How inflationary are tariffs, really?
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Donald trump has just announced day one terabits on china, also on mexico and canada, which restarts a favorite genre of economic reporting, very complicated stories about north american trade. So to down the show, the question everyone's asking, our carbs really inflationary.

This is on hedge the finance and markets podcast from the financial times and push and josh Oliver, the fs real state correspond and filling in for cate Martin, filling in for robbed, strong and truly scraping the bottom of the substitute host barrel. Luckily, our guest is from the very top of the guest barrel. We have Christy's, the fts economics commentator and author of our excEllent central banks newsletter. So Chris, let me start with this. Why is that the people think tariff s will .

be inflationary? Well, ultimately, taffe are attacks on imports, and it's attacks on Price of import. If he gets pushed food to consumer Prices, that raises the Price level, and that might be to seen as a Price level increase that would certainly raise inflation in the short term. And then if IT fed through to wages and Prices, that could be inflation is and that's why people think they're inflationary. The question is how inflationary I think that's the that's the real question were trying to get to the bottom of today.

Is, is that sort of just a technical thing where if the the terror means that such in such costs, x amount more than that shows up in the inflation survey and then that gets reported as more inflation? Or is IT more fundamental than that if you have terrors round of economy that IT drives up .

inflation in other ways? Well, I think if we want to talk about that, we be genuinely inflationary, then IT should be driving up inflation on an ongoing process, not just an increase in the Price level of a particular tariff item or good that has a particular tariff apply to IT because that's really a Price level shift.

But people conflict .

that to all the carefully, these things really are inflationary. And i'll try and telling when I think it's surprised level shift on when IT might have a inflationary impact .

is the impact depend on what type of economy we're talking about. I mean, you wrote a great piece on this in the F. T, where you pointed out that the us. Is a remarkably closed economy, because you explaining what that means, that why IT matters to the impact .

of terrify IT certainly matter us. So open economies do a lot of trading when IT comes to terrorist talk about trading in goods, because terrorists s are not applied to services. So they do a lot of trading in open economies, do a lot of trading in good.

So goods imports and exports are big share of the economy. Germany, for example, to add up all the goods imports and all the goods exports, that comes about seventy percent of the german economy. Clearly, when you get to bigger economies, more of the stuff happens within the borders.

So if you look at the eu is about thirty percent is external trade at china, thirty three percent. Us, nineteen percent. So the us.

Is a very closed economy. Much, much of the activities all happening within the us, rather the next early us trading with other country. And that means that immediately IT means the effect of terrorists.

We shouldn't exaggerate them, because most of what goes on in the U. S. Happens within the U. S. Not crossing borders. Chris.

what does others have to do with washing machines?

Well, washing machines were a bit of a cause. celebrate. In the last trump administration, IT was the first thing he put tariff s on very publicly in twenty eighteen. And then everyone wanted to look at the Price of washing machines, and that the obviously do was to look at the Price of wash machines in the us. Compared with the Price of other appliance.

because I was washing machine, specifically not dish washers and fries.

specifically washing machines, and specifically U. S. Style of washing machines, which are quite different to the rest of the world, but says the U. S. Thing, and the other appliances didn't do. So you could just go look in the consumer Price index for washing machines, and you compare that with the consumer Price index for other appliances, and you get a picture that looks like the Price of washing machines rose dramatically compared with other planes. Immediately after he put the terrifying, then IT gets a little bit complicated.

So look, because IT wasn't complicated. yeah.

So in twenty twenty, that Price of washington seems compared with other other planes goes back down. And basically the difference goes back down to zero for a few quarters. And then IT raises again after the after the COVID crisis in twenty twenty one, and then when the times expire in twenty twenty three, came back down again. So if you look at the whole period, IT does look as if wash machines got more expensive when terriers applied. Although there's a difficult period in twenty nineteen, which is hard to explain, but this has caused an enormous amount of argument between various economists who all accuse each other of Cherry taking the time frame when they are actually making the comparison.

I'm sure IT was not trust intention to give us a sort of controlled, experimented inflation by choosing one single housel. Good to put terrify. That was very helpful. Speaking of debate, I mean, I gather that there was a big economist showdown on the internet recently on this very subject to tells about that. And what did do we learn?

Well, there was a really vital lic show down between. Justin walters is a professor economics at michigan and are in cast who's the chief economist of american camps. And they basically had a bit of what we used to call a twitter war. But now I don't know what that is, an x war.

Go on exactly this on washing machines, where one person, first of all, just in offers, would put up the chart showing the Prices went up immediately after the said would say a but they came back twenty one, Justin, we've say, yeah, but that was mostly the pandemic. And IT was went on and on on and really got very, very heated indeed. And the important thing is washing machine was only one of the tariff s that were put on by the previous trump administration.

And it's bit silly just to be looking at wash machines because when academics are really looked at all the tariff lines and on a really careful studies, bush machines actually a bit of an exception to the rule. And just to say what where where does the academic research come out of the all the trump tif? Well, IT says number one truck was wrong in saying that foreigners pay for these tastes.

IT was that the U. S. Importer paid about ninety five percent of the test.

