There is a lot of talk in Washington, DC about tariffs and President-elect Trump has promised to leverage this tool again - already promising an additional 10% tariff on products imported from China and an additional 25% tariff on products imported from Canada or Mexico. It brings a range of emotions among policymakers, domestic manufacturers, trade associations, labor unions, and companies. Given that it is a centerpiece of the President-elect's economic policy, it is worth watching closely and understanding the broader play the White House and aligned stakeholders are making. Here are five things to watch in the tariff debate:
Tariffs are Happening: There is little doubt that tariffs will be implanted on day one of the new Trump presidency. He has promised to do so on the campaign trail and already announced his initial policy. There could be more to come beyond what he has already outlined; to some degree, tariffs are a form of leverage and they are entirely within the control of the President (no need to jump over all the hurdles of the legislative process).
Tariff Fatigue is Real on Capitol Hill: Policymakers on Capitol Hill have been fielding phone calls from frustrated constituent companies since President-elect Trump initiated Section 301 tariffs on imports from China during his first term. They have no control over these tariff decisions and Congress unwinding them is not realistic or politically feasible. Policymakers are caught between their constituents and a winning political issue with little ability to influence either. Then doubling down on tariffs will put more pressure on policymakers, especially if prices increase dramatically, which many economists predict they will.
Tariffs Are Tough to Eliminate: Once a President moves forward with tariffs, they are very hard to remove politically. President Biden, who came to office complaining that tariffs were not useful, not only kept them in place, but also removed exclusions from many of them (effectively increasing tariffs on products). Vice-President Harris campaigned on proposed Trump tariffs being a tax on consumers, yet did nothing to remove or lower tariffs while in office. Stakeholders who support tariffs (like unions) fight to keep them in place, of course. If they become tied to a broader effort (i.e., tax reform), which comes with its own procedural difficulties, they are even more problematic to unwind since they would be used to pay for tax benefits. The bottom line here is that politics and policy are wrapped in messaging that makes unwinding tariffs in today’s landscape very tough.
The Link Between Tariffs and Their Purpose is Sometimes Murky: When 301 tariffs were first implemented in the first Trump Administration, justification was rooted in specific concerns related to China. In some cases, products added to the tariff list had no link to the concerns outlined. The tariffs expected on January 20 are said to be in response to poor immigration enforcement and the import of drugs - neither of which is directly connected to most of the U.S. companies manufacturing overseas. De-linking products facing tariffs and the justification for tariffs make it harder to explain and could become a political liability for some. This is especially the case for products that have little or no domestic manufacturing base.
The Complex End Game: Trade is always a bit of a moving target given evolving international relationships and domestic priorities; for that reason, the end game around tariff policy is tough to predict t and brings the one thing companies do not want - uncertainty. Even if companies choose to relocate manufacturing operations to the U.S. their supply chains are often still in Asia and cannot just be moved without consequence. Additionally, trade policies that can help shift manufacturing away from China, including the Generalized System of Preferences, are not in place and, therefore, a system of incentives does not currently exist. These issues are complex and will remain so for the near term.
Tariff policy is something to watch closely in the year ahead as it drives uncertainty and some concern within the business world. Geopolitical relationships, domestic policy, and everything in between could have an impact on tariffs. The leadership being put in place with jurisdiction over trade policy feels comfortable in the tariff space and lacks political risk without another election on the horizon. At the same time, tariffs have spurred some companies to move and may spur some new action by other countries to better align with the Trump Administration. For now, we will watch for the tariffs already promised and go from there,
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