Tariffs: What’s ahead and why it matters

Episode Summary

Executive Summary: Goldman Sachs analysts said the latest tariff actions already amount to roughly a compressed version of the first Trump trade war, with more policy escalation still likely. They see mid-single-digit increases in the effective U.S. tariff rate as manageable for growth but inflationary for the U.S., disinflationary for some peers, and supportive of a stronger dollar and more cautious Fed stance.

Main Topics: Tariff escalation and current policy state (Priority: 5/5): Alec Phillips recaps the flurry of tariff announcements: China tariffs were implemented, Canada and Mexico were delayed, and steel/aluminum tariffs were expanded with fewer exemptions. The panel emphasizes that more announcements, including reciprocal tariffs and possible EU-focused measures, are still pending. Comparison with the 2018-2019 trade war (Priority: 5/5): The speakers argue that the current tariff push is faster and in some respects larger than the first-term trade war, with the recent China and metals measures compressing what previously unfolded over years into weeks. Reciprocal tariff versus universal tariff risk (Priority: 5/5): Alec explains that a reciprocal tariff could partly replace a universal across-the-board tariff, but it does not eliminate the risk of further broad tariffs, especially if revenue needs or sectoral targeting become central. Growth implications by region (Priority: 4/5): Joseph Briggs says the baseline tariff scenario is manageable for the U.S. but more damaging for China and via uncertainty for Europe and other exporters. The main channel outside the U.S. is trade-policy uncertainty, not direct tariff hits. Inflation and Fed policy impact (Priority: 4/5): Tariffs raise U.S. inflation modestly, lifting core PCE to 2.6% by year-end in the baseline. That makes the Fed somewhat more cautious, but the team still expects cuts unless inflation surprises materially higher. Market pricing, currencies, and investor positioning (Priority: 4/5): Kamakshia Trivedi says markets have reacted, but not fully priced the whole tariff path. The dollar strengthened, the euro weakened, and investors are hedging with dollar upside, volatility, diversified equity exposures, and non-U.S. opportunities. Upcoming catalysts and policy phases (Priority: 4/5): The panel watches near-term reciprocal tariff details, possible EU tariffs, sectoral tariff announcements, and the April 1 memo deadline. They frame policy as moving from negotiation leverage to domestic industry protection and potentially to revenue generation.

Key Arguments: Recent tariffs already roughly match the first Trump trade war’s effective tariff increase, but they arrived much faster and with fewer exemptions. Market reactions suggest tariffs are only partially priced; currency and equity moves show some anticipation, but further escalation could create additional repricing. A reciprocal tariff may substitute for a universal tariff in the short run, yet it does not remove the risk of later broad or sector-specific tariffs. Under the baseline scenario, U.S. growth slows only modestly, but China and the euro area face larger headwinds from tariffs and trade-policy uncertainty. Tariffs are inflationary for the U.S., pushing core PCE higher, but may be disinflationary in other economies if growth slows and Chinese supply is redirected. The Fed is likely to remain cautious, but tariffs alone are not enough to stop expected rate cuts unless inflation accelerates beyond forecasts. Investors are increasingly using hedges and diversification rather than making large directional bets because timing tariff announcements is difficult. The biggest uncertainty is whether tariffs remain a negotiation tool or become a lasting revenue and restructuring mechanism for U.S. trade policy.

Data Points: China tariff increase in first Trump term: ~10 percentage points - Alec Phillips said the effective tariff rate on imports from China rose by about 10 points during the first-term trade war. Current China tariff: 10% across-the-board - Implemented early in the new administration, covering more imports than the first-term China tariffs. Steel tariff: Expanded with no exemptions - New steel tariffs were announced and exemptions from the first administration were removed. Aluminum tariff: 10% to 25% - Alec noted the aluminum tariff rate increased materially under the new measures. U.S. dollar move: +1.5% - Kamakshia cited the broad dollar rally when Canada and Mexico tariffs looked imminent. Baseline effective tariff rate increase: ~4 percentage points - Alec’s baseline adds China tariffs, another 10 points, and critical imports/steel-aluminum measures. Reciprocal tariff add-on: ~1-2 points - Estimated additional effective tariff-rate increase depending on implementation. Risk scenario add-on from VAT inclusion: ~10 points - If VATs are included in reciprocal-tariff calculations, the increase could resemble an across-the-board tariff impact. U.S. growth impact: ~0.25 percentage point slower - Joseph’s estimate for U.S. growth under the baseline tariff scenario. China growth impact: ~70 bps lower - Joseph’s estimate if another 10 percentage points of China tariffs are added. Euro area growth forecast: 0.7% - Goldman Sachs’ forecast for euro area growth this year, below consensus. Euro area growth drag from trade war: ~1 percentage point - Joseph referenced the prior trade war slowing euro area growth by about a point. U.S. core PCE forecast: 2.6% by year-end - Goldman Sachs raised U.S. core PCE inflation due to tariffs. Counterfactual U.S. core PCE: ~2.1% - Without tariffs, core inflation would likely have converged closer to target. Fed baseline: 2 cuts in 2025, 1 in 2026 - Joseph said tariffs may delay easing but not necessarily eliminate cuts. Podcast recording date: Wednesday, February 12, 2025 - Episode recording date stated at the close.

Pivotal Quotes: "we got a 10 percent across the board tariff on imports from China that actually covers more than all of the imports that were covered during the entire first term" — Alec Phillips: Used to compare the speed and scale of current tariff actions with the first Trump trade war. "the longer they stay in place, the more likely it is that the market impact will build over time" — Kamakshia Trivedi: Explaining why markets may still be underpricing the eventual effect of tariffs. "the impact as manageable" — Joseph Briggs: Describing the baseline macroeconomic effect of the expected tariff path.

Implications: Markets may still face more tariff-driven volatility, with the dollar supported, Europe and China more vulnerable, and the Fed slightly more cautious. If tariffs expand beyond the baseline, growth and inflation impacts could become materially larger.