A tiny bit was chinese manufacturer lowing their Prices. The vast majority went to the U. S. importer. But what's really interesting that in the majority cases, IT then didn't pair obviously, to get passed on to consumers. So washing machines was here the exception.

So and the way that economists trying work this out, they can see that importers are paying more. So it's a attacks on imports with one exception, sort of commodity intermediate good. So things that go into the production of other goods.

So steel, their exporters did pay because you can just get steal from pretty much anywhere. And so if you want to stay competitive, you have to lower your Price. But that deal is again another exception, said the majority of goods the importer paid. We didn't obviously get transmitted to consumers.

Now people don't know whether that meant that the importers themselves absorb the additional cost in their margins or pass IT on to their own workers in lower pay than they would otherwise get, or they try to get ahead of the tires were imported, all this stuff just before the tires came in. So they didn't affect them too much. All they did smart things saying, we're actually amErica is not that competitive and economy. We can raise all our Prices by a little bit and say things that haven't got terrorist will raise those Prices as well as so you can actually easily see IT. And so it's sort of confounding the tools that economists use to try work out.

But basically the vivid is is saying actually not foreign countries that pay IT is american companies .

one way or another? It's american. American is are state oil by americans in for more other amErica pays. But it's not entirely clear exactly how that is.

So the key difference between twenty eighteen and now is the set of like shock and scale. So if trump falls through with what he said, does the scale of what's proposed below the existing academic literature out the window?

To some extent, IT must do. so. The things I was talking about, whether an important and massage ge the way the companies raise some Prices now Prices and get and make more a bit levels of push, push IT out in a sort of way to smooth the effect that they can be.

If you have across the board twenty five percent tifft on your biggest trading partners of mexico and canada, then that is going to have a much bigger effect. Not we're standing. The fact, remember all the time that amErica is quite a close economy, so don't exaggerate that.

But you is much harder to disguise IT and hide IT away if it's big and the partners are big. I don't think that means in most cases that the exporter is going to pay. So I don't think that you don't really want to be canada or mexico in these circumstances because more likely, you will pay by not exporting at all because amErica will find or important to find some of us to get the same products from.

But those trade flow changes take time and not easy to do overnight. And if you think about canadian oil, for example, which is exported to america, that comes generally because there's a pipeline. And so that's not gonna shift anywhere in the short term.

So IT does look as if americans will pay and might pay quite a bit. So we might see more of IT in the american Price indexes. But again, remember, this is a Price level shift at first, and it's only if the response to this is that american workers demand will pay.

Companies exceed that pay offer because they think we can raise our Prices at all, that IT becomes inflation. So number one, I think this is bad economic policy, no doubt about that. But let's not then compounds that mistake by exaggerated impact.

IT will be amErica who pays, but the scale, even though this, canada and mexico are america's largest trading partners, is still relatively small to the size of the us. economy. Chris.

Normally I would ask you to summarize where we go from here and what the evidence means, but you have just done IT perfectly. So thank you so much. Will be back in a second with long, short.

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Welcome back to unhedged, its long, short, the part of the show where we go, long something we like and short something we don't. Chris, was you a long shot this week?

Well, i'm gonna go short. Scott basson trumps new pic for treasury secretary. The markets of treated his nomination with quite a lot of joy, but I think there's more a relief rally than a relief for that. IT wasn't just some TV personality. I'm going to go short on him effectively because I think this morning he worked out that maybe he doesn't have much powers to do secretary and he's just going to be reacting to whatever trump ed dreamed up in the middle the night just like he's had to do today with terrace.

So you're going short on his ability to be a grown up in the room as everybody keeping saying on us economic policy.

Absolutely, I think, is going to be mad. And I think there's a bit of a cottage industry part in our own industry of to rationalize what's going on and actually is just madness.

yeah. I think could also you could also go short on his ten year, which is the other thing people forget about trapt pix is that some of them will stay and some of them will go. And he seems like one who could possibly .

go how long do you think he's going to last?

Are going two years yeah.

and I think i'm with you on that.

I am gonna short, sadly, something that I actually do like, which is the smithfield meat market in the city of london. You know that in my day job on the F. T.

Property correspondent, and I am currently waiting on the outcome of a vote in the city of london about closing the market, which is, depending on how you count, nine hundred years old, quite sad actually, I think. I mean, I love the history, this place. And the problem was they were going to try move IT and IT cost too much money. And so this vote going on as to whether they should just give up a moving and close IT, and I think unfortunate they are ably are gone to close IT. So that's a short but I think it's it's a sort .

of sad note gna join my favorite retail butcher is media wholesale place, but my favorite retail butchers called Smith fields butchers, but it's just across the road from the market. And IT is just fantastic. S, I shouldn't believe be giving them a pg on the show.

but they deserve IT. This is unpaid promotional ally promise. So thank you very much. Chris. Josh, over. This is unhedged.

Thank you for joining and headed is produced by jake harper had edited by brian. First start, our executive producer is jack. The good steam.

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A thirty day free trial is available to everyone else. Just go to F T dot coms that unhedged offer. I'm josh Oliver. Thank you for listening.