Business Economics

Fiscal Policy vs. Tariffs

After a newborn baby hiatus, I’m back in the saddle. I’ve written a lot about tariffs and it looks like my initial thesis of the so called trade war wasn’t spot on. As a refresher, I believed the supposed trade war wouldn’t cause meaningful harm to consumers or the U.S. economy. Thankfully, as more and more information has come to light my view has evolved. I’m still hopeful cooler heads will prevail and the current situation will not get any worse.  I came across this chart a couple of weeks ago from LPL showing the anticipated negative impact of tariffs (around midyear) vs. the expected positive impacts of fiscal policy changes enacted this year. Interestingly, the fiscal policy benefits heavily outweighed the assumed impact of tariffs. The one flaw of this analysis (in hindsight) is the unpredictability of tariff impacts on exports, imports, prices, supply chains, etc… I’m not sure you can really forecast the impact of tariffs. I’m thinking only in hindsight will we really know the full impact of tariffs.

Interestingly, the NY Fed’s blog had a post earlier today discussing whether tariffs actually help reduce trade deficits. I’ll allow you to read the post, but the gist of it is that trade deficits not only reduce imports but also reduce exports. The authors don’t suggest a trade deficit reduction will or will not occur but it certainly appears you don’t get a lot of bang for your trade deficit buck with the imposition of tariffs on imports.