This is an audio transcript of the Unhedged podcast episode: ‘How inflationary are tariffs, really?’
Robert Armstrong
Special note to listeners: we’re very keen to hear your questions and answer them on the air. If you have burning questions about markets, finance or the economy, send them to [email protected].
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Josh Oliver
Donald Trump has just announced day one tariffs on China and also on Mexico and Canada, which restarts a favourite genre of economic reporting: very complicated stories about North American trade. So today on the show, the question everyone’s asking, are tariffs really inflationary?
This is Unhedged, the finance and markets podcast from the Financial Times and Pushkin. I’m Josh Oliver, the FT’s real estate correspondent, filling in for Katie Martin, filling in for Rob Armstrong and truly scraping the bottom of the substitute host barrel. Luckily, our guest is from the very top of the guest barrel. We have Chris Giles, the FT’s economics commentator and author of our excellent Central Banks newsletter. So, Chris, let me start with this. Why is it that people think tariffs will be inflationary?
Chris Giles
Well, ultimately, tariffs are a tax on imports and it’s a tax on price of imports. If it gets pushed through to consumer prices, that raises the price level. And that might be 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, it could be inflationary. So that’s why people think they’re inflationary. The question is how inflationary? I think that’s the real question we’re trying to get to the bottom of today.
Josh Oliver
Is it sort of just a technical thing where if the tariff means that such and such costs X amount more then 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 tariffs around an economy that it drives up inflation in other ways?
Chris Giles
Well, I think if we want to talk about we’re being 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 applied to it, because that’s really a price-level shift. But people conflate the two all the time.
Josh Oliver
We’re not gonna do that, are we?
Chris Giles
We’re not gonna do that.
Josh Oliver
We never do that.
Chris Giles
We’re gonna talk about this really carefully and try and get to the bottom of whether these things really are inflationary. And I’ll try and tell you when I think it’s a price-level shift and when I think it might have an inflationary impact.
Josh Oliver
Does the impact depend on what type of economy we’re talking about? I mean, you wrote a great piece on this in the FT where you pointed out that the US is a remarkably closed economy. But can you explain what that means and why it matters to the impact of tariffs?
Chris Giles
It certainly matters. So open economies do a lot of trading. When it comes to tariffs we talk about trading in goods because tariffs are not applied to services. So they do a lot of trading in open economies, do a lot of trading in goods. So goods, imports and exports are a big share of the economy. Germany, for example, if you add up all the goods, imports and all the goods exports, it comes to about 70 per cent of the German economy.
Clearly, when you get to bigger economies, more of the stuff happens within their borders. So if you look at the EU, it’s about 30 per cent is external trade. China, 33 per cent; US, 19 per cent. So the US is a very closed economy. Much, much of the activity is all happening within the US rather than externally — US trading with other country. And that means that immediately it means the effect of tariffs, we shouldn’t exaggerate them because most of what goes on in the US happens within the US, not crossing borders.
Josh Oliver
Chris, what does all this have to do with washing machines?
Chris Giles
Well, washing machines were a bit of a cause célèbre in the last Trump administration. It was the first thing he put tariffs on very publicly in 2018. And then everyone wanted to look at the price of washing machines. And the obvious thing to do was to look at the price of washing machines in the US compared with the price of other appliances.
Josh Oliver
Because it was washing machines specifically, not dishwashers and fridges and other bits.
Chris Giles
Exactly. Yeah, it was specifically washing machines and specifically US style of washing machines, which are quite different to the rest of the world. But so it was a US thing and the other appliances didn’t do it. 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 appliances immediately after he put the tariff in. Then it gets a little bit complicated.
Josh Oliver
Good, ’cause it wasn’t complicated.
Chris Giles
Yeah. So in 2019, that price of washing machines compared with other appliances goes back down to basically the difference goes back down to zero for a few quarters and then it rises again after the Covid crisis in 2021. And then when the tariffs expired in 2023 it came back down again. So if you look at the whole period, it does look as if washing machines got more expensive when tariffs were applied, although there’s a difficult period in 2019, which is hard to explain. But this has caused an enormous amount of argument between various economists who all accused each other of cherry-picking the timeframe when they are actually making the comparison.
Josh Oliver
I’m sure it was Donald Trump’s intention to give us a sort of controlled experiment in inflation by choosing one single household good to put tariffs on. That was very helpful. Speaking of the debate, I mean, I gather that there was a big economist showdown on the internet recently on this very subject. Tell us about that and what did we learn?
Chris Giles
Well, there was a really vitriolic showdown between Justin Wolfers, who’s a professor of economics at Michigan, and Oren Cass, who’s the chief economist of American Compass. And they basically had a bit of what we used to call a Twitter war — what now, I don’t know what it is, an X war — on exactly this, on washing machines, where one person, first of all, Justin Wolfers, would put up the chart showing the prices went up immediately after the tariffs went in. Oren Cass’s editors would say, aha! But look, they came back down again in 2019. Justin Wolfers would say, yeah, but that was mostly the pandemic. And it was went on and on and on. And they really got very, very heated indeed.
And the important thing is washing machines was only one of the tariffs that were put on by the previous Trump administration. And it’s a bit silly just to be looking at washing machines, because when academics have really looked at all the tariff lines and done really careful studies, washing machines actually is a bit of an exception to the rule. And just to say what where does the academic research come out of all the Trump tariffs? Well, it says, number one, Trump was wrong in saying that foreigners paid for these tariffs. It was that the US importer paid about 95 per cent of the tariffs. A tiny bit was Chinese manufacturers lowering their prices. The vast majority went to the US importer. But what’s really interesting that in the majority of cases then didn’t appear obviously to get passed on to consumers.
