Goldman Sachs chief economist Jan Hatzius weighed in on former President Donald Trump's plans to impose a 10% across-the-board tariff on U.S. imported goods to punish other countries.
Such a plan would protect domestic industries, Trump argues. But that's not how the global economy works, Hatzius explains.
What Happened: Trump's tariff proposals could prompt a trade war that would send significant monetary policy shocks across all advanced economies, and increase inflation across the U.S., Hatzius said Tuesday at the European Central Bank (ECB) forum on Central Banking in Sintra, Portugal.
During the panel, chaired by ECB board member Isabel Schnabel, Hatzius highlighted that Trump's proposed tariffs are "large by postwar standards."
In addition to a 10% surcharge on all U.S. imports, Trump also wants a 60% tariff on imports from China.
Combined, these tariffs could raise the average U.S. tariff rate by 16 percentage points to nearly 20%, which would be the "highest in the postwar period," Hatzius said.
Why It Matters: A tit-for-tat trade war between the U.S. and the EU could elevate global trade policy uncertainty to the heights experienced during the peak of the 2018-2019 trade tensions.
Hatzius expects U.S. inflation to increase by 1.1 percentage points if the U.S. imposes a 10% tariff on all goods imports and the EU matches this action.
Higher prices would negatively impact real personal income and consumption. Increased trade policy uncertainty would also hit business investment.
The two negative effects could only be partially offset "if tariff revenue is fully recycled into tax cuts," Hatzius said.
Overall, Hatzius predicts a substantial 1.0% hit to GDP in the Euro area and a more moderate 0.5% hit in the U.S.
Monetary Policy Implications And Uncertainties Ahead
In terms of monetary policy, these estimates suggest a dovish effect in the Euro area, with a potential -40 basis points impact due to the large growth effect outweighing the inflation effect.
In the U.S., the implication is "hawkish," with a potential 130 basis points impact as the inflation effect outweighs the growth effect.
"A trade war is not necessarily a reason for the Fed to hike rates," Hatzius noted. "It may not even be a reason for the Fed to forego cuts altogether. But if it keeps core PCE inflation above 3% instead of near 2% in 2025, it might well be a reason to delay cuts that might otherwise occur more quickly," he stated.
Hatzius emphasized the uncertainty surrounding potential trade policies in a second Trump administration. "It is possible that the inevitable trade negotiations would result in tariff levels that are ultimately considerably more minor," he said.
However, the trade war could also become much more intense.
Hatzius estimates that a conflict between the U.S. and China would greatly exacerbate these outcomes, causing a more substantial rise in US inflation, a greater impact on European growth, and a stronger argument for divergent monetary policies between Europe and the US.