Tariffs ‘won’t disrupt trade’

US President Donald Trump’s rhetoric on trade tariffs has made markets very jittery, as it would certainly have an impact on global economic growth and company profits.

However, UBS Wealth Management’s global chief economist Paul Donovan doesn’t believe there will be a major trade disruption. His expectation is that major parties will come to a negotiated solution.

He pointed out that one has to consider how Trump has approached the issue. “The tariffs we have seen so far have been very cleverly applied,” Donovan said. “They are largely invisible and economically very limited in their impact.”

For instance, the US has imposed tariffs on washing machines. Almost all of these appliances sold in the US are imported, so one might think this would have a noticeable impact, but Donovan believes this isn’t the case.

“The American consumer doesn’t see a price increase in buying a washing machine today. The last time you bought a washing machine was 10 or 15 years ago,” he pointed out.

The tariffs on steel and aluminium are similar. The average consumer buys products that use steel or aluminium, and so one might expect to see the effects coming out down the line. But Donovan suggested these impacts would be very small.

Budweiser, for instance, announced that due to aluminium tariffs, the price of a can of beer would have to increase. One might expect US consumers to notice this, but Donovan believes it will be negligible.

“The average price of a six pack of Budweiser is $9.50,” he said. “With the aluminium tax, it becomes $9.56. That could be absorbed by retailers or wholesalers, but even if it is passed on, you’re not going to notice six cents.”

But if Trump starts to impose more tariffs, Donovan believes the US consumer would start to feel it. “If you put a 25% tariff on Nike shoes, the US would notice,” he said.

“If there is a 25% tariff on iPhones, there would be riots in Seattle. The tariffs on $50 billion of Chinese goods that he just announced are the last he can impose without the consumer noticing. And of course the consumer is the voter.

“My view is therefore that we won’t get a trade disruption,” Donovan said. “There will be more noise, but we won’t get a trade war.”