How inflationary are Trump’s tariffs? By Investing.com

As per a report by Standard Chartered (OTC:) Bank dated Wednesday, Trump’s proposed tariff policies could significantly impact US inflation. The Trump-Vance ticket advocates for a 60% tariff on all Chinese goods and a 10% tariff on goods from the rest of the world, raising the average tariff on imports from 4.8% to 15.6%.

Estimated inflationary impact:

Analysts at Standard Chartered Bank estimate these tariffs would increase the price level by 1.8% over two years, equivalent to an inflation rate 0.9 percentage points higher than the baseline each year. This estimate assumes no secondary effects and is based on the following:

Several factors contribute to these relatively modest inflation estimates:

Lack of secondary effects: The estimates do not account for potential secondary effects, such as businesses passing on higher costs to consumers or supply chain adjustments.

Small segment of GDP affected: Chinese exports to the US constitute about 1.5% of GDP, so a 60% tariff impacts a relatively small segment of economic activity.

Limited impact of global exports: Exports from the rest of the world make up about 12% of US GDP, so a 10% tariff on these goods pushes the price level up by about 1.2%.

Most of the price impact is expected from the 10% tariff on non-China imports.

Historical context and risks

After the US-China trade war, average US tariffs rose to 19.3% on Chinese goods and 3% on goods from the rest of the world. The proposed 60/10 tariffs mark a significant increase.

The primary risk is the potential for secondary effects. Inflation effects are likely to hit before the US can build sufficient import-substitution capacity. Price impacts may be mitigated if other trading partners can export at competitive prices, but shortages and lack of substitutes could exacerbate price increases, creating a negative supply shock.

While the direct inflationary impact of Trump’s proposed tariffs is estimated at 1.8% over two years, secondary effects and supply chain disruptions could significantly elevate these costs.