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The major fear when the whole global tariff campaign began on liberation day in April was that the United States economy and the global economy may experience additional sticker shock on top of the elevated historic inflation that was the Biden economy. There were some legitimate fears around this not just because of economic reasons, but political ones as well.
While the United States is in a good position to prevail in most trade wars, there would be great uncertainty and unpredictable timing not ideal. Just because you can win a conflict does not always mean that it is worthy of participating in. And that really was the fear of some economists. Left leaning people simply wanted to oppose any Trump idea regardless of the long term benefits.
Now a few months later, the data points are showing that the fear is unwarranted. Despite Democrats trying to sell a rather hypocritical message about cost increases, the impact on inflation is nowhere near the inflation they pushed onto the American public without any long-term benefit. They brought on historic levels of inflation in days simply to appease a fringe agenda in the face of strife. The tariffs have brought historic investments and trade deals.
Why have the tariffs not exploded inflation to a level that the left can pass the buck?
What was the purpose of the tariffs? The stated purpose was to rebalance global trade. Let us talk about trade. There are benefits to engaging in global trade. Every nation has different competitive advantages than others. Either through natural occurrences related to skills inherent from cultural development over time. Some nations have access to unique resources or have certain skill sets that can be exchanged for resources and skill outputs they lack.
The idea behind trade is that everyone gets the full plate without having to possess the skills for each dish. That basic framework works effectively as long as all parties operate in a transparent manner and without protectionism. Under the guise of globalization and free trade, we have been somewhat trained to believe that there are no barriers to trade any more and no infractions. And to perceive trade imbalances as a sign of quality differences. But that is not exactly accurate. Or always accurate. Sometimes we think that by default but are not aware of the reality.
As we have discussed in Trade with Tariffs, the purpose of the tariff campaign by the Trump administration was to achieve a rebalance of trade by strongly encouraging our trade partners to remove barriers and restrictions impacting sales for our American companies. And eliminate the behaviors that act like barriers and protectionist programs. And simply just commit to buy more American goods and services.
The benefits from the tariff campaigns have been trade deals that have removed barriers for American products. Reducing the tariff impact and making it more balanced to a degree. And most importantly, the commitments on purchasing goods, services, and energy as well as the investments in our domestic economy. During a trip to the Middle East alone, our allies in the region pledged a total of about two trillion in investments into the American economy.
Now, we will still have to see how that pans out, but those are significant. Certain trade deals that should have happened before also came to fruition. Like with our strongest ally in the United Kingdom of Great Britain and recently the European Union. As we are a significant ally to them on the diplomatic front, we should naturally be an economic partner as well. Especially for energy. Hopefully, we can finalize ones with Japan and find common ground with Canada and Mexico as well.
What about the risks? The biggest risk with the tariffs was the potential that prices would rise for Americans, who already experienced historic inflation under Joe Biden. Those same Democrats that brought you that inflation jumped on the message that tariffs are a tax and projected that inflation would grow on top of what they already hoisted on the American consumer. But, it did not. The inflation rate is holding steady for the most part.
The “tariffs are a tax” mantra is a clever political quip, but it is misleading. Tariffs are not exactly impactful in the same way a tax is. Tariffs can be avoided by simply buying the domestically produced item or one that is purchased under an existing trade agreement. A tax is levied against every good, service, or person in that class to be taxed. So it is unavoidable unless spending is completely ceased.
Again, back to my inflation lesson from the prices we pay podcast episode, available on the Christopher Peter Review YouTube Channel, inflation occurs when supply and demand gets out of sync in a dramatic event. Inflation is a natural economic mechanism to get the economy towards an equilibrium where demand of the public matches the supply the economy can provide.
If demand grows too high, prices rise to temper that demand to a point that it aligns to the supply the current productivity can accommodate. If supplies fall too low, prices rise to lower demand to match that new supply level. Vice versa, deflation happens to restore a workable balance to raise demand to accommodate a glut of excess supply in the near term.
As some places have reported, the tariffs have pushed consumer behavior towards domestically produced items or another cheaper alternative. There will be some buyers that still purchase the tariffed goods and pay the higher prices. But the mix of supply seems to be occurring more than a change in supply. So, as of now, there should not be a great level of inflation. Companies have invested in inventory to blunt uncertainty.
Another major factor is that the tax protections companies are receiving alleviate the need to pass on any impact they are experiencing from tariffs. Many companies have offered their worst case scenarios for what may result from tariffs, but have not seen those fears come to fruition. Good for marketing, as you can see with Walmart, who fueled fear over tariffs, but is reducing prices in many areas. Although they did increase in others.
Overall, the lack of the inflation on top of Bidenflation has not occurred, which is a good thing. And there have been many economic positives that have occurred for Americans both near term and for generations. This is the transformational change that we voted for. Not everything is easy. Sometimes there are benefits of rocking the boat as long as you understand and mitigate the risks.