Avery Shenfeld sits down with Paul Krugman, a Nobel Prize-winning economist renowned for his insights in macroeconomics. They dive into the intricate U.S. budget process and its impact on social safety programs. Krugman discusses the complexities of recent trade agreements, especially with the UK, and the challenges Canada faces in its negotiations with the U.S. Additionally, they analyze how tariffs influence inflation and investment uncertainty, alongside the political dynamics shaping bond market volatility. Expect sharp commentary and thought-provoking economic trends!
The detrimental effects of a multi-way trade war highlight the urgency for reevaluating high tariffs to protect economic stability.
Uncertainties surrounding U.S. budget deficits and spending cuts can undermine global confidence in the dollar and impact international markets.
Deep dives
The Impact of Trade Wars on Economies
A multi-way trade war with high tariffs is considered detrimental to all economies involved. Predictions about the future of the current trade conflict are largely dependent on the mindset of influential political figures, particularly Donald Trump, who has significant leeway under U.S. trade law to impose tariffs unilaterally. As the negative consequences of the trade war become evident—such as rising consumer prices and potential shortages—there is speculation that a reevaluation of these high tariffs may occur. For example, a reduction to tariffs around 10% is viewed as a feasible compromise that balances economic impact while allowing the administration to save face, reducing the dramatic costs associated with steeper tariffs like the current 145% on some Chinese imports.
Long-Term Effects on Investment Certainty
The uncertainty generated by the ongoing trade wars has potential long-term implications for corporate investment decisions, particularly in countries like Canada that rely heavily on the U.S. market. Historical treaties like NAFTA fostered a sense of security that encouraged companies to invest based on the expectation of open trade, but the current climate introduces hesitation and caution. Companies may forgo significant investments due to fears about future fluctuating tariffs, which creates a stagnation in growth and innovation. The reliance on strong cross-border trade agreements means that the uncertainty surrounding U.S. policy might lead to decreased commitments from corporations to invest in Canada and the North American market.
Concerns Over U.S. Budget Deficits
The potential for increased budget deficits in the U.S. raises concerns in global financial markets, especially in light of proposed tax cuts and their financing through deep cuts to the social safety net. Republican unity on spending cuts appears fragmented, leading to skepticism about their ability to control the budget deficit effectively. The sustainability of the U.S. dollar as a trusted asset is at risk if international confidence in U.S. fiscal responsibility wanes, which could have severe consequences for both the U.S. economy and global markets. Observers suggest that Republican deficit hawks may prioritize cuts to social programs while neglecting tax implications, which raises doubts about long-term fiscal policies.
On Friday, May 9th, CIBC’s Chief Economist Avery Shenfeld, was joined by Nobel Prize Winning Economist and former NY Times Columnist Paul Krugman to discuss the US budget process, the outlook for the US trade policy, and some of the implications for Canada.
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