The Impact of Higher Tariffs on the Economy and Investments: A Comprehensive Analysis by UBS
With the 2024 presidential election approaching, the possible reintroduction and increase of tariffs in the United States are causing ripples in the financial markets. Tariffs, which are taxes on imported goods, were a key part of trade policy during the Trump administration. Now, as the U.S. considers returning to higher tariffs, analysts at UBS have delved into the potential economic and investment impacts of such actions.
According to UBS, the inflationary impact of tariffs is significant. A 10% universal tariff applied to imports to the US could raise overall price levels in the US economy by 1.3%. This increase could lead to a "profit-led inflation" scenario, where companies raise prices beyond the tariff's direct impact.
Higher tariffs are expected to slow economic growth by increasing the cost of goods and reducing domestic consumption, especially for lower-income households. Additionally, tariffs can make domestic firms less competitive by increasing their production costs, potentially leading to lower economic activity and employment.
UBS forecasts a negative cumulative impact on GDP over three years under scenarios where selective or universal tariffs are imposed. For example, the U.S. GDP could decline by 1.0% to 1.5% under a universal tariff scenario. The broader the application of tariffs, the more severe the economic impact, as rerouting supply chains becomes less feasible.
Furthermore, higher tariffs could trigger retaliatory measures from trading partners, depressing global trade and leading to higher costs for consumers and businesses. This tit-for-tat escalation could specifically target industries that are politically sensitive, further amplifying the negative impact on the U.S. economy.
In the equity markets, UBS anticipates that higher tariffs, especially if applied universally, would put downward pressure on U.S. equities. A 10% universal tariff could lead to a decline in U.S. equity markets by about 10%. Sectors such as retailers, automotive manufacturers, and tech hardware are likely to be most affected, while domestically focused sectors like U.S.-based steel producers might benefit.
In response to economic challenges posed by higher tariffs, UBS expects the Federal Reserve to take a more cautious approach by likely lowering interest rates to prevent a recession. Although tariffs might initially drive up inflation, the overall impact on economic growth is expected to push long-term interest rates down as the Fed focuses on maintaining economic stability.
Under a universal tariff scenario, UBS predicts that the yield on government bonds could decline to around 2.5% to 3% as investors seek the relative safety of government bonds amid economic uncertainty. The imposition of higher tariffs is likely to lead to an appreciation of the U.S. dollar in currency markets initially, driven by a flight to safety. However, UBS analysts caution that this strength may be short-lived as the U.S. trade deficit widens.
In conclusion, the reintroduction and increase of tariffs in the United States could have far-reaching implications on the economy and investments. From higher inflation and reduced economic growth to potential declines in equity markets and currency fluctuations, the impact of tariffs is complex and requires careful consideration by investors and policymakers alike. It is crucial to monitor developments in trade policy and assess the potential risks and opportunities that may arise from changes in tariffs.