Poisonous Tariff Uncertainty
April 26, 2025
Uncertainty (or volatility) is the live-blood of financial markets. If financial actors were certain about the development and strength of the underlying factors the markets would be predictable. There would be no need to hedge risks and no profits were to be made through speculation. Uncertainty is what keeps financial markets alive.
For those dealing with real products in the real economy uncertainty is a poison. When the prices of products become too volatile the risk of dealing with them and of investing in their production becomes too high. When volatility prevails real markets will falter.
This is where Trump's tariff mania hits.
As a recent NY Times piece highlights (archived):
Businesses are rushing to cancel factory orders or halt shipping containers before they leave China, unable to afford the tariff when the ships arrive in America. They are pausing capital investments and new hiring, and scaling back spending to only the bare necessities. Future products are being scrapped, because they are no longer financially viable.
The Federal Reserve Bank St. Louis produces hundreds of economic statistics. It includes several which are measuring uncertainty:
People’s confidence in anticipating the future dwindles during periods of major economic change. Economists and analysts try to gauge the level of uncertainty about economic conditions because it can affect economic decisions (saving, spending, investing, switching jobs…), which can affect aggregate economic outcomes.
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Many factors can cause uncertainty, such as structural economic shocks, global events, and financial crises. Policy actions can also drive economic uncertainty. In our second FRED graph above, we use the overall economic policy uncertainty index (EPU) to understand how important policy uncertainty is for the recent increase in overall uncertainty.
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The EPU also has values for subcategories such as taxes, regulation, and trade. By looking at these subcategories, we can identify the specific types of economic policy that are most associated with uncertainty. .. Until summer 2024, most types of economic policy uncertainty were at or below 100, meaning they were at normal or low levels. Recent uncertainty, which began rising in 2024, has been especially pronounced for trade policy. By February 2025, it had jumped to almost 2500, which implies close to 25 times more uncertainty than the norm.
Note that the FRED data only includes February. The additional uncertainty introduced by recent Trump shifts on tariffs have yet to be incorporated.
The larger aims behind Trump's tariffs are to press the world to subsidize U.S. empire and, in a repeat of the cold war, to shun all trade with China. Neither is likely to work.
The cost introduced by the tariffs and the uncertainty will have to be carried by U.S. consumers as well as by a myriad of small and medium enterprises. The lack of imports from China on the shelves will be visible for everyone. The larger economic fallout will have nearly immediate effects.
In his recent interview with Time Trump seems totally unfazed by this. He is convinced that his tariff strategy will win.
Q: If we still have high tariffs, whether it's 20% or 30% or 50%, on foreign imports a year from now, will you consider that a victory?Total victory.
Q: Why so?
Because the country will be making a fortune. Look, that's what China did to us. They charge us 100%. If you look at India—India charges 100-150%. If you look at Brazil, if you look at many, many countries, they charge—that's how they survive. That's how they got rich. Now, zero would be easy. Oh, zero would be easy, but zero, you wouldn't have any companies coming in. They're coming in because they don't want to pay the tariffs. Remember this, there are no tariffs, if they make their product here. There are no tariffs, if they make their product here. There are no tariffs. This is a tremendous success. You just don't know it yet, but this is a tremendous success what’s happening. We're taking in billions and billions of dollars, money that we never took in before. We're also, very importantly, because of that, because of the money we're taking in, those companies are going to come back and they're going to make their product here. They're going to go back into North Carolina and start making furniture again. They've already started. In Mexico, many car plants that were under construction have stopped. They're all coming into this country. We're gonna, you're gonna see car plants going at a level that you've never seen before.
But how long will it take to build those new plants? What if the machines needed to build them come from China? How long will it take to find and train new workers? Will they be able to produce at competitive prices?
The hoped for positive side of the tariffs are long term. The pain from them will hit immediately. Why Trump thinks he and the Republicans can survive this politically is beyond me.
But how can he change course when he is committed like this?
Posted by b on April 26, 2025 at 15:11 UTC | Permalink