The Real Reason Tariffs Threaten Our Economy

announcement on tariffs

The markets plunged on President Donald Trump’s announcement on tariffs.

It’s not that the initial announcement by itself was going to derail our economy. But investors have focused on the threat of a looming trade war.

There’s another elephant in the room, though, that many seem to avoid discussing when highlighting the risks of tariffs.

And it doesn’t even require other nations to retaliate.

I’m talking about the nation’s debt.

Sitting at $20.85 trillion and climbing, it is at an astronomical level that will be a force to reckon with some day.

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No one right now has a rational plan to deal with it — and that’s a problem.

What we do know is that the trickle-down effects of protectionist policies like tariffs will upend the U.S. economy as we know it.

Here’s how it works.

Announcement on Tariffs

All tariffs start with the right frame of mind: to protect jobs, and hit back at countries that are manipulating prices — either through cheap labor or other actions.

Now, many, possibly including Trump, would argue that this is exactly what the U.S. should do. That the U.S. is strong enough to stand on its own.

And that is true.

The Elephant in the Room

But this is where the elephant in the room of government debt comes up.

Tariffs do one thing for certain — increase prices.

By nature, if we charge more for countries to export us raw goods, it means final products will see price increases. Higher costs will always hit the consumer.

Higher prices lead to an increase in inflation, because inflation, by definition, is the fall in the purchasing value of money.

Inflation rises because prices are rising.

The Federal Reserve is a tool to combat inflation. One of its mandates is to keep prices relatively stable. In order to do this, the Fed is able to manipulate interest rates.

A Relationship of Opposites

Think of this relationship as opposites.

To subdue inflation, the Fed will raise rates. With lower interest rates, the Fed is trying to spark inflation.

Right now, the Fed is in the middle of an interest-rate hike cycle. It is doing this because it sees inflationary pressures in the market.

The problem comes if we follow through with tariffs.

With those inflationary pressures that are already present, like an economy at full employment that just got a tax cut, we’ll see higher prices for practically every good we use.

The Fed’s response will be to increase rates higher and more quickly.

So, what’s so bad about higher interest rates?

Our debt.

The Repercussions of Tariffs

The government’s more than $20 trillion in debt is rolled over every three to four years to new bonds. That means what was once locked in near-zero interest rates will now be rolled into higher rates. This means the U.S. government will begin paying much, much more for its debt obligations.

It currently pays about $223 billion in interest payments — which is a substantial amount.

But if interest rates continue to climb, and get back to a level that was considered normal for the last three decades, we’ll find ourselves paying $825 billion in interest by 2020. That’s more than the recently boosted defense spending of $700 billion, about the same as Social Security obligations and half the amount of all personal income taxes the government receives in a year.

These are mind-blowing statistics.

And this is a rational expectation.

It likely will be worse.

This isn’t a hidden risk, either. Trump knows the repercussions of broad tariffs, and I think the original announcement will get tweaked drastically before it is signed.

Trump’s Greatest Asset

Trump, I hope, uses his business instincts to leverage the greatest asset he has ever had — the U.S. economy.

He is going to look to scare other countries by coming off as serious about tariffs, and use that leverage to push those countries into better trade deals.

That is a positive outcome from all of this.

If no one negotiates with him, though, and Trump follows through with steep, broad-reaching tariffs, other countries will retaliate, and the markets will remain volatile.

A sell-off on the news is likely, but then stocks will rebound.

The rebound will come as there isn’t a change in the data from the tariffs for a while. The tariffs have to find their way through fixed contracts and such before we see prices rise.

But once the data starts to show a rise in prices is hitting the economy, likely a year or so after the tariffs, that’s when the real panic will set in.

I’ll let you know to get out long before then if that is the case.

For now, let’s wait and see where the dust settles.

Regards,

Chad Shoop, CMT

Editor, Automatic Profits Alert

  • scruffyleon

    Where did Trump say he was going to have wide sweeping tariffs? He didn’t.
    In fact, Trump is targeting Chinese dumping of steel and aluminum. Countries that use their own steel and aluminum can have exemptions from tariffs. For those who chose to use steel and aluminum with China as the origin, they pay.

    The reason NAFTA will fail is because Canada and Mexico refuse to stop China from dumping auto parts (steel and aluminum) and shipping those assembled parts to the US, tax free.

    Speaking of tariffs, why not mention the tariffs that have been in place against the US for the last 30 years? Is it OK for other countries to tariff the US but we can’t retaliate?

