More worryingly, these tariffs have been imposed, paused, rolled back, and reimposed on apparent whims. The uncertainty has been more harmful to the business and economic environment than the tariffs themselves.
Economists are left connecting the dots
Given their whimsical and non-surgical nature, the tariffs’ role as a trade tactic can be all but ruled out. It could be aimed at bolstering political negotiation, but it seems too extreme a measure for that.
Economists have been inferring that Trump’s agenda is more nuanced. That his policies are chaotic by design, and are aimed at weakening the US dollar. The safe haven currency, if weakened, would boost US manufacturing by making exports more competitive. USD had appreciated in anticipation of Trump’s presidency, and has given up all the gains within 2 months of his term.
ETMarkets.com
Trump may have been emboldened by the resilience displayed by the US economy in recent years. Recovering promptly after the pandemic, the US economy has been growing persistently despite encountering 40-year high inflation, the most aggressive monetary tightening seen in decades, and stubborn geopolitical conflicts.
Drastic changes can have catastrophic consequences
But consumer sentiment is not to be played with. Any drastic changes implemented suddenly, can have catastrophic consequences. Abrupt policy-changes are more likely to spook consumer sentiment. And if consumer sentiment drops sharply, it no longer follows the principles of economics. No amount of monetary or fiscal stimulus can push the pessimism out of the hivemind. It can take years and even decades for sentiment to recover. Take for instance, Japan’s “lost decades.” Faced with an asset-price bubble that had built up from aggressive lending, Japan’s central bank had abruptly raised its policy rate from 2.5% to 4.25% in a single sweeping hike in December 1989. What followed was sharp Yen depreciation, deflation, and a flat economy for 3 decades. Even negative interest rates could not boost consumer sentiment in the country.More recently, one should take lessons from China’s conundrum – Following the government’s aggressive crackdown on rising real-estate debt in 2021, consumer sentiment dropped down to the dumps. The government has been announcing stimulus after stimulus since then, but the pessimistic consumer sentiment just won’t budge.
Sentiment in the US had been soaring high on the back of the AI boom. But notwithstanding protectionist chip policies, the disruption led by China’s DeepSeek has eroded this confidence. Any drastic policy-changes in the US can hurt consumer sentiment further and lead to potentially cataclysmic consequences.
Ananya Roy is the founder of Credibull Capital, a SEBI-registered investment adviser. X: @ananyaroycfa
Views are personal and do not represent the stand of this publication.
