Uncertainties about customs duties continue to grow. We wake up to new news every day. Let's talk about a few different possible scenarios in this article. According to a study by the Center for Strategic and International Studies (CSIS), the effective customs duty rate that the US receives on imported products will increase from 2.4 percent to 22.4 percent after the April 2 tariffs. One of the long-term goals is for the tariffs to transform the US from a service country to a manufacturing country. The phrase "long-term" is important here because it is naturally impossible for such a large country's production motif to change in a short time. Again, according to the study I mentioned, the ratio of people working in the manufacturing industry to total employees will be 8.6 percent in 2023. This ratio was 31.1 percent in 1950. In 2000, when China was not on the world stage to this extent, the ratio was 14.7 percent. Trump is trying to reverse this ratio with taxes. However, this is an extremely flat and, in my opinion, domestic policy-oriented strategy. In a world where productivity has increased so much, supply chains have developed to this extent and the service sector is so prominent, developed countries turning to manufacturing as if they were developing countries is an attempt to reverse history.
Another purpose of the tariffs is to strengthen the US’s position as a leading country in technology. While doing this, they aim to increase the public’s infrastructure and energy investments required for innovation. The aim is to finance these expenditures with public revenues from customs duties.
On the other hand, tariffs will have some shorter-term consequences. Such as increasing inflation, decreasing growth and increasing unemployment. Fed member Christopher J. Waller touched on possible tariff scenarios and the possible effects of these tariffs on the US economy in a speech he made. It is obvious that the effective tariff rate, which is currently around 2-3 percent, will increase. What is uncertain is how high this rate will rise. Since negotiations are ongoing, it is impossible to say anything about this for now. But Waller evaluated his expectations for two scenarios where the tariff rate increases to 10 percent and 25 percent, and the Fed's possible moves in the face of this.
Accordingly, if the tariff rate increases to 25 percent, the Fed's favorite inflation indicator PCE could rise from 2.7 percent to 5 percent. Growth would fall and unemployment would rise from 4.2 percent to 5 percent. Tariff uncertainty would halt capital flows, investments would decrease, and productivity would fall. According to Waller, the impact of tariffs on inflation would be one-time and temporary. In the scenario where inflation expectations are well anchored, the target figure of 2 percent would be approached again in 2026. However, the effects on growth and employment are more likely to be more permanent. Therefore, it would be right for the Fed to make a rapid interest rate cut in such a scenario. Waller calls this a 'rainy day interest rate cut'.
If the effective tariff rate is 10 percent, inflation would rise to a maximum of 3 percent. This will not cause any major difficulties for the Fed to achieve its targets. There will again be minor effects on growth and the Fed will not need to change its monetary policy stance. In this case, we can expect interest rate cuts to come only in the second half of the year.
As you can see, everyone in the world has given up their jobs and is trying to fish in troubled waters. The scenarios written today can be destroyed by an announcement the next day. The most probable of the possible developments I have written above is that investments will fall. This is not good news for the world's long-term growth.
The information, comments and recommendations contained herein are not within the scope of investment consultancy. Investment consultancy services are provided within the framework of the investment consultancy agreement to be signed between brokerage firms, portfolio management companies, banks that do not accept deposits and customers. The comments in this article are only my personal comments and these comments may not be appropriate for your financial situation and risk return. For this reason, investments should not be made based on the information and comments in my articles.
