Whipsawing Trade Policy Sows Uncertainty in Big Box Retail

Bing Crosby’s Great Depression era anthem “Brother, Can You Spare a Dime?” is probably hitting Corporate America’s Spotify rotation after more of POTUS Trump’s America First trade policies landed on Tuesday.

A slew of earnings reports last week from the consumer discretionary sector raised the specter of sapped spending as executives discussed the possibility of increasing prices on goods to offset the costs of tariffs on shipments from Canada, Mexico, and China. By the end of the week, President Trump punted, delaying import duties on some goods from Mexico and Canada after US equity indexes flashed red. Yet his strategy is reminiscent of the 1930s-era trade protectionism that some economists say exacerbated the Great Depression.

History Lesson

The Smoot-Hawley tariff bill was devised to support struggling US farmers and focused on agricultural imports. Aggressive lobbying from businesses expanded the scope to a variety of imports from sauerkraut and clothespins to goldfish and fountain pens by the time President Hoover signed the bill into law in 1930. Retaliatory tariffs killed exports. Global trade sank. And American consumers ultimately paid the price.

Trump 1.0 trade policy also came with consequences. When tariffs were applied to washing machines in 2018, prices climbed 12% for American consumers, according to a research paper authored by a pair of University of Chicago professors and a Federal Reserve Board economist. Some 1,800 new jobs were created, but the average annual cost to consumers was over $815,000 per job created, according to the paper.

Trump 2.0’s trade war — larger in scale, broader in scope, and implemented more quickly than the duties imposed during his first term — could be felt by American households more keenly this time.

Yale Budget Lab’s analysis of Trump 2.0 tariffs as of Tuesday estimates personal consumption expenditures will rise by 1% in the short-term to 1.2% under full retaliation, or the equivalent of an average per-household consumer loss of $1,600 to $2,000 in 2024 dollars (That was assuming immediate effectiveness of tariffs). Electronics and clothing are disproportionately affected, while cars and food would also see above-average price hikes, the group said. After consumers shift their spending habits because of price increases, the loss per household settles at about $1,100 to $1,400.

Big-box retailers Target, Best Buy, and Costco said they are staying flexible in what they described as a complex and fluid situation:

• Target said it is committed to providing affordability but forecast a wide range of potential scenarios for the year. CFO Jim Lee explained: “What we don’t know is potential consumer demand — that’s across the board, based on how tariffs ripple across the economy.
• Best Buy CEO Corie Barry said price increases for American consumers are “highly likely” because the electronics store’s vendors will pass on some of their tariff costs to retailers. Costco chief Ron Vachris had his own not-so-sunny assessment: “When it rains, it rains on everyone.”

Rainy Days and Mondays: Fortunately, the US economy is a lot sunnier than it was when Smoot-Hawley was enacted, but if President Trump ignores market signals, you might consider grabbing an umbrella.