Three months ago, when US First Quarter GDP data was released, I wrote that it would be tempting to blame the fall of 0.3%, on Trump's economic policy. Tempting, because, for one thing, its what Trump would do. But, it would be superficial, opportunistic and wrong. As I set out, the fall was basically statistical, as US companies rushed to import the things they needed ahead of the introduction of Trump's proposed tariffs. The surge in imports is what caused the statistical fall in US GDP, just as, for Britain, the surge in exports, to the US, during that period, of things like Jaguar cars, created a statistical increase in GDP. Both would inevitably be reversed in future quarters, and now they have.
Proving the point in the original post, Trump has, now, claimed that the bigger than expected rise in US GDP, in the second quarter, is a sign of the success of his economic policies. Its not, its just that, having filled their boots, in the first quarter, by bringing forward their imports of goods, to avoid Trump's tariffs, US companies are able to just run down those inventories rather than bringing in additional imports. Its that consequent drop in imports, which has led to a statistical rise in US GDP, for the second quarter, just as its concomitant, a fall in UK exports of Jaguar cars to the US, has led to a statistical drop in UK GDP.
In coming months, US companies, having run down inventories, will again have to resume their normal level of imports, and other countries will resume their normal level of exports to the US. Except, of course, that, now, although the ridiculous levels of tariffs that Trump had first announced, which would have quickly wrecked the US economy, have been reduced to around 15%, those tariffs are still much higher than they were prior to Trump. A look at the US GDP data over the last 6 months, averaging out the effects of the bringing forward of imports, gives an indication, however, of the effect of Trump's tariffs on the US economy. Despite the claims of Trump, and some of his fanboys such as Piers Morgan and Nigel Farage, its not good.
The average over the six months is 1.25%. That compares very badly with the average of more than 2.5% in the last year of Biden's Presidency. It compares even worse with the average US growth rate since WWII of around 3%. The effect of Trump's economic policies, the uncertainty created and so on, is already hitting the US economy. In the first quarter, imports surged by 37.9%, but only fell back by 30.3%, in the second quarter, as those inventories were run down. In coming months, as those inventories are run down further, imports will rise further. But, we are also, now, beginning to see how this will play out in other ways, as I have described previously.
Tariffs are a tax, and like all taxes, they ultimately represent a deduction from surplus value, i.e. from profits. So, Trump's government has sucked in additional revenues from these taxes, but the taxes have simply reduced the profits of US companies. They have not, as Trump and his followers claimed, been paid by foreign countries. The actual process by which those tariffs/taxes get deducted from profits depends on a series of other conditions. For example, if companies are able to just raise their prices to recoup the amount of the additional tax/tariff, the hit to their profit is not immediately seen. Whether they can increase their prices depends upon whether there is sufficient liquidity in the economy to facilitate such a general price rise by all companies. If not, then it depends upon the price elasticity of demand for different commodities. In short, some companies would be able to raise prices, if consumers continued to demand their products, despite the higher price, but, then, those consumers divert spending from other products, causing their demand to fall sharply, and causing companies, in those spheres, to take a bigger proportional hit to their profits.
Ultimately, that would mean capital would grow more slowly in, or even leave, these badly hit sectors of the US economy, and grow more rapidly in those sectors where profits had not been so badly hit. But, then, this increase in supply in these sectors would cause their prices to drop, and their profits along with it. The fall in supply of commodities in spheres where capital leaves would cause prices of those commodities to rise again. Its what Marx describes in Capital III, and elsewhere, of how disparate rates of profit get averaged out. The end result is that profits overall get reduced by the amount of the tariff/tax.
