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Author: Martin Jacob, Professor of Accounting and Control, IESE Business School (Universidad de Navarra)
Original article: https://theconversation.com/trump-tariff-chaos-radical-uncertainty-will-likely-make-companies-delay-investments-254263
Trump’s sweeping “reciprocal” tariffs are generating huge uncertainty, which may prompt many companies around the globe to delay investments and major decisions as they await greater clarity. Even with the newly announced 90-day suspension of tariffs, large companies will be moving cautiously over the coming weeks and months.
This is bad news for growth, especially at a time when companies and economies face additional sources of geopolitical uncertainty, such as the war in Ukraine and shifting relationships in Nato.
To understand the impact of these tariffs on Europe and elsewhere, it’s important first to note that US calculations of the trade deficit include only goods and exclude services. This is a major omission – especially since the US is a huge exporter of services – and skews the true magnitude of the EU-US trade gap.
The White House has claimed that EU tariffs on the US are around 39%, justifying its (currently paused) reciprocal tariff of 20%. However, World Trade Organization and EU data puts EU tariffs on US goods somewhere closer to 1% or 5%.
Vowing to “fight to the end”, China has already retaliated and the US has responded in kind, announcing a further tariff hike from 104% to 125% at the same time as the 90-day suspension for most of the rest of the world.
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Nobody wins a trade war
Retaliation with equivalent tariffs tends to magnify their already negative impact. Escalating trade wars mean that exporting companies are not only hit with a new tax on their products, but all of Europe’s imports from the US also become more costly. That both slows economic growth and pushes up inflation. However, Trump has rejected repeated EU offers of “zero for zero” tariffs on certain goods.
The EU took its first tentative step towards retaliating by saying it would gradually impose tariffs on around €21 billion of US goods, though the Commission stated that “these countermeasures can be suspended at any time, should the US agree to a fair and balanced negotiated outcome.”
Ursula von der Leyen has therefore welcomed the new pause on US tariffs, calling it “an important step towards stabilising the global economy”.
Her statement highlighted that “tariffs are taxes that only hurt businesses and consumers”. It also reiterated the offer of zero-for-zero tariffs and called for stability – in her words, “clear, predictable conditions are essential for trade and supply chains to function.”
Trump’s decision to pause tariffs is presumably driven by capital market pressure, looming consumer price increases, and the pressure on US government bonds. While capital markets have rebounded in response, the long term picture is still mired in uncertainty. It is just a pause, not an end to the trade war.
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Economic cost of uncertainty
As global markets continue to deliver their verdict on the tariffs, companies are caught in the geopolitical crossfire. These policy shifts generate major uncertainty, which is very bad for business.
One corporate response to tariffs and uncertainty is to shift supply chains away from high tariff or uncertain countries. This is neither easy nor cheap. It would be costly for European firms to replace all US suppliers, to limit imports from its largest trading partner, or to find alternative markets.
Despite being the motivator for Trump’s tariff war, one of the underlying problems is that there’s a logic behind trade deficits. Put simply, countries tend to specialise in the goods and services in which they have a competitive advantage.
Take coffee, for instance. Colombia and Brazil are the world’s biggest coffee producers, largely because of favourable growing conditions. About 0.35% of the coffee consumed in the US is grown domestically, mainly in Hawaii, but tariffs will not replicate the soil and climate of South America.
There is also the question of wages, especially in industries such as clothing and footwear. In the unlikely scenario that Nike, for example, were to shift all its production back to the US, the cost of paying American workers would drive the prices of their goods exponentially higher. It is simply not feasible for all low-wage manufacturing jobs to come back to the US.
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How companies respond to uncertainty
In the end, the most common reaction by business leaders to policy uncertainty is simply to wait and see. Companies delay investments and hold off on major decisions until the situation becomes clearer. The 90-days tariff pause will not solve this issue, and it might even exacerbate it by further delaying big investment decisions.
We’ve seen this negative investment impact of uncertainty clearly in our research on policy decisions that were much less disruptive than this. We looked at corporate reactions to the surprise election of Donald Trump in 2016 and to his 2017 Tax Cuts and Jobs Act (TCJA), the most significant reform to US corporate tax policy in over 30 years.
Conventional wisdom would indicate that once these two major events had passed, uncertainty would decrease, especially given the generally positive sentiment that corporate-friendly changes to tax policy were in the works. That turned out not to be the case. We found tax policy uncertainty rose after the election and, while it decreased overall once TCJA was passed, it still remained high in many firms.
Domestic companies, even those that stood to benefit from the tax cuts, held back on investment. Multinational companies shifted some investments abroad, particularly to countries with lower political risk.
One of the major goals of Trump’s tariffs is to increase investment in the US. Some companies are even sending signals that that is what they intend to do, but it will be difficult for production on a large, global scale to suddenly return to the US. If history is any guide, companies are more likely respond to the recent radical political swings with caution rather than bold investment plans.
Martin Jacob no recibe salario, ni ejerce labores de consultoría, ni posee acciones, ni recibe financiación de ninguna compañía u organización que pueda obtener beneficio de este artículo, y ha declarado carecer de vínculos relevantes más allá del cargo académico citado.