Tariffs unlikely to have lasting impact on US economy – Bullard

Disruption of global supply chain could be biggest risk of trade dispute to date, says St Louis Fed president
James Bullard
James Bullard: “Markets are, I would say, still pricing in the idea that this will not develop into a full-fledged trade war”
Tom Campbell

Trade disputes initiated by the Trump administration are not likely to substantially alter – in the short term at least – the macroeconomic evolution of the US, according to James Bullard, president of the Federal Reserve Bank of St Louis.

In an interview with Central Banking published today (August 15), Bullard reflects on the impact tariffs may have on the world’s leading economy. “I think there can be large effects, but I don’t think we’re close to that right now, and it’s not clear what the ultimate outcome will be,” he says. “Markets are, I would say, still pricing in the idea that this will not develop into a full-fledged trade war.”

However, Bullard adds that US trade policies are still evolving, and Fed officials will continue analysing them as new information emerges.

The administration of US president Donald Trump has imposed tariffs on Chinese imports, as well as those of its traditional allies such as Canada, the European Union, Japan and Mexico. The ultimate objective of these measures is to fulfil Trump’s election pledge to reduce the US trade deficit. The overall US trade imbalance increased year-on-year by 12.6% in 2017 to $568 billion, according to the Bureau of Economic Analysis.

The trade position is especially lopsided with China. The US trade deficit in goods with Asia’s largest economy reached $376 billion in 2017, according to the US Census Bureau. On July 6, the US imposed tariffs on $34 billion worth of Chinese imports, while Beijing retaliated by approving levies on the same worth of US imports. The Trump administration has threatened to increase tariffs on $200 billion of Chinese goods at a rate of 25%,

The chair of the Federal Reserve, Jerome Powell, first addressed trade policies in July. “There’s no precedent for this kind of broad trade discussions in my adult life,” said Powell before the Senate’s banking committee on July 17.

Countries that have “remained open to trade, and have not erected barriers, including tariffs, have grown faster, had higher incomes, higher productivity, and countries that have gone in a more protectionist direction have done worse”, Powell added. “I think that’s the empirical result.”

Limited impact on inflation

Higher import prices derived from tariffs could push upward pressure on inflation. However, Bullard does not believe this would immediately trigger policy changes by the Federal Open Market Committee. “I would be inclined to view that as a one-time shift in the price level and something we would look through,” he says. “If you look at something like the big oil price decline in 2014, we treated that as a temporary event.”

In Bullard’s view, the trade disruptions are unlikely to trigger a different policy approach: “I think the same thing could be said for any trade effects that would come through – we would probably view that as a one-time change.”

But the St Louis Fed president highlights a major cost associated with changing trade policies. “I think one of the biggest risks on trade is the disruption of the global supply chain,” he said. “Now they [firms] are going to adapt the global supply chain to this new environment, and then they’re going to have to pay all these transition costs to get from one environment to the other.”

Bullard says it is still unclear what will be the outcome of US and other trade policies, but transition costs will have to be covered. “The new environment might be better, might be worse – it’s hard to tell, but the transition costs are something that you’d have to pay, so there could be temporary effects from that.”

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