Tariffs are here to stay

There’s a lingering view in some economies that tariff activity out of the United States is a policy oddity to be managed until normality returns. But after spending a week in the US in July — my first trip since the pre-pandemic era — I’ve formed the view tariffs may now be a permanent part of trade with the world’s largest economy.

The revenue alone is striking enough; between $US200 billion and $US300 billion a year has been suggested. That doesn't close the US' fiscal hole, but it’s certainly not loose change.

Regardless of what happens at political level in the medium term in the US, it will be hard for any government to give up that tariff revenue. But it's not clear to me the international community (particularly some economies in Asia) have adjusted to the idea these tariffs might not be a flash in the pan.

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Concentrated

It was clear from my discussions in the US that the process of government is viewed as being centralised in the White House. That was perhaps not a surprise, but useful to understand. Bureaucracy is certainly less involved in the detail of policy, and often involved only after announcements are made.

It was also clear China is very much part of US considerations, even when not at the centre of discussion.

Interlinked with that story are artificial intelligence and energy. There’s a view the US won’t win any race for the former before solving for the latter. In the strategic competition with China, AI is an area the US really wants an advantage. Expect these themes to be an active consideration for US policy moving forward.

One surprise during my trip was how little the Federal Reserve came up as a topic of discussion. Certainly, when it did come up, the focus was on the future of Chair Jerome Powell. But in some ways, I wonder whether that focus misses the point of what has actually changed.

The US administration's approach to bureaucracy has been to make sure it's aligned with policy objectives. I would be surprised if the Fed is treated any differently.

From May, the administration will have a chance to put its stamp on the Fed by appointing the next Chair. From that point, we should expect it to operate differently from the Fed we've been used to over the last couple of decades. I think the Fed is fading from view, at least partly.

Getting on with it

My final observation was around the US economy; specifically, the idea it is in a state of chaos.

I think outside the US, the broad view of the world’s largest economy is quite negative. But that’s not the case within US borders.

I think the US economy is slowing, and will continue to slow, for a range of reasons. Tariff costs will make their way to consumers. Population dynamics will shift due to the administration's approach to migration.

But I’m less concerned about the risk of a sharp slowdown. The sense I got from my travels in the US was everyone is just getting on with it.

Richard Yetsenga is Chief Economist and Head of Research at ANZ