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CEO North America > Opinion > Tariffs: The Costs of Inaction

Tariffs: The Costs of Inaction

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Tariffs: The Costs of Inaction
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Both short-term decisions and long-term strategies are essential to mitigate risks and capitalize on shifting opportunities.

It helps to put tariffs in context, as symptoms of a larger geopolitical trend: the move from a globalized world to a post-global one. After decades of integrating markets, electorates are pushing back against policies of economic integration, with many nations implementing or considering more protectionist policies, to the detriment of nations that rely on exports. Fragmented markets are more costly for businesses and punish mistakes of prediction or forecasting more severely.

Beware the lure of simplistic answers

Predicting the precise impact of tariffs is a fraught exercise. Currency adjustments, retaliatory tariffs, and shifting trade flows create ripple effects that defy linear calculation. Efforts to quantify these impacts can sometimes yield false precision, leaving businesses ill prepared for the complexities ahead. Strategic responses require a balanced grasp of uncertainty, not blind reliance on models or assumptions.

In general, a tariff is just a specific instance of a government tax that raises government savings (government revenue minus government spending), at the expense of different sectors of the economy: Households may incur higher prices, businesses may generate lower profits, and foreign trading partners may take a hit to their balance of trade. Which sectors ultimately bear the cost of a government’s change in policy is determined by a complex mix of supply and demand balances that vary across products and within those products’ value chains. 

In the event of a broad increase in tariffs, it is virtually impossible to fully anticipate the net effect of the policy. We can, however, say it’s unlikely that the cost of the tariffs will be fully borne by either consumers or foreign entities. While the global economy is in a very different place than it was in 2017, back then tariffs had a negligible impact on US consumer price inflation; at the product level, though, the impact was varied, and it changed over time as well. 

Beyond that, any changes in US tariff policy will produce many effects and countereffects, both within the US economy (e.g., the creation of domestic substitutes) and outside the US economy (e.g., the diversion of trade flows from tariffed to non-tariffed countries). While these effects would undoubtedly disrupt business plans and operations, they will also tend to mitigate the macroeconomic effects.

More broadly, inflationary pressures from tariffs may be lower than many leadership teams assume (see Figure 1). To use an example of a highly disruptive scenario—the immediate imposition of 100% import tariffs on China—the net inflationary shock is likely to be substantially less acute than the post-pandemic inflationary shock when supply was globally constrained while demand was stimulated.

Read the full article by Karen Harris, François Faelli, Hugo Parkinson, and Dunigan O’Keeffe / Bain & Company

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