    This writers lack of knowledge and understanding of what is going on in the market doesn’t give me much confidence in Banyan Hill.

  • jrj90620

    With actual inflation much higher than govt’s phony 1.5% figure,the Fed is keeping interest rates well below interest rates that would be necessary to curb inflation.Until inflation gets so high,that even the most govt worshipping citizen believes inflation is out of hand,the Fed will continue business as usual.It’s really amazing that so many Americans believe that politicians are dishonest,but somehow figure that govt,run by these same politicians,is honest.

  • jrj90620

    I benefit when stores,restaurants dump products on me.I think the same is true for the U.S.If Chinese are willing to accept our depreciating fiat Dollars for real goods,why complain?Thank you China, for providing so many great deals for us,that we wouldn’t have, if those products were produced in the U.S.

  • scruffyleon

    Because the Chinese are exploiting their citizens labor by low wages
    We require our US companies to match every dollar they withhold in SocSec & Medicare.
    We require our US companies to pay a Minimum Wage.
    We require our US companies to comply with a wide range of Regulations, ranging from safety to environmental concerns.
    We require our larger employers to provide Health Insurance.
    Our US companies must price their goods & services accordingly, to afford to pay for all these things they are ‘required’ to do.
    These ‘requirements’ benefit our workers…but they put hobbles on our employers, who cannot compete with the Cheap Imports, which are produced without any of those ‘requirements’.

    If you don’t care about your fellow human beings, you should feel right at home in a Communist country. May I suggest you live in North Korea or China?

  • scruffyleon

    And the Federal Reserve is honest? They own our Dollars now – we just rent the money from them.
    The FR is NOT a part of our government yet we let them control our money.
    We must be idiots.

  • taxx

    President Trump made a statement regarding tariffs and the elites go nutz! Anyone with a modicum of common sense and knows anything about Trump should know it is an opening salvo and will be NEGOTIATED on terms more fair to America.
    Our current trade deficit is unacceptable and ONLY Trump is addressing the issue. I love it when these idiots tell us how bad things will go when they have no idea what Trump will get during negotiations with the countries responsible for the great trade imbalance

  • Bankske

    The elephant in the room is not debt created by tariffs and those cheap goods quoted by the author has two prices: one is at the cash register and one the taxes required to support displaced workers. Here is a post which I put on facebook when Trump was running for office. I received “likes” of six figures. ” People criticize Trump for advocating tariffs as being a protectionist. Protectionist only became a dirty word after national corporations wanted to hire cheap overseas labor. Our founding fathers realized that this country had to impose tariffs to protect our economy. Yeah, those geniuses were protectionists. Think about it, what is wrong with one trying to protect themselves, their families and their country. Protectionism has been promoted as a dirty word by the MSM because a few wealthy people want a global economy so that they can have global power. Wasn’t that what the American revolution was all about, breaking the shackles of a global power and global economy. Trump has it right. We need jobs brought back from outsourcing. Only jobs will cure this nation. Lowering taxes will not. Globalization has done more damage than Trump is addressing. The MSM tell us that people who are not working are lazy and just want to **** on government benefits. Not so. I live amongst these people. They want to work, but don’t have the power to fight globalization. When companies transfer local jobs overseas, displaced workers must depend on government benefit programs in order to survive. Our workforce participation has dropped to very low levels; dependence on government benefit programs, such as food stamps, is at an all time high. Society and the economy are intertwined, they cannot be separated. Attempts to do so will result in chaos. The government must provide some support for those displaced by globalization and free trade. The proponents of free trade will tell you that globalization has provided you cheap products which improves your standard of living. This is a bold faced lie! Globalization has only lined the pockets of the elite. Those cheap products have two costs: the direct cost at the cash register and the indirect cost of higher taxes to fund the government benefit programs for the displaced workers. The products are probably much more expensive than they would have been if they had they been manufactured locally. A second effect of globalization creating large numbers of government dependent displaced workers is a huge reduction in our tax base and our potential market for goods. The reduction in the tax base means that those working must pay their taxes along with those taxes that cannot be paid by the displaced workers. However, the bill is too large for the working population, so the government must compensate by printing and borrowing more money. Bingo! 19 trillion dollars debt. It also dooms the life of the dollar. NOTHING IN LIFE IS FREE! Globalization is destroying our country for the benefit of a few. Even those few will suffer because the earnings in the price/earnings ratio come 100% either directly or indirectly from society and society is fast losing its ability to support those earnings! Borrowing to drive the economy, as proposed by the Federal Reserve, not only kicks the can down the street, but also enhances the “bursting of bubbles”. Borrowing to drive the economy puts the economy on borrowed time. Payback is coming with a vengeance.”