However, central banks exist to protect the interests of capital, including the effects on profits. So, they tend to create conditions whereby any cost increases for companies can be passed on in price rises. Its one reason that Trump is desperate for the Federal Reserve to cut its policy rates, and keep liquidity plentiful. The other reason is that lower interest rates boost asset prices, and Trump has his focus sharply on the stock market, and property market. But, then, any such rise in prices means that the cost of living for workers rises, i.e. the nominal value of labour-power. In conditions where labour-power is plentiful, companies can get away with not raising wages. They can pay wages that are below the value of labour-power. Over the long-wave cycle, however, that gets evened out, as with the movements of market prices of all commodities. In the course of the cycle, a surplus of labour-power gets turned into a shortage of labour-power, and, then, wages rise above the value of labour-power. We are in this latter phase.
In the 1980's and 90's, there was a large surplus of labour-power, as the microchip technological revolution massively raised productivity. But, by the 2000's, that was starting to unwind. Despite continued attempts, particularly after 2010, of states to restrict economic growth, so as to slow the demand for labour and capital, and so to limit the rise in wages and interest rates, the relative surplus population has been shrinking. In those conditions, it becomes impossible for capital to simply raise prices without there being a consequent rise in wages. Companies raise prices, but, to attract and retain workers, they have to pay higher wages, so that what they gained in their profits from the higher nominal prices, they lose in the subsequent rise in nominal wages. It just takes longer to play out, and, also, leads to the potential for a price-wage spiral.
That can be seen in the US jobs and wages data. The average initial weekly jobless claims is around 220,000 on a four-week moving average. That compares with a level of around 400,000 when the US is entering a recession. The latest non-farm payroll data showed a sharp slowdown in the number of new jobs being created, but still not a fall in employment levels. In part, the slowdown reflects the damage done by Trump's tariffs, but also his other main policy, the attack on migrants. A sharp drop in the total labour supply, mostly of migrant workers, itself, contributes to a slow down in employment. That is also seen in the fact that, average hourly earnings are rising faster.
Bourgeois economists and financial pundits, most of whom are not old enough to have witnessed this kind of phase of the long wave cycle, before, but which occurred in the 1950's, 60's and 70's, take the conditions of the last 30-40 years as being normal, and more or less eternal. So, their starting point is that workers can never be able to raise their wages to compensate for these rising prices. Indeed, various catastrophists on the Left have a similar view, reminiscent of the likes of Proudhon, or of the Lassallean Iron Law of Wages. So, we had all sorts of predictions, as inflation spiked after the ending of lockdowns, that there would be the biggest drop in real wages ever seen. It didn't happen. In fact, real wages rose sharply, and in some spheres, where there were acute labour shortages, they rose particularly quickly. That doesn't mean some at the very bottom haven't seen their position deteriorate.
The concomitant of this view that workers could not raise their wages was that they would not be able to consume at the same level, and so, demand would fall, so companies would not need so many workers. That would take the pressure of wages, and also, reduce interest rates, so boosting asset prices. But, workers have not reduced their consumption, as prices rose. In part, they had savings built up over lockdowns, which they could draw on. Its also the case that, as interest rates rose, providing anything up to 6% on savings, compared to the near zero rates before that, those with savings saw a not insignificant rise in their income from interest, available to spend. But, also, the fact that firms saw a large rise in demand following lockdowns, meant they had to employ more workers, and the demand for labour caused wages to rise.
At the very least, as I've set out previously, households, if not individuals, saw a rise in incomes as more of them were employed, more had longer hours of employment, overtime and so on, and so more to spend. But, it was also clear that many saw their individual wages rise too. At first the largest component of that was of workers getting higher paid jobs by moving employer. The average rise was around 14% compared to just a 7% rise in wages for workers staying with the same employer. So, workers continued to spend, firms continued to need workers to meet the rising demand.
The latest US jobs data and spending data shows that, as the number of initial jobless claims remains at historically low levels, and wages continue to rise. Similarly, consumer spending remains high, so that firms continue to need to expand and employ more labour, or else lose out to their competitors. The main relative losers have been workers employed by the state, but as seen in Britain in the last couple of weeks with doctors, nurses and other NHS staff, that ultimately catches up too, as those workers demand pay rise to compensate for what they have previously lost out on. Its not as though the NHS is being inundated with job applications!
