Pic: Adobe Stock
US President Joe Biden's announcement of higher tariffs on Chinese exports of advanced technology products follows a string of duties levied against Chinese exports by Biden's predecessor. It comes amid strained US-China trade relations and ahead of a domestic election day rematch between Biden and former President Donald Trump, increasingly putting the two candidates in competition over protectionist trade policies.
Yet economists warn that the new duties, and tariffs more broadly, may carry an unwelcome consequence: higher prices and a heightened probability of higher-for-longer interest rates. While the Fed is expected to slightly lower benchmark rates this year from their current decades-long high, higher tariffs are likely to feed through to higher prices, complicating central bankers' decisions, according to S&P Global.
Amid recent US and EU efforts to reshore certain critical supply chains, the International Monetary Fund (IMF) warned against the institution of protectionist measures in its April World Economic Outlook report. The IMF stated such measures could ‘trigger retaliation from trading partners’ and ‘generate welfare losses.’
The industries that have so far been tariff targets represent a small percentage of total US imports from China. Measured in dollar value, the US has only imported 2 per cent less from the major Asian economy in the first quarter of 2024 compared to the first quarter of 2023, according to US Census Bureau data.
Although tariffs can have the long-term impact of better economic growth in the domestic economy, near-term effects would run counter to the Fed's plans. The Fed has kept the benchmark federal funds rate at a range of 5.25-5.5 per cent since July 2023 as policymakers aim to bring inflation to 2 per cent annual growth. The consumer price index hit 3.4 per cent in April, a slight acceleration from earlier in the year but drastically lower than the peak of 9.1 per cent in June 2022.
Resilience in the labour market and among US consumers have contributed to the Fed's higher-for-longer approach to interest rates, though the Fed's latest economic projections in March suggested three 25-basis-point rate cuts before year-end.
Fed chairman Jerome Powell this month signalled rates may need to stay higher for longer as inflation has yet to cool to target levels. Fresh Fed projections are due in June, and market watchers have narrowed their expectations to one-to-two cuts by the end of the year, according to the CME FedWatch Tool, which tracks investor sentiment through federal funds futures.
Fibre2Fashion News Desk (DP)