In the following analysis, John Plassard, senior investment specialist at Mirabaud Group, has been delving into history to see what lessons we might learn in terms of what we might expect by way of Trump’s threat-based approach as his second term gets underway in January. And what HAS all this got to do with washing machines? Read on to find out.
Hardly a day goes by without the financial media and economists talking about the inflationary impact of the tariffs Trump has promised once he returns to the White House. However, if we look at the past and the negotiating methods of the incoming American president, things are not quite so obvious.
The facts
Throughout his campaign, Trump reaffirmed his willingness to impose significant tariffs on foreign imports, particularly from China. He has portrayed these tariffs as essential to revitalising US manufacturing, reducing the federal deficit and lowering food prices. Indeed, Trump has presented tariffs as key elements of his economic and national security agenda. At a rally in Flint, Michigan, he called tariffs “the greatest thing ever invented”, underlining their importance to his political vision.
The specific tariffs he has proposed are considerable, ranging from a general tax of 10% on all imported products to duties of 60% on products from China, and up to 25% on Mexican products if deemed necessary.
Trump claims that these import taxes would deter companies from relocating jobs and protect US industries from what he describes as unfair competition. He has also indicated his willingness to impose these measures without going through Congress, as we saw in 2018 when he used Section 232 of the Trade Expansion Act to introduce tariffs on steel and aluminium imports, citing national security concerns to justify his decision.
Trump recently warned that he would immediately apply 25% tariffs on all Mexican imports if Mexico’s new president failed to stem the flow of drugs and crime into the US. This reinforces his position that tough economic measures against other countries can be used to protect US borders and interests.
These comments have fuelled fears of a massive return of inflation. But what is actually happening?
What are the arguments for a rise in inflation?
According to some analysts, the Trump tariffs would likely exacerbate inflation, as they would increase the cost of imported products and, consequently, prices for American consumers.
Economists, including Nobel Prize winners, warn that tariffs generally pass on costs to consumers, fuelling rather than containing price rises.
In addition, Trump’s plans to influence the Federal Reserve’s decisions could compromise the latter’s ability to fight inflation by creating political pressure against rate hikes.
According to a report by the Peterson Institute for International Economics, Trump’s economic policies, if implemented, would lead to higher consumer prices than would otherwise be the case.
High tariffs, labour shortages and the Fed’s compromised independence could push inflation back up to the levels seen at the peak of the pandemic.
Ultimately, although Trump claims that his measures will make “foreigners pay”, studies suggest that they would place a disproportionate burden on American consumers.
What history tells us
When you look at history, the conclusions are somewhat different from the theory.
In fact, in general, when customs duties are imposed on goods, they have a one-off impact on the price of imports. Unless there is retaliation or a continued escalation of tariffs, the price increase is incremental and stops there.
Inflation, as we know, is a comparison of current prices with those of a month or a year before.
All other things being equal, once a single tariff has been implemented, after a month or a year the comparison rate goes back to zero.
Washing machines
An amusing gauge of inflation often put forward by economists is the price of washing machines!
A study by Flaaen, Hortaçsu and Tintelnot (The Production Relocation and Price Effects of US Trade Policy: The Case of Washing Machines) assessed how US tariffs on washing machines in 2012 and 2018 affected consumer prices and overall inflation. The analysis ultimately found that the impact on inflation was more limited than many had anticipated.
The tariffs in 2012 (when Trump was not in power) and 2018, which targeted imports from South Korea, Mexico and China, resulted in only modest price rises as manufacturers shifted production to countries like Thailand and Vietnam, circumventing the tariffs.
Even though the 2018 tariffs were more extensive and covered almost all sources of imports, their inflationary impact remained limited, even if it was higher than in previous cycles.
The price of washing machines rose by around 12% and, surprisingly, tumble dryers – which are not taxed but are often purchased with washing machines – saw similar price rises due to consumer preference for matching appliances.
Despite these price rises, the overall inflationary effect on consumer goods remained limited, partly because domestic brands and foreign producers absorbed some of the cost increases.
The study points out that inflationary fears linked to customs duties can sometimes be exaggerated, particularly when production can be relocated to avoid taxes.
The modest effects of inflation have also been helped by factors such as market competition and the adaptability of production, with brands like LG and Samsung building factories in the US to avoid the new tariffs. While the tariffs led to higher-than-expected price rises for specific items such as washing machines and tumble dryers, they had no overall impact on consumer price indices and did not trigger inflation for other products.