So, the effects of Trump's tariffs, as with any other tax, are to reduce the profits of US companies. Of course, what Trump has hoped for is that the US is such a big economy, and market for the exports of other countries that, rather than see the sales of their products fall, foreign companies would “eat” some of the tariff themselves, by reducing their prices to the US, and, so reducing the profits of those foreign companies. But, the experience of the last 6 months showed that that didn't happen. The US economy is definitely very big, but most of what it consumes, it also produces itself, as with other large economies such as China and the EU. So, as I have set out before, the US is China's biggest export market, but it still only accounts for around 6% of Chinese exports and 2.5% of Chinese GDP. So, Chinese exports to the US, on average, can fairly easily be diverted to other markets, not least its own domestic market, and the same applies to the EU, and other large economies. The only economies not able to do that, are the small isolated economies, like Britain.
So, exporters from these larger economies are not so dependent on the US market as to need to “eat” some of Trump's tariffs out of their own profits. The main burden falls on US companies whether immediately, or as a result of higher costs, including higher wages, as they pass through the system. Its why Trump has had to repeatedly chicken out on his proposed tariffs, as the threats were seen as empty. The so called “trade deals”, such as that with the EU, agreed when Trump was in Scotland, are nothing of the sort. Even though Trump never imposed his proposed 50% or 35% tariffs on the EU, and ended up with a figure of 15%, he still didn't get what he wanted, and seems not to have understood what the deal entailed, reminiscent of Boris Johnson.
Trump thought that the EU had agreed 0% tariffs on US imports. They hadn't. They only agreed 0% on some goods. In short, as with the “deals” Trump did with Starmer and others, its basically just a superficial, publicity stunt, and the details can be scrapped at any minute, and probably will. Trade deals take years to negotiate, and require putting into law by respective legislatures. Trump wanted to save face, and the EU gave him the opportunity to do so. Even so, many EU states are unhappy with how Von Der Leyen performed. The consequence is likely to be, as I said at the start of the year, that the EU will simply shift more of its trade to being with China and Eurasia, and less with the US. The US will simply face the higher costs resulting from the Trump tariffs, and a consequent hit to US company profits.
One consequence, already seen is that, if we take a car maker based in Europe, be it Jaguar or Ford, they will face 15% tariffs on their exports to the US. But, Trump has imposed 50% tariffs on a range of raw materials imported into the US. So, for example, a Jaguar or Ford produced in the US, will see the cost of various raw materials such as steel, copper and so on, used to produce the car rise by 50%. That makes the US produced car more expensive, even after the 15% tariff, than the same car, produced in Europe, Japan etc., and imported to the US! That is clearly not what Trump sought to do, but he's ended up in that idiotic position, because he has just plucked a tariff level out of the air, which can change from day to day, and because he has wanted to shore up his dwindling support amongst MAGA, by trying to protect US coal, steel and other primary product producers.
The early indications, therefore, are that Trump's tariffs are hitting the US economy causing a deterioration in growth compared to the Biden regime, which itself was lacklustre. The main hit is going to be to US profits. That will first likely be felt in the profits of retailers like Wal-Mart that are huge importers of manufactured goods. Next will be US manufacturers that face higher costs of imported raw materials and components. Both will “eat” some of the higher cost out of their profits. Mostly, what will not immediately be hit are services companies, and, of course, that includes the huge tech companies. However, as the higher costs caused by the tariffs work their way into the rest of the economy – higher prices for steel, copper and so on, feed into the costs of producing cars, and electrical appliances, for example – so US prices, as a whole will rise, no doubt facilitated by the provision of liquidity by the Federal Reserve. This rise in prices is never a single event, but a rolling process, coming in waves. One price that will also rise, therefore, in conditions of tightening labour markets, is the price of labour-power, and as relative wages rise, so US profits as a whole will be hit.
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