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Saturday, March 15, 2025

Unpredictable and uncertain times

by

Mariano Browne
6 days ago
20250309
Economist Marino Browne

Economist Marino Browne

Nicole Drayton

Mar­i­ano Browne

Eco­nom­ics and pol­i­tics are close­ly re­lat­ed as po­lit­i­cal de­ci­sions of­ten have eco­nom­ic con­se­quences. The re­verse is al­so true. Po­lit­i­cal strate­gists pay close at­ten­tion to a coun­try’s eco­nom­ic per­for­mance be­fore an elec­tion. A strong econ­o­my should be good for the in­cum­bent ad­min­is­tra­tion, where­as a poor­ly per­form­ing econ­o­my should re­sult in elec­toral de­feat. To quote po­lit­i­cal con­sul­tant James Carville, “It’s the econ­o­my, stu­pid.”

The US econ­o­my gen­er­al­ly per­formed well un­der the Biden ad­min­is­tra­tion, grow­ing by 2.4 per cent in 2024 be­cause of strong con­sumer spend­ing and an ex­pand­ing job mar­ket. Con­sumer price in­fla­tion surged in the post-pan­dem­ic re­cov­ery pe­ri­od in 2022 but de­clined to less than three per cent in 2024. Egg price in­creas­es, blamed on the Biden ad­min­is­tra­tion by Trump, were due to a bird flu out­break and the sub­se­quent culling of in­fect­ed lay­ers. This de­creased the avail­abil­i­ty of eggs and drove up prices. Con­trary to Trump’s claims, the con­ser­v­a­tive FT news­pa­per in its March 7 ed­i­to­r­i­al la­belled the state of the US econ­o­my “a de­cent in­her­i­tance ...” that “... the pres­i­dent’s chaot­ic poli­cies are squan­der­ing.”

“To make Amer­i­ca great again,” Pres­i­dent Trump is re­ly­ing on tar­iffs (al­so called cus­toms du­ties, im­port du­ties, and im­port tax­es) as a for­eign pol­i­cy tool, a trade pro­tec­tion de­vice, and a mea­sure to en­cour­age in­ward for­eign in­vest­ment. The coun­tries cur­rent­ly sub­ject to this on­slaught are the US’s clos­est neigh­bours, Cana­da and Mex­i­co, and Chi­na, the pu­ta­tive threat to US hege­mo­ny. More tar­iffs are planned af­ter a study of third-coun­try tar­iffs (ex­pect­ed com­ple­tion is in April) that will in­form a pol­i­cy of coun­ter­vail­ing tar­iffs.

The 25 per cent tar­iffs on the US’s NAF­TA part­ners (a treaty rene­go­ti­at­ed in 2018 dur­ing his first term in of­fice) were rein­tro­duced this week af­ter a one-month post­pone­ment. A day lat­er, Trump grant­ed both Cana­da and Mex­i­co a one-month re­prieve on the prod­ucts cov­ered by NAF­TA. The tar­iffs are like­ly to cause sharp price ris­es for in­puts used by au­to­mo­bile man­u­fac­tur­ers in the US.

This sec­ond re­ver­sal has left fi­nan­cial mar­kets and in­vestors con­fused. This was ev­i­denced by the way the stock mar­kets re­spond­ed to these on-again, off-again tar­iffs. In­vestors know tar­iffs will in­crease do­mes­tic mar­ket prices and fu­el in­fla­tion­ary pres­sure. The stock mar­ket gains since Trump’s elec­tion were re­versed this week as the mar­ket had its worst week­ly loss in two years. The volatil­i­ty ev­i­denced on the trad­ing floor sig­nals in­vestor dis­like of pol­i­cy con­fu­sion. Busi­ness un­der­stands and will ac­cept risk but dis­likes un­cer­tain­ty. The “un­pre­dictabil­i­ty of tar­iff carve-outs, re­ver­sals and steps against trad­ing part­ners makes it im­pos­si­ble for busi­ness­es to plan” (FT, March 7).

