UBS On-Air: Paul Donovan Daily Audio 'Taxing via tariffs'
The desk is critical of potential tariff implementations from President-elect Trump, interpreting his recent interview as a clear signal that tariff policies will intensify, thus raising consumer prices in the U.S. Per the full note , the acknowledgment of the Federal Reserve's independence should bolster market confidence amid these new economic strategies. The desk notes that tariffs could severely dent consumer spending and thereby dampen economic growth, which would subsequently affect the dollar's strength against major currencies in the medium term.
What the desk is arguing
The desk interprets President-elect Trump's latest statements, particularly regarding tariffs, as a harbinger of increased economic strain on U.S. consumers. Trump’s admission that his policies may lead to higher prices demonstrates a clear shift towards protectionist measures that will likely alter the inflation landscape significantly. These insights suggest a looming risk of inflationary pressures feeding through to the broader economy.
The potential impact of tariffs is multi-faceted, as highlighted in the UBS commentary. The expectation is that tariffs will act as a direct tax on U.S. importers and will consequently be passed on to consumers, a dynamic that could catalyze broader price increases. Should this occur, the expected rise in consumer prices could erode real income and affect spending behaviors, aligning with the view that inflation could spike rather than stabilize.
The alternative read would be that if Trump softens his stance on tariffs or pivots back to trade negotiations, it may alleviate some of the pressure on consumer prices, thereby stabilizing expectations and the dollar in the near term.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Trump's acknowledgment of Fed independence may offer some market stability.
- 02The likelihood of tariffs points toward imminent inflationary pressures.
- 03Higher consumer prices could dampen economic growth and dollar strength.
- 04Tariffs as direct taxes on importers could have wider implications for U.S. consumer spending.
Market implications
Watch for how inflation data correlates with consumer sentiment indicators in the upcoming weeks as tariff discussions progress. If inflation begins to rise significantly above the Fed's target, it may shift market sentiment against the dollar, particularly against the euro and yen.
Risks to this view
A potential reversal of this outlook hinges on Trump's engagement with global trade partners. If a collaborative approach is taken to reduce tariffs or if economic indicators show unexpected resilience in U.S. consumer spending, market perceptions may shift to favor the dollar and temper inflationary fears.
Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 5.30 in the morning, London time, on Monday the 9th of December. Over the weekend, US President-elect Trump gave a relatively wide-ranging interview covering several issues of interest for markets.
Trump backed away from direct threats to the independence of the Federal Reserve, seeming to acknowledge that the Fed Chair cannot legally be fired by presidential whim, and that while the President may have views on monetary policy, they cannot directly influence it, although President Nixon did do a lot of heavy indirect influencing. Those statements are likely to be reassuring for investors. Less reassuring is the commitment to deport both illegal and legal migrants who are established in the United States.
While this may still be posturing rather than practical policy, the potential disruption to the economy would be quite significant. On the planned aggressive taxing of US consumers of foreign goods, Trump acknowledged that US consumers may face higher prices as a result. This does seem to suggest that tariffs are coming, and that unlike Trump's first term, they may be more than just bargaining chips.
There are four ways in which tariffs raise prices for US consumers. Tariffs are a tax paid by US importers, and that tax on imports is likely to be passed on to US consumers. Arguably, this is even more likely than in Trump's first term, as attitudes to pricing power have shifted.
If tariffs are at all effective, they would reduce the volume of imported goods somewhat, and in doing so, reduce the competition faced by US companies. US companies are likely to take advantage of that by raising prices. There may be upward pressures on wages as prices rise, raising costs and putting upward pressure on non-tariffed prices, though this is perhaps less likely in the current labour market.
Finally, there's an opportunity for profit-led inflation if retailers exploit consumers' ignorance of how much the consumer price is subject to tariff. A 10% tariff should lead to roughly a 4% consumer price increase, but consumers may be so used to hearing of 10% that they accept a 10% price increase. The US washing machine tariffs of 2018 to 2023 are a great example of these inflationary pressures in practice.
The tariffs now no longer apply, but the damage to competition and other factors mean that while global washing machine prices are generally slightly lower than 2017 levels, in the US prices are still over 20% higher. The failure of the opposition's attempt to impeach South Korean President Yun has resulted in unions threatening strike action until the president is removed from office. At this stage, the threats do not affect technology producers, but they would impact other parts of the economy and potentially disrupt the supply chain.
Sources & References
How we cover this story