Íslandsbanki's Chief Economist says a tariff war has begun and the outlook is that inflation could be somewhat higher as a result. It is uncertain whether tariff increases will be applied against Iceland, but in any case, the tariff war could lead to indirect price pressure in this country.
The U.S. President's tariff increases on goods from European Union countries will take effect on April 2. Import duties on goods from Canada and Mexico increased to 25 percent on March 4, and to twenty percent on goods from China. Markets around the world trembled and Asian stock indices fell sharply.
The effects were also felt in Iceland, where the share prices of all companies on the main market of the Stock Exchange of Iceland fell and the top index fell by almost four percent. The US president announced that tariffs on EU goods will be increased to 25 percent. It is not clear whether tariffs on EEA countries such as Iceland will also increase.
U.S. President Donald Trump said in a speech to Congress that many countries had imposed much higher tariffs on the United States than the United States had imposed on them. The system was not fair to the country and therefore he would launch the increases on April 2.
"I wanted it to be April 1st but I did not want to be accused of April Fools' Day. It only makes a difference of one day but this cost us a lot of money. But we are doing this in April, I am very superstitious. On April 2, reciprocal tariffs will take effect,” Trump said in his speech, among other things.
No matter how high tariffs other countries impose on the United States, Trump said the United States would respond in kind with tariffs of equal value.
News anchor Sindri Sindrason spoke with Jón Bjarki Bentsson, Chief Economist at Íslandsbanki, on the evening news on Stöðvar 2 about the U.S. tariff increases and their impact on Iceland. Uncertainty due to the measures can be seen in markets around the world.
Yes, I think it can be said that it has started. After these U.S. actions, Canada, Mexico and China have responded in kind in one way or another. It seems that spears are being pointed at Europe as well, said Jón Bjarki.
He says that although some easing of tariffs between Canada and the United States will occur, U.S. officials have announced that the tariffs announced this week will not be fully lifted.
The markets seem to agree with me and most economists that this is not good news for the economy. The outlook is that inflation, especially in the countries that are involved in the tariff war, may be somewhat higher as a result, said Jón.
Interest rates will then be higher and at the same time the economies in those countries may take a hit, according to Jón.
I think the markets have, somewhat rightly at least, been pricing in more uncertainty about whether the same growth will be seen in the United States and neighboring countries as in recent months, he said.
Icelanders with one trump card
It’s very difficult to say now because I don’t hear anyone getting to the bottom of it, neither Icelandic leaders nor Norwegians who are very concerned about these issues, whether they are also looking at us and Norway or whether this threat is limited to the European Union itself, said Jón.
We have often been able to sail between the rocks and the waves, playing chess under the cover of how small we are and in the case of the United States we have a trade deficit, importing more goods from the United States than we export to them. Trump seems to be particularly upset with countries that are exporting more to the United States than they are, so at least we have that trump card in our hand, he said.
There could be indirect effects in the end. As long as we are careful not to end up outside the customs walls of other major trading blocs, Europe is of course our largest trading area overall, then the impact will hopefully be moderate and perhaps no less indirect than the indirect effects of customs walls that will be erected against us, said Jón Bjarki and added:
The uncertainty is that this could be something unfortunate for price pressure.
Source: Visir (in Icelandic)
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