Deciphering US tariffs – A long-term perspective

What is driving this dramatic shift in US trade policy?

There are three core motivations behind the new tariffs imposed by the US administration. The first is to reindustrialize the US economy and promote local jobs. The US economy has lost millions of jobs over the past decades. The goal of Donald Trump is to create a favorable environment for job growth, particularly in this sector. The second motivation is to create fiscal leeway to reduce corporate and household taxes. This may lead to a new fiscal policy plan aimed at boosting corporate earnings and household revenue. The idea is to substitute corporate and household taxes with revenue from customs duties. The third objective is to promote bilateral negotiations. The administration is looking to negotiate directly with countries, bypassing the rules that have been implemented by the WTO. And this is exactly what we have seen from the u-turn that was announced recently, by the US administration - they are pausing tariffs for 90 days to allow for discussions with various countries to create agreements on imports that could benefit the US economy. However, the Chinese economy and administration are excluded from these negotiations. The situation is not uniform, as tensions between China and the US persist, creating an unfavorable environment for equity markets.

What are the likely consequences for the US economy?

It is extremely complicated to assess the potential impact of these tariffs on the US economy because the assumptions change daily. We aim to estimate the impact on three key metrics: GDP, inflation, and monetary policy, in other words, the level of the Fed Funds rate.

We estimate that growth will decline in 2025 compared to 2024 due to confidence shocks and supply chain disruptions created by this volatile and uncertain environment generated by tariffs. In our assessment GDP growth will be slashed, moving from 2% to a range of 1.1% to 1.3%. so clearly we have a negative impact on output in the GDP growth rate in the US and in parallel we have a positive impact on inflation due to the tariffs and this impact is estimated at 1.4 percentage points. This means that If the average inflation rate is 2.5%, it could reach 4% in the US this year. This is a problem for the Fed because we have, in the meant time, less growth and more inflation which could result in stagflation. It is not the case for the moment because we haven’t seen the unemployment rate increasing and, I must insist on this point, we are not in a recession. Growth is weaker but it is not negative, so we are not in a recession. Not at the moment. So the Fed is in a corner, because they will have to choose between sustaining growth with lower interest rates or combating inflation by maintaining rates. This shock corresponds to a supply shock, which monetary policy cannot address efficiently.

We believe the Fed will likely opt to promote the business cycle and smooth the impac of tariffs by cutting interest rates at least twice this year, with a consensus around four cuts.
 

How do you see things unfolding from here?

Overall, this environment is not favorable for visibility in capital markets, particularly for risk assets. If a concrete agreement is reached by the end of the 90-day negotiation period, it could be positive for equity markets and lead to a rebound in risk assets.

Despite the uncertainty and economic shock facing the US and global economies, there are reasons for potential improvement through fiscal and monetary policies. In this context, we believe there’s no reason to panic, as capital markets are known to experience drawdowns and recover.