  • Charles Burton

    Our Founding Fathers realized, because they were politicians themselves, that politicians run ‘Government, and that politicians and citizens were actually natural enemies, not allies. They tried to write the Constitution so as to limit the power of politicians to harm the citizenry, while giving citizens a rallying point and a sense of identification and control of Government. Politicians have been nibbling away at those limitations ever since; all in the name of benefits to the citizens, of course. We are closer than most of us realize to the inevitable end result of that trend: Dictatorship of some sort. I was a child of the ’30s, and I know that even then, people were beginning to lose freedoms. They had beaten the idiocy of Prohibition, but had accepted the right of politicians to impose it and remove it in the first place – along with other restrictions. Trump’s tariffs are just another such political control device, like Smoot-Hawley in the 30’s. Look at what resulted: an even Greater Depression than we already had at the time. I know, it’s only two, not 20,000, like Smoot-Hawley, but the principle is the same: control of the populace. WE are the ones who will pay those tariffs, not other nations or their companies. They will contribute to inflation in this country.

  • EE

    Trumps tariffs are actually the retaliatory response to others tariffs. The other countries have a choice to reduce tariffs and thus reduce costs for all. The ******** is from the folks saying fabricators will lose jobs at the expense steel workers gain. It won’t happen that way because countries will adjust their tariffs down to avoid the 25% Trump has started!

  • c_dynes

    Basic economics 101; Tariffs result in inflation,which then triggers high interest rates. As for China being punished,that wont happen since Chinas steel imports account for ONLY 2%.Canadas is 18%, EU 21%, S Korea 10%. So those tariffs wont hurt China at all,or result in better trade deal for the US. For someone with an MBA from Whartons, Trump is clueless about how the economy works or any other thing having to do with finances,thats apparent by excessive bankruptcy filings and his low net worth in comparison to say Warren Buffet,or Jeff Bezos. Trump wasn’t even in the TOP FIVE of US Billionaires….let that sink in…So Canada gets an exemption and Mexico form Tarrifs , so what? still wont impact China. What this misguided policy shift will do is shortchange American workers that work in small local businesses making steel parts etc.thats in every state in the US….that’s a potential loss of over 160,000 jobs for a short gain of 60,000? Not a very good deal at all. Hurrah for the Steel unions.. Also inflation,that impacts the average Joe and Josephine’s cost of living. Thats called a TRADE TARRIFF WAR ,retaliation for making it difficult on trading partners..Goods and commodities will increase in price ,down to your Coors beer. Interest rates will go up….This may also spark a major recession,..anyone with a clue should be concerned… and invest accordingly..Money in the bank would be good ,since interest rates will hike up..Dont invest in any steel or aluminum stocks though..

  • c_dynes

    Canada ,Mexico, also use Chinese steel,/aluminum but will have exemptions..The Chinese will continue to benefit,they wont be impacted at all. also part of the tariffs unintended consequences are Trade Wars. That means American goods will be slapped with taxes ,that’s already happened with EU retaliation of taxes on Harley Davidson motorcycles….that could also impact US jobs.. The US doesnt get get more than 2% of steel and aluminum from China. This tariff wont hurt China at all,but will hurt the little guy whose Coors or Bud beer prices goes up..you might want to educate yourself further on basic economics 101.

  • c_dynes

    North Korea is technically a dictatorship monarchy,not Communist. Also China may be politically communist ,but economically China is Capitalist and operates like a capitalist entity.

  • c_dynes

    The Fed is the gatekeeper of the U.S. economy and is part of the federal government. Based in Washington, D.C., the Fed is the bank of the U.S. government and regulates the nation’s financial institutions. It’s comprised of a network of 12 Federal Reserve Banks and a number of branches.
    The Federal Reserve: CNBC ExplainsPublished 12:43 PM ET Thu, 28 July 2011 Updated 11:21 AM ET Wed, 18 March 2015

  • c_dynes

    ‘These American companies could be hurt by Trump’s tariffs’
    by Julia Horowitz @juliakhorowitz March 9, 2018: 11:14 AM ET Anheuser-Busch
    The aluminum used in beer cans is expected to get more expensive once the tariffs go into effect. Anheuser-Busch (BUD) has warned that it could threaten manufacturing jobs in the industry.

    The company employes more than 18,000 people in the United States.