Like all wars, trade wars cause ca­su­al­ties. Tar­iffs are in­fla­tion­ary. They in­crease prices with­out any im­prove­ment in the val­ue of the af­fect­ed prod­uct. A pre­vi­ous col­umn not­ed that the US au­to­mo­bile in­dus­try is the largest ben­e­fi­cia­ry of the NAF­TA treaty. In­creas­ing tar­iffs on au­to­mo­bile in­puts will in­crease the cost of au­to­mo­biles man­u­fac­tured in the US.

An analy­sis by War­wick J McK­ib­bin and Mar­cus Noland for the Pe­ter­son In­sti­tute for In­ter­na­tion­al Eco­nom­ics (Feb­ru­ary 4, 2025) con­cludes that 25 per cent tar­iffs on Cana­da and Mex­i­co and tar­iffs on Chi­na would hurt all four coun­tries. Re­tal­ia­to­ry mea­sures hurt US ex­porters.

For ex­am­ple, US grain prices have fall­en sharply (corn, wheat, and soya bean) as re­tal­ia­to­ry tar­iffs have been levied on agri­cul­tur­al ex­ports, which have fu­elled fears of a glut. Tar­iffs would hurt Cana­da and Mex­i­co more than the US, low­er­ing Cana­da’s GDP by a lit­tle over one per­cent­age point rel­a­tive to what it would oth­er­wise have been. The sit­u­a­tion wors­ens for each coun­try if re­tal­ia­to­ry mea­sures are in­clud­ed.

Tar­iffs can­not stop traf­fick­ing in il­le­gal drugs or il­le­gal im­mi­gra­tion. Yet, this is the sup­posed rea­son for de­ploy­ing tar­iffs. They can on­ly force ne­go­ti­a­tion.

The dif­fi­cul­ty is that Trump’s rhetoric and bom­bast guar­an­tees re­tal­ia­to­ry re­spons­es. Na­tion­al­ism is a nat­ur­al re­sponse on all sides. Un­sur­pris­ing­ly, Cana­di­ans have been boo­ing the US an­them at in­ter­na­tion­al events and boy­cotting US prod­ucts. The Mex­i­can pub­lic has re­act­ed sim­i­lar­ly. McK­ib­bin and Mar­cus Noland con­clude that “... even if these tar­iffs are avoid­ed, the US has dam­aged it­self rep­u­ta­tion­al­ly, and its part­ners may look to di­ver­si­fy their trade and in­vest­ment away from the US.”

Un­cer­tain­ty is the key im­pact. Even un­ful­filled threats are dam­ag­ing. An in­con­sis­tent US is an un­re­li­able part­ner. If the US treats its largest trad­ing part­ners this way, what is the prospect for small­er states? Pol­i­cy sta­bil­i­ty is vi­tal for busi­ness­es that re­ly on ex­ports to for­eign mar­kets. It is crit­i­cal for small coun­tries with lim­it­ed op­tions. Small states like Cari­com’s mem­ber coun­tries can­not eas­i­ly di­ver­si­fy their trade op­er­a­tions away from the US. How will Trump’s un­pre­dictabil­i­ty af­fect T&T’s re­la­tion­ship with Venezuela?

Cari­com coun­tries have ad­dressed some of their de­vel­op­ment needs by ac­cess­ing loans from Chi­na and us­ing med­ical per­son­nel from Cu­ba. Cuban sports coach­es have al­so been in­flu­en­tial in im­prov­ing ath­let­ic skill sets. These ac­tiv­i­ties have at­tract­ed neg­a­tive com­ment from US au­thor­i­ties in the past but not puni­tive ac­tion. This more ag­gres­sive US ap­proach should make Cari­com gov­ern­ments ner­vous. Pana­ma’s treat­ment is a prece­dent.

What are the al­ter­na­tives? What are Cari­com gov­ern­ments do­ing to in­su­late and mit­i­gate the fall­out ef­fects from Trump’s mea­sures? Buy­ing time and sell­ing hope, or prepar­ing, adapt­ing and ad­just­ing?

Mar­i­ano Browne is the chief ex­ec­u­tive of­fi­cer of the Arthur Lok Jack Glob­al School of Busi­ness.


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