If you haven’t heard about tariffs a hundred times in the past month, you must have been in a coma (sorry to hear, hope you get well soon).
And although everyone wants to understand what the tariffs mean, it is very difficult to undertake any useful analysis when US trade policy - and counter policy from other countries - changes weekly. The variance is not just incremental tweaking either, but numbers so large they are barely comprehensible.
Take Vietnam for example. Vietnam exports ~$146 billion USD worth of goods to America and the “Liberation Day” tariffs were announced at 46%. That means an import tax of approximately $68 billion with the stroke of a Sharpie. But once the 90 day suspension was announced eight days later, those tariffs were dropped to 10% to allow time to “negotiate” - a $53 billion p.a. change.
To provide scale, the market capitalisation of QANTAS is around $8 billion in USD. The annual collectable tax difference between these two policy positions (not trade, but tax paid by US importers), is worth more than 6 times QANTAS! That is a lot of negotiating pressure on Vietnam, a country with a GDP slightly better than heavily sanctioned Iran. And what happens when the 90 days is up you may ask…?
These policy shifts are like a toddler constantly playing with knobs on the stove when you are preparing a four course feast for the in-laws – the chances of getting a good outcome are low. The US administration is not shooing the kid out of the kitchen either, but bringing in a few pre-school mates to join in. They plainly acknowledge that more change is coming, as negotiations with the tariffed countries, plus lobbying from impacted industries, will create “deals” which further alter policy.
Which is the heart of the problem. Business cannot deal with such substantial uncertainty.
With legislative change, the process of drafting, debating and voting in the two chambers ensures lead time to understand the consequences of, and, generally, a timeframe for, implementation. With traditional Trade Agreements, they are negotiated between governments over many years with substantial input from industry. But an Executive Order? Well, that can be whipped up that morning and signed before lunch. The consequence is massive and the unpredictability is extreme.
Say that you were an Australian wine producer with a niche market in the US. Would you be pulling the trigger on any new investment even if the current 10% tariff would not have a major impact on profitability? There is no surety that a competing country will not get their tariff completely removed in a sweetheart deal. Or perhaps wine in general gets specifically targeted with further tariffs to protect the struggling US industry, as has been the case with imports like aluminium and steel!
Now compound this further with indirect impacts. The EU has been threatened with a 200% tariff on wine into the US, a major market for them. If this happens, will EU wines flood into Australia, seeking alternatives, and take domestic market share from the winemaker?
Expand the ripple effect over the broader industry. Nurseries, lenders, input resellers, and machinery dealerships will all be impacted if this wine maker (and others), for argument’s sake, pulls back on plans to convert 10 ha of old Riesling vines to US preferred Cabernet Sauvignon.
Direct tariffs on Australia are not significant on their own, but Australia’s enormous trade with Asia will be impacted, as many countries are effectively locked out of the US as things stand.
Magnify this globally and the ripple effect is akin to the guy who eats meat pies for breakfast doing a bombie in the spa.
Agreements will eventually be struck, but what will they be worth when existing free trade agreements with the US have been unilaterally shredded like a tarp in a cyclone? There is little chance that any negotiation in the 90 day window will yield much more than an in-principle promise, with the details finetuned over a much longer period - and it’s the details that matter to business.
This is the prime reason why many market pundits are predicting a global recession – perhaps severe. It is not just the tariffs, it’s the uncertainty. Uncertainty kills confidence and low confidence feeds recessions like moisture feeds mould in hay.
In uncertain (i.e. risky) environments, businesses and governments have the choice of fighting, freezing or fleeing. We will undoubtedly see a mixture of all three, with freezing the first choice whilst chests are puffed and egos stroked and poked (if a 1000 pound gorilla approaches, play dead). Fighting will ensue during the negotiation process –China and the US are both already bloody and bruised from their first round of tariff one upmanship. Investors have also been fleeing US markets, as evidenced by US share and bond market falls.
Where will this end? No-one knows - which is the point. The only thing certain is the uncertainty.
As the tsunami rolls in, The Compass will take another gander in a future article. Stay tuned!
