How inflationary are tariffs, really?

Episode Summary

Executive Summary: The episode examines whether Trump’s proposed tariffs on China, Mexico, and Canada are truly inflationary. Chris Giles argues tariffs are first a price-level shock and only become sustained inflation if they trigger wage-price spillovers. He says the U.S. is relatively closed, so the macro impact is smaller than many fear, but broad 25% tariffs on major partners would still likely raise U.S. prices, with Americans—not foreign exporters—bearing most of the cost.

Main Topics: Tariffs vs. inflation: price-level shift or sustained inflation? (Priority: 5/5): The central distinction is between a one-time increase in prices from tariffs and ongoing inflation. Giles stresses that tariffs usually raise import prices immediately, but that does not automatically mean lasting inflation unless wages and broader prices keep rising in response. Why the U.S. economy matters (Priority: 4/5): The discussion highlights that the U.S. is a relatively closed economy, so trade shocks affect a smaller share of total activity than in more open economies. That limits, but does not eliminate, the inflationary effect of tariffs. The washing machine tariff case study (Priority: 4/5): Trump’s 2018 washing machine tariffs serve as a natural experiment. Prices for washing machines rose relative to other appliances, then later moved back, fueling debate over whether the effect was tariff-driven, pandemic-related, or a cherry-picked example. What the academic evidence says about who pays tariffs (Priority: 5/5): Giles summarizes research showing foreign countries largely did not pay the tariffs; U.S. importers bore most of the cost. In many cases, the burden did not clearly pass through to consumers, suggesting margins, wages, or pricing strategies absorbed it. Scale of Trump’s new tariff plan (Priority: 5/5): A broad 25% tariff on Mexico and Canada would be harder for firms to hide or smooth out than the earlier targeted tariffs. Giles says the larger scale makes a bigger price impact more likely, though he still cautions against overstating the effect. Markets, policy, and Treasury Secretary Scott Bessent (Priority: 3/5): In the Long Short segment, Giles is skeptical that Bessent can act as an independent, stabilizing Treasury Secretary under Trump, suggesting policy will remain driven by unpredictable presidential decisions. Smithfield meat market closure (Priority: 1/5): The hosts briefly discuss the possible closure of the historic Smithfield meat market in London, a personal and local-market note that closes the episode on a sad cultural note.

Key Arguments: Tariffs are taxes on imports, so they can raise the price level immediately, but that is not the same as persistent inflation. A tariff becomes genuinely inflationary only if it leads to wage gains that feed into broader price increases. The U.S. is a relatively closed economy, so tariff effects are smaller than in more trade-dependent economies. Academic work on the 2018 Trump tariffs suggests U.S. importers paid most of the cost, not foreign exporters. Washing machines were an exception: their prices rose sharply after tariffs, making them a poor basis for generalizing. Broad 25% tariffs on Mexico and Canada would likely be more visible and harder for firms to absorb than earlier targeted tariffs. Some sectors, especially commodities and intermediate goods like steel, may see exporters reduce prices to remain competitive. Any major impact on inflation would depend on second-round effects, especially wages and firms’ pricing behavior. Bessent’s appointment may not constrain Trump’s policy impulses, so market relief may be overstated.

Data Points: U.S. goods trade share of economy: 19% - Giles cites this as evidence that the U.S. is a relatively closed economy. Germany goods trade share of economy: 70% - Used as a contrast to show how open some economies are. EU external trade share of economy: 30% - Illustrates openness relative to the U.S. China external trade share of economy: 33% - Another comparison point for openness. Importers paid share of Trump tariff costs: about 95% - Giles summarizes academic findings on who bore the burden of the 2018 Trump tariffs. Washing machine tariff timing: 2018 start; 2019 reversal; 2021 rise; 2023 expiration - Describes the price pattern in the washing machine case study. Proposed tariff rate: 25% - Trump’s announced day-one tariffs on Mexico and Canada are referenced as a broad shock. Tariff targets: China, Mexico, and Canada - The new proposed tariffs restart debate about North American trade and inflation. Treasury Secretary tenure forecast: 2 years - Giles and the host speculate on Scott Bessent’s likely survival in the role. Smithfield meat market age: about 900 years - The hosts mention the historic age of the market in the closing segment.

Pivotal Quotes: "tariffs are a tax on imports" — Chris Giles: Explaining why tariffs can raise prices and potentially inflation. "we're talking about a price-level shift at first" — Chris Giles: Clarifying that tariff effects are not automatically persistent inflation. "the evidence is saying actually it's not foreign countries that pay, it is American companies one way or another" — Chris Giles: Summarizing the academic literature on the incidence of Trump-era tariffs.

Implications: Listeners should expect tariffs to raise prices quickly, but sustained inflation depends on wages and broader pass-through. For markets, the scale of Trump’s planned tariffs matters more than the rhetoric, and the U.S. will likely bear most of the cost.