This nuanced impact showed that, although tariffs exerted pressure on prices in targeted categories, their wider effect on inflation was mitigated by strategic shifts in production and market adjustments.
Overall, while the 2018 tariffs increased the prices of some appliances, their contribution to overall inflation in the US was far from the catastrophic scenarios some had predicted.
These tariffs illustrate how targeted industrial policies can stimulate growth and investment, by supporting not only direct industry, but also suppliers and related sectors of the economy.
Six years on, it is clear that the tariffs not only revived the US manufacturing industry, but also strengthened the washing machine industry, achieving the policy’s original aims of job creation, competition and economic resilience.
What happened during Trump’s first term?
The data shows that tariffs imposed during the previous Trump administration’s trade war did contribute to inflation, but less than many had anticipated.
For example, a study by the Federal Reserve Bank of New York, Columbia University and Princeton University found that US consumers indeed bore some of the increased cost of tariffs, particularly on imports from China.
However, these price increases were generally limited to certain categories of goods rather than to the whole economy, resulting in an average annual increase in costs of around $400 to $500 per household. This is a significant increase, but it did not lead to substantial, widespread inflation.
In 2018 and 2019, headline inflation in the US remained relatively low, at around 1.9% and 2.3% respectively, even as tariffs were imposed on billions of dollars’ worth of imports.
The modest inflationary effect is partly explained by the fact that many companies absorbed some tariff costs to maintain competitive prices, which reduced the direct pass-through to consumers. In addition, the strength of the US dollar helped to offset some import costs, as it made imported goods relatively cheaper, even with tariffs.
Other reports from organisations such as the International Monetary Fund and the Tax Foundation have shown that while tariffs slightly increased prices in specific sectors (such as consumer electronics and household appliances), they did not lead to a general rise in prices.
Economists have concluded that while tariffs have had an impact on prices and consumer costs in targeted areas, the overall effect on inflation has been less than initially feared.
What if it was all a question of negotiation?
The impact of introducing import taxes is of course theoretical, and we can debate the subject for a long time. However, there are 2 things to bear in mind when talking about potential customs duties:
- Inflation is Trump’s enemy: Analysts believe that the economic mistakes made by the Biden administration, particularly on inflation, contributed to Trump’s return to the White House. Exit polls show that voters’ dissatisfaction with the economy played a key role, with nearly 70% of those who viewed the economy negatively backing Trump. Despite warnings, Biden’s stimulus plan for 2021 fuelled inflation, pushing prices higher than expected. In addition, Biden’s choice to maintain most of the Trump-era tariffs missed an opportunity to reduce the prices of consumer goods, adding to inflationary pressures. The incoming President is well aware that inflation could dent his current popularity rating and potentially cost him the mid-term elections in 2 years’ time. For this reason, it is reasonable to think that the new administration might not be too aggressive.
- Threats as a means of negotiation: Trump has always used threats as a key strategy in negotiations, often creating situations of political “hostage-taking” to obtain concessions. By threatening to terminate agreements such as NAFTA and the Iran nuclear deal, as CNN reminds us, he sought to exploit other parties’ fear of being disrupted in order to gain advantages. Domestically, he has used similar tactics, ending or threatening to end programmes such as health cost-sharing subsidies and protections for young undocumented immigrants, to pressure Democrats to negotiate on his terms. However, Trump’s threats have often isolated him, causing traditional allies and even Republicans in Congress to distance themselves from his approach. Internationally, his willingness to abandon major agreements has weakened US alliances, as evidenced by the unified opposition of European leaders to his approach to the Iran deal and the fact that other countries have concluded trade agreements without the US. Ultimately, while Trump’s threats have created uncertainty and anxiety for those involved, they have often not resulted in the concessions he expected, instead strengthening opposition and diminishing US influence.
Nonetheless, his current threats (on tariffs, Iran’s nuclear programme, Ukraine, etc.) are part of his “bargaining trademark” in the search for (potential) compromise. The same approach should apply when he returns to the White House on 20 January…
Conclusion
Trump’s first presidency was marked by a negotiating style centred on threats, often creating political “hostages” to achieve his objectives. His imposition of tariffs on imports such as washing machines raised fears of inflation, but ultimately had a smaller than expected impact on prices due to production changes by manufacturers. As Trump prepares for a new term in office, a threat-based approach is likely to remain his main negotiating tool, albeit one that will not necessarily be acted upon…