    Auto parts manufacturers

    The Motor & Equipment Manufacturers Association, which represents companies that make vehicle parts in the United States, has said the tariffs will make cars more expensive and could put the many of the more than 800,000 jobs in its industry at risk.

    Boeing

    The nation’s largest single exporter uses aluminum and some steel parts to make planes. Boeing (BA) could also suffer if other countries decide to retaliate against US tariffs by buying planes from competitors like Airbus. The company has more than 140,000 employees in the United States and around the world.

    Caterpillar

    Making Caterpillar (CAT) construction equipment could get more expensive if steel and aluminum prices rise.

    The company employs more than 98,000 full-time workers around the world. About 42,000 are in the United States.

    Campbell Soup Company

    Commerce Secretary Wilbur Ross has said that there’s 2.6 cents worth of steel in a can of Campbell’s soup, and consumers can expect prices to rise less than one cent as a result of tariffs. Campbell’s (CPB) responded that “any new broad-based tariffs on imported tin plate steel — an insufficient amount of which is produced in the U.S. — will result in higher prices on one of the safest and more affordable parts of the food supply.”

    Campbell’s has about 18,000 employees.

    Craft breweries

    Craft breweries, which have been a breakout success over the past few years, worry that future growth will be stunted if beer cans get more expensive due to higher aluminum prices. Oskar Blues, a Colorado-based brewery with operations in North Carolina and Texas, said tariffs would put “a strain on the business.”

    DowDuPont

    An executive at the chemical company told Bloomberg that it might need to start building plants in Canada or Argentina if the cost of construction goes up too much in the United States.

    DowDuPont (DWDP) has approximately 98,000 employees.

    Ford

    Ford (F) uses steel and aluminum in car production. Ford said in a statement that the tariffs “could result in an increase in domestic commodity prices — harming the competitiveness of American manufacturers,” though it mostly uses American-made steel and aluminum in vehicles manufactured in the United States.

    Ford has about 202,000 employees worldwide.

    General Electric

    GE (GE) makes jet engines, power plant turbines, trains and other heavy machinery, all of which use steel and aluminum. Higher costs could inflict further damage on a company that already faces serious financial troubles. GE said in a statement that it’s monitoring the situation but expects the impact to be “minimal.”

    GE has about 313,000 employees total. About 106,000 are in the United States.

    General Motors

    GM (GM) cars contain steel and aluminum, though the company says that more than 90% of the steel it uses to make cars in the United States comes from American suppliers.

    It has more than 180,000 workers around the world.

    Molson Coors

    The maker of Coors Light and Miller Light has said that it makes an “increasing” number of beers in aluminum cans. Rising prices will “likely to lead to job losses across the beer industry,” the company said on Twitter.

    The company has 17,200 employees globally, about 7,900 of which are in the United States.

    Oil companies

    Members of the oil industry have warned that Trump’s steel tariffs could derail the country’s energy boom by raising prices on foreign steel, which oil companies use in drilling and production, as well as in pipelines and refineries.

    Canary LLC, a Denver-based oilfield services company that employs about 300 people, said higher costs could force it to lay off up to 17% of its US workers.

    Whirlpool

    Whirlpool (WHR) recently got a boost when Trump slapped tariffs on imported washing machines. Now it could get more expensive to make household appliances like dryers and refrigerators in the United States as metal costs rise.

    Whirlpool has about 92,000 employees.

    CNNMoney (New York) First published March 8, 2018: 3:34 PM ET

    /

  • c_dynes

    For example,if the target is China,then Trump should be effecting a trade policy that specifically addresses China and Chinas dumping of goods on the US market,specifically a tax on Chinese goods,to rebalance the trade deficit, . Not a sweeping tarriff on steel and aluminum that impacts every foreign entity but China.

  • scruffyleon

    Where in the Constitution is there a provision for the FR?

  • scruffyleon

    Wrong! There are 5 Communist countries in the world and North Korea is one of them. Period.

  • scruffyleon

    You are welcome to your opinion – and it is a very poor, misinformed one at that.

    How about you write a public apology to me here on Banyan Hill when US pulls out of NAFTA?

    Your knowledge of Economics is skewed by Global Free Trade Conditioning.
    Everyone admits the past 40+ years of U.S. trade deals have resulted in the massive export of U.S. wealth via jobs and manufacturing gains within other nations. The financial beneficiaries of those prior trade
    positions were: Wall Street, multinational corporations and multinational banks. The losers of prior trade priorities was the U.S. middle-class.
    So ask yourself, friends and family this very important question:
    If prior U.S. trade policies resulted in the export and redistribution of U.S. wealth… What happens when you reverse the process?

