A new Trump presidency will likely mean another global round of trade wars. While higher tariffs raise the prices of goods and services – the end result for the entire economy is usually the opposite… deflationary. Tariffs act as an additional tax, so it is rather difficult to have higher inflation – unless new money creation is added to the system.
The final effect of the trade war depends on the reaction to higher tariffs of many entities:
1) How will producers, exporters, importers, retailers and also final consumers react,
2) Will they increase purchases of goods before the introduction of tariffs, how big will be the substitution effect (purchases of substitute goods not covered by tariffs),
3) Will other countries also react with retaliatory tariffs, how will capital markets react (negative wealth effect etc.),
4) How much will domestic industries "protected" by tariffs raise prices, how much will international trade suffer, how will direct investment be redirected, etc.
In 2018, the United States imposed tariffs on $283 billion of US imports in 2018, with rates ranging between 10 and 50 percent. Tit-for-tat retaliatory tariffs (from China, The European Union, Mexico, Russia, and Turkey) averaged 16 percent on approximately $121 billion of US exports in 2018 (source: “The Impact of the 2018 Tariffs on Prices and Welfare,” Mary Amiti, Stephen J. Redding, and David E. Weinstein, Journal of Economic Perspectives—Volume 33).
But after two years, all major measures of US inflation were lower than in 2018—see Figure 1. Figure 2 shows the same measures of inflation over the longer term, including genuine inflation in 2022!
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