by Mitch Kokai
Senior Political Analyst, John Locke Foundation
All of which demonstrates the gains from globalization. Companies can locate plants anywhere, usually where their customers are, and procure components from suppliers around the globe. Tariffs are impediments to gaining comparative advantage, which has become far more complex than when British classical economist David Ricardo introduced the concept in the 19th century to demonstrate the benefits from trade. Instead of England trading wool for wine from Spain, modern corporations utilize complex supply chains that cross borders. Disrupting them poses a bigger threat to global growth than the tariffs’ dollar impact.
Cornerstone Macro, headed by Nancy Lazar, makes the point that second-order effects could be more significant than the precise dollar amounts from the tariffs. The 25% tariff on $50 billion of goods from China would total $12.5 billion, equivalent to a 0.1% tax hike on the U.S. economy. A 10% tariff on an additional $200 billion worth of goods would effectively double that, to 0.2%. “While still manageable, this would offset almost half of the estimated boost from tax cuts in 2018,” the firm wrote to clients.
“More importantly, this represent only first-order effects of the tariffs,” the note continues. “Second-order effects, more difficult to quantify, would include a hit to business confidence, headwinds from a stronger dollar, and supply-chain disruptions, including a loss of competitiveness of U.S. exporters who rely on imported components.”
This effect is also pinpointed by Barclays’ head of macro research, Arjay Rajadhyaksha, in the bank’s latest outlook. “It doesn’t take a lot of such uncertainty for companies to decide to postpone spending until there is more clarity on policy. Taking this logic one step further, it would not be an enormous stretch for investors to downgrade global growth expectations, due to fears about a trade war.”