Trump's tariffs and inflation fatigue are a toxic brew

The next White House may not have the leverage it expects in trade negotiations.

- Jonathan Levin

Donald Trump's allies tell us that tariffs are principally a negotiating tool rather than a tax on consumers: If you threaten America's trade partners with new duties, they'll immediately cave in and provide more favourable terms for the exports it produces domestically and sell into their markets.

Key to that logic is the idea that the US has all the leverage, and that just isn't true in the current macroeconomic environment.

When Trump fired his first shot in the 2018 trade war with China, core inflation was running at around 2.3 per cent and 30-year mortgage rates were around 3 percentage points lower than today. That meant Trump had sufficient cushion to pursue his goals without unduly punishing American households and sacrificing political support.

This time, the US is coming off the worst inflation in 40 years and still struggling with mortgage rates that have rendered housing unaffordable. America's trade counterparts know that the US has a limited tolerance for additional economic pain.

Will the backdrop get much better by Inauguration Day on Jan 20? Unlikely, and it may even get marginally worse.