So washing machines was here the exception. And the way the economists try and work this out is they can see that importers are paying more. So it’s a tax on imports with one exception: sort of commodity intermediate goods. So things that go into the production of other goods. So steel, their exporters did pay because you can just get steel from pretty much anywhere. And so if you want to stay competitive, you have to lower your price. But steel is again another exception.
So the majority of goods, the importer paid, but it didn’t obviously get transmitted to consumers. Now, people don’t know whether that meant that the importers themselves absorbed the additional cost in their margins or passed it on to their own workers in lower pay than they would otherwise get. Or they tried to get ahead of the tariffs and imported all this stuff just before the tariffs came in so it didn’t really affect them too much. Or they did the smart thing saying, well, actually America is not that competitive an economy. We can raise all our prices by a little bit. And so things that haven’t got tariffs on, we’ll raise those prices as well so you can’t actually easily see it. And so it’s sort of confounding (inaudible).
Josh Oliver
But basically the evidence is saying actually, it’s not foreign countries that pay. It is American companies, one way or another.
Chris Giles
So it’s America one way or another, because American companies are mostly owned by Americans. In some form or other America pays, but it’s not entirely clear exactly how that is.
Josh Oliver
So the key difference between 2018 and now is the sort of like shock and awe scale. So if Trump follows through with what he’s said, does the scale of what’s proposed blow the existing academic literature out the window?
Chris Giles
To some extent it must do. So the things I was talking about, whether an importer can massage the way the companies raise some prices and other prices and make them all a bit level, so push it out in a sort of way to smooth the effect of the economy. If you have across the board 25 per cent tariffs on your biggest trading partners, so Mexico and Canada, then that is going to have a much bigger effect, notwithstanding the fact remember all the time that America’s quite a closed economy. So don’t exaggerate that.
But it’s 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’ll pay by not exporting at all because America will find, or importers will find somewhere else to get the same products from. But those trade flow changes take time and are 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 more pay, companies accede to that pay off then because they think, oh, we can raise our prices at all, that it becomes inflationary.
So number one, I think this is bad economic policy, no doubt about that. But let’s not then compound that mistake by exaggerating the 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.
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Josh Oliver
Chris, normally I would ask you to summarise where we go from here and what the evidence means, but you’ve just done it perfectly. So thank you so much. We’ll be back in a second with Long/Short.
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Welcome back to Unhedged. It’s Long/Short, the part of the show where we go long something we like and short something we don’t. Chris, what’s your long/short this week?
Chris Giles
Well, I’m gonna go short Scott Bessent, Trump’s new pick for Treasury secretary. The markets have treated his nomination with quite a lot of joy, but I think that’s more of a relief rally than the relief that it wasn’t just some TV personality. I’m gonna go short on him, effectively, because I think this morning he worked out that maybe he doesn’t have much power as Treasury secretary and he’s just gonna be reacting to whatever Trump dreamed up in the middle of the night, just like he’s had to do today with tariffs.
Josh Oliver
So you’re going short on his ability to be a grown-up in the room, as everybody keeps saying, on US economic policy?
Chris Giles
Absolutely. I think it’s gonna be mad. And I think there’s a bit of a cottage industry partly in our own industry of trying to rationalise what’s going on. And actually it’s just madness.
Josh Oliver
Yeah, I think you could also go short on his tenure, which is the other thing people forget about Trump’s cabinet picks — is that some of them will stay and some of them will go. And he seems like one who could possibly go.
Chris Giles
Come on then. How long do you think he’s gonna last?
Josh Oliver
I give him two years.
Chris Giles
Yeah, I think I’m with you on that.
Josh Oliver
I am gonna go 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 I’m the FT property correspondent. And I’m currently waiting on the outcome of a vote in the City of London about closing the market, which is, depending on how you count, 900 years old. It’s quite sad, actually. I think, I mean, I love the history of this place. And the problem was they were gonna try and move it and it cost too much money. And so there’s a vote going on as to whether they should just give up on moving it and close it. And I think unfortunately, they probably are gonna close it. So that’s a short. But I think it’s a sort of sad note on which to end the show.
Chris Giles
I’m gonna join you in that. My favourite retail butcher — it’s really a wholesale place — but my favourite retail butcher is called Smithfield’s Butchers. So it’s just across the road from the market. And it is just fantastic. So I shouldn’t really be giving them a plug on this show, but they deserve it.
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Josh Oliver
This is unpaid promotion, we promise.
Chris Giles
Absolutely.
Josh Oliver
Thank you very much, Chris. I’m Josh Oliver. This has been Unhedged. Thank you for joining us.
Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. Special thanks to Laura Clarke, Alastair Mackie, Gretta Cohn and Natalie Sadler.
I’m Josh Oliver. Thank you for listening.
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President-elect Donald Trump has just announced “Day 1” tariffs on Mexico and Canada, in addition to previously promised tariffs on China. Tariffs will definitely affect domestic prices, but how much, and will they truly cause catastrophic inflation? Today on the show, guest host Josh Oliver discusses the tariffs with the FT’s economics commentator Chris Giles. Also, they short the new Treasury secretary and the 900-year-old Smithfield meat market in the City of London.
For a free 30-day trial to the Unhedged newsletter go to: http://www.acphonor.com/interactive/https://www.ft.com/unhedgedoffer
You can email Robert Armstrong at [email protected] and Katie Martin at [email protected].