Tariff uncertainty will be a drag on competitive dynamics

If you’re an executive right now, what are you focused on: tariffs or competing?

Capitalism works best when companies have a clear set of rules and can fight for market share. Today’s news is undoubtedly good on tariffs but it’s a 90-day pause, similar to the ‘liberation day’ climb-down.

In today’s environment there is so much uncertainty. There are few executives with international supply chains that are right now focused on gaining market share. Instead, they’re trying to navigate changing rules, stockpile and manage inventories.

Yes, there are probably opportunities to undercut competitors but if competitors can’t respond and the moves are temporary, does that really create sustained disinflation? I’d argue that it simply leads to turmoil in pricing that resets with weaker competitive dynamics.

My guess is this is how the Fed sees it as well.

The recipe right now isn’t there for disinflation in the world as companies are writing tariff clauses into contracts and stuffing warehouses. Right now they have to decide if they want to pay 30% tariffs on Chinese goods or risk waiting around for a better/worse deal later.

The bull case now for risk assets and the US dollar is the massive tax cut package that Republicans are working on. I’d say a good deal of that is already priced in but certainly not all of it. It’s looking like it will be paid for via Medicaid cuts and massive deficits. Even with that it’s mostly a continuation of the regime that’s already in place.

But when you look out further at some point you need to price in a tightening fiscal regime. The US is running at deficit at 7% of GDP and tariffs and DOGE aren’t going to pay for much at all. The Joint Congressional Committee on Taxation is just out with an analysis saying the tax bill will cost $4.9 trillion over 10 years.

I’d imaging there will be cheers in markets when that’s passed but at some point, it will need to be paid for so at some point you need to price in some level of austerity.

This article was written by Adam Button at www.forexlive.com.