Peterson Institute’s Lovely warns new tariffs equal: “Uncertainty…Disruption and Higher Prices”

Mary E. Lovely, Senior Fellow at the Peterson Institute of International Economics, based in Washington D.C., warned of “uncertainty” and “disruption” on U.S. trade and for U.S. shippers as a result higher tariffs expected to be implemented by President-elect Donald Trump.

Lovely said the effect of higher tariffs will be to raise prices and many projections are that inflation will increase by 1 percent:” We're going to see higher prices. Many people are predicting about one percentage point increase on the inflation rate.”

Lovely spoke at the Port of Los Angeles media briefing with the Port’s Executive Director Eugene Seroka on November 20^th where she said: “I think we should start with the three most important words today, which are uncertainty, uncertainty, uncertainty. If I were to add one more, it would be disruption. So, we are looking ahead to a period that we think will be very active for trade policy. And that is going to cause a lot of headaches, I think, and rearrangements for shippers as well as the managers of global supply chains. We expect that the new Administration will get to work right away, particularly on tariffs on China.”

Lovely is also a professor emeritus of economics at Syracuse University, where she was the co-editor of the China Economic Review. Her current research examines the effects of U.S. tariffs on China and the implications of China's foreign investment policy on trade flows.

US Exports and Manufacturing

Lovely said US exports and US manufacturing could suffer: “Now, unfortunately, we have not heard a lot about exports in this campaign from either side. That is unfortunate because our exporters are our biggest, most productive, most innovative companies … And all of these policies really do handicap our exporters. So, of course, that has implications for jobs at the Port of LA, but it has implications for jobs across the United States, particularly in manufacturing. The US remains the second largest manufacturer, goods exporter in the world. So, I think none of this is really good for US commerce.”

She also expressed skepticism about the benefit to U.S. workers and jobs: “… First of all, the US is not really competitive at U.S. wages on many products, low value products. Second, we are operating in a full employment economy. Americans want better jobs, not necessarily more jobs. A third concern … is that President Trump is going to begin a program of deportations from the United States, and that will put more pressure on labor markets, particularly in certain segments, in certain areas. So, altogether, we have a problem, want better jobs, not more jobs. And the question is, ‘are these tariffs going to give us that?’ I think that is a very open question. I myself come down on a side of intense skepticism.”

Sourcing Challenged

Supply chain managers for companies sourcing products from abroad will be challenged: “Supply chain managers learned a lot about where there is alternative sourcing. The problem for them is, ‘do I make a bet, say, … on Mexico or on Vietnam or on Thailand, when I don't know what tariffs are going to be coming on exports from those countries?’ So, this is kind of a double whammy for supply chain managers, many of whom have already been well into their China plus one plus two strategies. So, they have the message supply chains are moving (but) you cannot protect yourself entirely when tariffs are going to be … placed on everybody. So, you can only continue the movements that you have, but it is a very difficult time … to place the kind of $20 million, $50 million bets that manufacturers must place to build new plants.”

Lovely is also not hopeful about the long-term economic impact: “I think there is a vision … we will create this kind of Fortress America. It will bring these jobs back; it'll bring investment back. Now, it is true that some investment will come in, we will see some jobs increase, but we will lose jobs in lots of other areas … we have to ask in the end … five, ten years down the road, what is the U.S. economy going to look like? It's still going to be a big economy. We are still a prosperous nation, but it's going to be going more slowly. Prices will be higher because of these policies. And I am afraid, as I mentioned, that U.S. manufacturers will be less competitive.”

Tariff Impacts at Home

Lovely says that as the negative economic impact mounts, there will be reactions from elected representatives and their constituents: “I think we will see action from Congress where individual districts are saying: ‘Hey, you know, trade with Germany is really important to us.’ Or ‘Hey, you know, we have a South Korean auto plant in our district, and a lot of what we're seeing from Korea is machinery that's going into a new plant or a new semiconductor plant.’ So, I think they will have some pushback when the economic reality of these broad-based tariffs really come home to individual districts.”

Ports and shippers will also be impacted by reduced trade flows which will reduce the number of imported goods available to consumers: “We will see an effect on trade flows, both imports and exports. The flows will decrease despite having what I think will be a robust economy next year. Simple. Our imports will be taxed. Consumers will turn toward domestic goods or service alternatives. Our exports will be hurt because we are going to see higher prices on the things that our producers use to produce in the United States … A lot of what comes through the Port of LA is in fact, intermediate inputs that are used by American manufacturers to create goods here in the U.S. They will be hurt with this price increase, and they will find in the global marketplace that their competitors are not hamstrung in the same way. So, I think we're going to see an impact on both import flows and export flows for consumers. We are going to see higher prices … We have become … sort of sanguine about the variety that we see in both our clothing, our household goods, our electronics and some of those products will simply disappear from the marketplace.”