As I mentioned in my February 2 blog, imposing tariffs can easily result in an escalating trade war. In the other words, slapping your trading partners can result in them slapping you back. That seems to indeed be the case here.
The current administration’s negotiating style appears to be what is known as distributive bargaining. In distributive bargaining, there is a winner and loser. This is common when there is a limited supply of something and two sides fighting over it. Think pie. The more slices I get, the less you have. Winner. Loser.
The other type of negotiating is known as integrative bargaining. In integrative bargaining, the two sides don't have a complete conflict of interest, and it is possible to reach mutually beneficial agreements. Instead of a single pie to be divided by two hungry people, you might consider a baker and a caterer negotiating over how many pies will be baked at what prices, and the nature of their ongoing relationship after this one gig is over.
Integrative bargaining, I feel, is more representative of how the world operates. This is particularly true when there are more options or solutions available to the negotiating parties. In the case of trading partners, instead of win-lose, a more practical view might be trying to think, win-win. An even more enlightened view would be win-win-no-deal.
In win-win, both sides are looking for mutual benefit. In win-win-no-deal, both sides are willing to amicably part if they cannot come to an agreement. This is representative of how the world operates by and large. In the case of a basic commodity like soy beans, there are many countries offering them for sale. In that case, it is in the interest of the seller to come to an agreement if they really want the business. The buyer has other choices.
Turning now to the tariffs in place, the tariffs are not hitting all industries or even companies within the industry uniformly. Here are a few thoughts on select industries:
Auto: Recent studies estimate that the average U.S. new vehicle price could increase by $3,000 with the 25% automotive tariffs on Canada and Mexico. A small glimmer of light can be seen in the fact that inventory levels are plentiful. And it is possible that the administration is not realizing just how many times US auto parts are passed back and forth between the US, Canada, and Mexico. Automobile companies that might weather this storm better are ones that have on-shored their manufacturing facilities in the country where they are selling their vehicles.
Footwear: While the initial thoughts were that shoe makers would be OK from this round of tariffs owing to sourcing diversification away from China, Canada, and Mexico, the tariffs are devastating to Vietnam. With a 46% tariff, Vietnam is one of the hardest hit countries on the list. In the case of Nike, 50% of their shoes are made in Vietnam.
Lumber: In 2023, the U.S. exported almost $760 million and imported $6.9 billion of softwood lumber, typically used in framing construction. The Trump administration’s tariffs on Canada would place upward pressure on softwood lumber costs as Canada accounts for 73% of total softwood lumber imports, valued at $5.0 billion. While an avowed hope of the administration is that the tariffs would influence/ persuade (force?) US consumers to buy US made products, the fact of the matter remains that logging in the US has steadily declined over the years. This is a dangerous industry with higher than average risk of injury. Lumber tariffs will likely reduce housing starts and make remodeling more expensive. Combined with higher interest rates, the housing market could face challenges.
Retail: Most retailers are issue cautious guidance for 2025 as a result of tariffs. Tariffs raise the cost of imported goods and there might not be a locally made substitute. Consumer sentiment has already fallen due to tariff fears and higher inflation expectations. Adding to retail woes could be possible modifications to government assistance programs like SNAP. Even stricter immigration policies could impact the retail industry.
What might this mean to the average American consumers? The Budget Lab's analysis found that a broad 20 percent tariff would raise consumer prices by between 2.1 and 2.6 percent if the Federal Reserve does not take action. This is equivalent to a loss of purchasing power of $3,400-4,200 per household on average in 2024 dollars. The analysis found that tariffs would burden households with lower incomes more.
If broad 20 percent tariffs are implemented and other countries retaliate with tariffs of their own, the disposable income of the lowest-income households could drop by 5.5 percent, while it would drop by just 1.9 percent for the highest-income households.
This is a challenging time. Perhaps one thing to keep in mind is that there are no tariffs on second-hand goods (ie, used cars). That does not help much with consumer perishables.
Of course, we might hope that the administration comes to its senses before a broader global trade war erupts.