Why an economist says temporary U.S.-China tariff deal doesn’t ease uncertainty

Transcript:

LEILA FADEL, HOST:

We’re going to dive further into how Trump’s trade policy has impacted the U.S. economy and American consumers. Diane Swonk joins me now to discuss. She’s the chief economist at accounting firm KBMG US (ph). Good morning, Diane. Thanks for being on the program.

DIANE SWONK: Good morning.

FADEL: So this temporary relief on tariffs in this deal with China comes after a lot of big talk about how tariffs will fix things economically here in the U.S. What did you make of this deal to bring tariffs back down on Chinese imports?

SWONK: Well, it was really important in the sense that we had actually had a cessation of trade, which you just heard in your piece, where people couldn’t get things in. But the other issue is uncertainty. And these sort of stop-go kind of programs are the things that can make for very big policy mistakes. When we think about inflation and how it affects the U.S. economy, we remember the pandemic, and it’s much easier to shut factories down than ramp them back up again. And this is the same thing, where all of a sudden, a lot of freight shipment fees went way up in the wake of the pandemic, which was an additional cost in addition to the tariffs.

So the good news is we see trade flowing again. Some of the empty store shelves are still going to be there ’cause there’s a lag in terms of getting things into the country. That said, there’s a lot that’s waiting on the outside to come in as soon as – to take advantage of this. But the uncertainty issue is another major factor weighing on the economy. I often liken it to, you know, a broken stoplight at a busy intersection. Everyone all of a sudden slows down to a crawl to try to creep across the stoplight, not knowing which person is supposed to go next. And some opt out entirely and do a U-turn, wait for traffic to clear or the stoplight to be fixed.

FADEL: In practical terms, how does that end up impacting U.S. businesses and consumers, this uncertainty?

SWONK: The really hard part is not only does – it’s sort of a paralyse (ph) and panic, which is what you’re hearing. There was a paralysis for 40 days where people waited for this, and now a panic to get everything in. Those two things are stagflationary. And that is what the Federal Reserve is so worried about today, is that we’re talking about a period where the risk of inflation is much higher. And it’s not just a one-time event because of the layered nature and the unevenness with which tariffs have been applied. It is a multiple-time event that’s causing these additional disruptions into the supply chain, like what we are seeing right now.

And those are the things we worry about because stagflation is not something we’ve seen since the 1970s. And the Federal Reserve has said, listen; we know the mistakes of the ’70s, and as hard as it is, it’s better to not just look through that inflation. They’re still smarting from the fact they didn’t raise interest rates fast enough and deal with the inflation. We’re still feeling the embers of – from the pandemic. And it’s really important for them to prioritize holding off on additional rate cuts until they know the economy – the inflation is derailed.

FADEL: Now, the president imposed tariffs across a bunch of different countries, and then we saw these countries come to negotiate. We see this deal with China – temporary deal. We saw the trade deal with the U.K. last week. What does that say about the administration’s strategy when it comes to trade negotiations?

SWONK: Well, whereas – it’s very hard to have that many – 90 negotiations in 90 days. And what we’re seeing is very few actual agreements, and even the ones that are coming out have very tentative rules around them. These things usually take years. And I think it’s important – you know, the rule of law and then ability to enforce it is much harder when you’re not dealing in a multilateral framework. It’s harder. It’s just one-on-one transactional.

FADEL: Diane Swonk is the chief economist at accounting firm KPMG US. Thank you so much, Diane.

SWONK: Thank you.