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The Trump administration teased what it called “reciprocal tariffs” for months. But when the president unveiled his new tariff program last week, it became clear he was actually targeting US trade deficits with other nations.
To help walk us through this new tariff structure, and understand the potential long-term business consequences, CFO Brew recently spoke with Thomas Kemp, a professor and economics department chair at the University of Wisconsin-Eau Claire.
Kemp, who teaches international trade and finance, among other subjects, said the tariffs will erode the US’s reputation as a stable global trading partner, which will have lasting impacts on US-based businesses.
This interview was edited for length and clarity.
What do you imagine the objective is of these new tariffs?
It’s really hard to figure out what the objective is…but it appears they’re sort of targeting trade surpluses. So effectively, the larger the surplus you have with the United States, the higher the calculated tariff rate is.
What do you think the results will be of these tariffs?
[It’s] extremely likely…we will see higher prices…The second thing that’s almost certain is that there is some contractionary impact of this. In other words, the economy will shrink to some degree.
The third thing that we can say with a high degree of certainty is that damage to American credibility globally has happened. How much damage? [It’s] hard to say, but some damage. Why? Because when you don’t do things that you say you’re going to do, or you don’t follow through on commitments that you made in the past, that makes you less credible in the eyes of others, and that’s what we’ve done.
We’ve had several trade agreements that we made with other nations in the recent past…that are not being honored by these activities. We sort of changed what we said we were going to do. And just like if you or I said we were going to show up for work today, and then we didn’t, we lose some credibility.
What are the potential difficulties for US-based businesses or multinationals that do a lot of trading with that loss of US credibility?
If you lost some credibility, next time you ask for that thing, they’re going to ask for more proof from you, they’re going to ask for more clarity that you’re going to follow through. That’s contracting costs. When we think about global business, the contracting costs associated for American businesses are going to rise. Foreign firms that are working with American businesses, they’re going to want harder…more specifics for recourse, etc., in the contracts to ensure that American firms follow through if there’s some calamity in American governance.
It’s going to be harder for American firms to be taken seriously in the international spheres as well because, of course, American business is backed by American law. And if American law isn’t as clear as it would be, then that’s the foundation upon which American business resides. And so although it’s not really businesses’ fault that their foundations are poorer than they used to be, they’re going to pay that cost.
Is there anything else you’d like to mention?
Economics looks really complicated, but really it isn’t. And in this action, we are messing with one of the most foundational things of economics, which is really not hard to understand at all, and that’s trust. Trust makes economies work better, because it makes things cheaper…We’re moving from a high trust economy to a somewhat lower trust economy, and that’s expensive. That’s the most important thing...I don’t mean to minimize [tariffs] at all. But that’s the longest lasting consequence, is that declining trust.