headwinds as trading partners introduce retaliatory tariffs. While exports are not as significant to the U.S. economy as they are to some large economies, such as Germany or China, the U.S. is engaged in a 360° trade war and cumulatively the impact matters.
With universal retaliation, we believe the impact could easily be -0.5% of GDP, which would be a sizable impact, particularly when the economy is already weak.
The Secondary Impacts of a 360° Trade War
While supply and demand shocks are the right place to start, executives should also be aware of five secondary drivers. Each are directionally negative for the economy, though they have delivered false alarms in the past and can surprise to the upside of gloomy forecasts.
- Confidence
The tariff shock will weigh on firm and consumer confidence, which could lead to hesitancy to spend, invest, and hire. Yet as a signal it has proven flawed in recent years—low consumer confidence has coexisted with strong consumption. Even so, steep drops in confidence must be taken seriously.
- Wealth effects
Equity markets plunged after investors’ hopes for modest tariffs fell flat on April 2. Falling prices lead to falling wealth, a headwind to consumption and drag on growth. Yet balance sheets remain historically strong, and not all bear markets come with recession—for example, the 2022 equity market fall of 25% did not trigger a recession.
- Monetary policy errors
Monetary policy is focused on dual objectives of stable prices and full employment. Tariffs push up prices and push down growth and employment. Even before April 2, the U.S. Fed had stressed elevated uncertainty around inflation and growth. This makes their path ahead a more difficult balancing act increasing the risk of a monetary policy error (i.e., rates being too high or too low).
- Competitiveness
Though imports are typically thought of as consumer goods, the fact is that around 50% of imports are production inputs for American businesses; for example, machine tools or steel. Consequently, the impact is not merely through lower consumption because of higher prices; it is also dims competitiveness due to higher-cost domestic production.
- Additional shocks
There is also the risk of new shocks. These can be endogenous, such as tariff-related disorder in financial markets driving up financing cost and delivering credit losses to the banking system with unpredictable consequences. Or they can be exogenous to the system—wars, natural disaster, solar flares, a pandemic, and so on—that hit an economy more consequential when it is already weak.
Leaders should watch these secondary channels carefully—with an understanding of their dynamics and potency.
An Uncertain Long-term Impact
It’s natural for executives to focus on the near-term—or cyclical—impact. But changes as substantial and far reaching as the altered tariff regime are likely to leave long-term— structural—impact.
The Trump administration’s stated objectives of tariffs include re-allocating global production to the U.S., where industrial output has stalled over the past 15 years or so, and delivering high-quality employment and economic prosperity. The Biden administration used incentives to pursue the same objective, notably the CHIPS Act, which helped delivered an investment boom in manufacturing facilities. The bet this time is that using the stick of tariffs instead of carrots of incentives will turbocharge this effect while providing fiscal receipts rather than costs.
But here, too, the 360° trade war creates complications. Consider that incentives for U.S. production were targeted at high-value, high-productivity sectors, such as semiconductors. The new tariff regime, meanwhile, indiscriminately targets not only every country but also virtually every product—whether it’s desirable to reshore them or not.
Pursuing the reshoring of semiconductors is not the same as sneakers, toys, or furniture. In fact, it can be a net-negative, if reshored activities compete with higher-productivity sectors for resources, particularly labor. If a growing share of lower-productivity production is added to the U.S. production mix, average productivity is downgraded and economic potential falls. It’s not in the U.S. interest to see lower-productivity sectors crowd out higher-productivity ones.
Exactly this outcome, however, is a key risk because the U.S. labor market is already structurally tight. Unemployment is near record lows and has been so since 2017 (with the interruption of the sharp but brief Covid recession). In a world of too much unemployment (such as the early 2010s) nearly any additional production (and employment) would be accretive, but in a world of tightness it means competing for resources. Where will the workers for reshored manufacturing come from?
Executives Can’t Wait for This to Pass
The evolving complexity and fluidity of the 360° trade war shock will continue to deny kneejerk reactions and conclusions. Executives should invest in building their understanding of tariff impacts so that developments can be continuously assessed.
Build capabilities, not masterplans
As tariff policy continues to evolve, managerial attention should be on building institutional analytical capabilities to monitor and translate policy gyrations into corporate preparedness and response. The traditional masterplan has a short shelf-life.
Revisit your assumptions regularly
The asymmetry of the trade war today is critical to understanding its impact, but this can evolve. For example, the trade war can go truly global should large exporters dump previously U.S.-bound exports on other economies, prompting them to respond with new tariffs.
Think in multiple timescales
Focus will always be pulled toward the tactical impact of today. Yet while continuously tweaking their tactical assessment, executives risk missing the strategic consequences. Any analysis must concurrently happen on the cyclical and structural timelines. The next few quarters shouldn’t matter more than the next decade.
Managing macroeconomic uncertainty is fast becoming a necessary executive skill, and tariffs will remain a focal point. Those who invest in analytical capabilities will be better able to withstand the gyrations in the tariff regime.