Breakingviews - Weaponizing US economic might will weaken it
The United States is an economic colossus, accounting for roughly 30% of global consumption, an estimate derived from Bureau of Economic Analysis, opens new tab and World Bank, opens new tab data. A yawning trade deficit in goods – about $86 billion in June – is the flipside, an enormous opportunity for exporters worldwide. Tariffs and bespoke, country-by-country investment deals effectively weaponize this dynamic: pay your way, or lose access.
An oddball patchwork of duties and pledges, like the European Union's declared intention to buy $750 billion of U.S. energy products and $40 billion of artificial intelligence chips, is the tenuous result. The administration claims $5.1 trillion in total promised inflows, says PolitiFact, with heavy caveats, opens new tab. To boot, it is attacking regulations that are bugbears of corporate America, extracting a promise of 'flexibilities' from Europe on its planned tax on carbon-intensive imports and nudging Canada to drop a digital services fee.
This aggressive strategy comes at a price. The average effective tariff rate stands at a level last seen in 1933, opens new tab, while the total customs-duty take could reach 2.6% of gross domestic product, according to Yale's budget lab, opens new tab. This is, effectively, a tax that will dampen consumption, raising prices and trimming near-term growth, Yale reckons.
For now, U.S. corporations seem fine. The blended net profit margin of S&P 500 Index constituents reached, opens new tab 12.8% in the second quarter, topping the five-year average, according to FactSet. But seven industries, including energy and real estate, posted year-over-year declines.
Consumer spending is already softening, flat, opens new tab year-over-year on an inflation-adjusted basis in June, per BEA data. That may restrain attempts to pass on rising costs, even as the Institute of Supply Management's manufacturing price index notched among its highest readings, opens new tab of the past three years in July.
When consumers are too stretched for companies to raise prices without losing sales, earnings will suffer. It's no accident that open trade has undergirded Uncle Sam's economic strength. A turn away from it could even backfire: European business activity hit, opens new tab a 14-month high in July as firms hedge against U.S. uncertainty. Tariffs might yet prove a tax on the engine of American exceptionalism.
Follow Sebastian Pellejero on LinkedIn, opens new tab.
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