  • IMissLiberty

    I stopped reading at the definition of “inflation.” “Inflation” is what one does to tires, balloons, bubbles, air mattresses, and the money supply. It doesn’t make any sense to say one inflates a price which is always a negotiation between individuals.

    Rising prices are caused by supply and demand changes, cost increases (monetary and regulatory, including tariffs), the weather, emotions, fads, and stupid political actions or manipulations, and the Fed. Inflation is only one of many possible causes of rising prices. Inflation happens before the price rises. “Inflation” is not a word that describes the result, it is a word that describes the action of increasing the money (or, rather, “currency”) supply. Price increases will probably follow.

  • Harry Speakup

    It seems to me that our trading partners are a lot closer to the edge of the cliff than we are. They will go over before

    we do. Trump expects them to be a little more reasonable.

  • Dr. Mike Reeder

    There isn’t! Since the Fed was given charge of our money supply, the dollar has lost 97% of it’s value.

  • Dr. Mike Reeder

    Well, the countries in Europe has castrated themselves with their open borders policy’s as well. How much thought went into that? If the U.S. cannot meet it’s considerable worldwide obligations the effect will be felt around the globe. It is NOT in the worlds best interest to raise prices on anything they sell in the U.S. Our national debt is a disgrace but, it may be propping the entire world up at present and Mr. Trump can do no wrong. He is the ONLY person in recent memory to at least TRY to do something.

  • charles moore

    You need to educate yourself. China is known to ship steel to other countries who then dump it in the U,S.India has a 100 % Tariff on Harley Davidson Motorcycles. I live in Florida and one day went to the Grocery store to buy Oranges and there were none. I told the Produce Manager “that this was Florida and there was no Citrus”. He informed me that because of Nafta ,Florida ships all their Citrus to California and we have to wait for others to ship it to us. The only way that I can buy Citrus then is online or on the roadside. Not to mention the costs of shipping Citrus to the Citrus State, Wow. a good part of the cost of beer is taxes and I don;t see you complaining about that???If they raise the price of cans then beer is also sold in bottles. Are you aware that steel cans of other products also contain lead which can seep into the product inside. The price of Steel is said to increase the price of a car by$175. Most finance over 5 years which amounts to $35 a year or less than $3 a month. People spend more than that at Starbucks every month… You need to take a course in Econ 101 and then correlate it with the facts, We want Fair Trade. Wake up.There is a simple solution to these overseas Plants that don’t want the Tariffs . Redo the Treaties for Fair Trade or locate your Plant in the U.S. and they won’t have to pay a Tariff.

  • charles moore

    What is your fascination with Coors beer? I am familiar with Busch, The average person can’t get employment with them unless they belong to the Union. People will adjust their buying habits , The taxes on alcohol and cigarettes is huge. Don’t see you complaining about them.Wake up. They also sell beer in bottles. Amazing. You don’t mind the huge taxes on beer but object to paying a few cents more for an aluminum can????. . If companies make the parts in the U.S. there is no Tariff. . We will raise the Tariffs on Foreign cars and people will buy more American cars. How about a 100% Tariff? India puts a 100% Tariff on Harley Davidson Motorcycles. How about Fair Trade?Take a course in Econ 101

  • charles moore

    You can’t single out just one Country. Take a course in Economics 101. Century Aluminum in Kentucky just announced that they are spending 100 million dollars to expand their Aluminum Plant. Don’t you think that that will require more hiring of employees??? Since Trump announced the Washing Machine Tariffs there is at least one foreign Country that is building a Plant here in the U,S, They will hire American workers. Amazing that you don;t mind the heavy tax on Beer but whine about a penny increase in an aluminum can. The 100 million expansion of the Aluminum Plant will take care of that. I suppose you don’t mind the Federal, Local and State tax on Gasoline. Are you going to stop driving a car?I doubt it as you apparently don;t mind the heavy tax on Beer. Politicians love increasing the “Sin Tax” on Alcohol and Cigarettes and it is heavy. But you don’t mind paying it and then whining about a penny tariff on a can of Coors. Coors does make Beer in bottles if you can’t pay the penny. This will also result in an extra $175. for Autos. Not everybody can pay cash and finance over 5 years pr $35.00 a year and less than $3 dollars a month. People spend more than that at Starbucks every month. You need to take a course in Econ 101. How about getting your facts straight.