How well can markets adjust to trade wars?

That is the topic of my latest Bloomberg column, here is one bit:

By putting its European production in Europe, Harley is creating a similar tariff-neutralizing effect, reflecting the market’s ability to adjust to an ill-conceived policy. In turn, we can expect that some European producers will place new plants in the U.S. or expand the old ones.

Note that Harley already had plans to shrink its U.S. production, and it already was expanding into Brazil, Australia and India. So perhaps the result here isn’t so different from what might have happened anyway.


…if you’ve spent years painstakingly constructing one of these international supply chains, you’re not going to let a few tariffs on one part of the chain shut you down. Instead, you are likely to just eat the loss and move on, because there is so much total value at stake.

At the same time, very large tariffs and trade barriers now will have much higher costs, if they are capable of shutting down the entire supply chain and disrupting so many moving parts.

To be clear, trade wars are still a mistake, most of all when directed against one’s allies.  But it’s worth thinking more clearly about what the final costs might or might not be.

Another factor I only mentioned in passing is currency adjustment.  The dollar has been relatively strong this year.  One hypothesis (unconfirmed) is that prospective tariffs strengthen the dollar, but of course that it turns gives back some of the supposed gains on the export side.  And many of you already know the standard result that if a country subsidizes its exports and taxes its imports, the exchange rate adjusts to make the policy more or less neutral.  There are lots of moving pieces here, and it may in fact be hard for an under-informed government to even get the trade war it wants.


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