MNI INTERVIEW: Data Suggest Trade Diversion From Trump Tariffs

Rapidly-updated UN import price data are consistent with the view that U.S. tariffs are diverting goods from the U.S., with potentially disinflationary consequences in other export destinations, though such effects are not yet obvious in the UK, an economist who co-authored research published by the Bank of England told MNI.

BOE external Monetary Policy Committee members Swati Dhingra and Alan Taylor, who have voted consistently for a lower policy rate path, have pointed to the risk that tariffs between the U.S. and other markets could cause disinflationary trade diversion to third countries such as the UK. Research published on Bank Underground, a blog for BOE staff, indicates that this could be occurring, coauthor Thomas Prayer said in an interview.

"If you look at the Chinese export prices, that seem to be falling compared to export prices in the world, that is consistent with some trade diversion," Prayer said.

Prayer and BOE economist Marco Garofalo used frequently-updated data from UN Comtrade on national import prices to build a database of import and export prices.

"We're able to look at the evolution of export prices for specific countries a little bit quicker than is normally possible," Prayer said. In contrast with national accounts' price deflators, which are typically reported quarterly, the Comtrade imports data are updated “as close as possible to real time as you can get with these huge administrative data sets," Prayer said.

INCREASING DIVERSION

The economists' model identifies changes in bilateral export and import prices over time and, while it does not identify causal factors, Prayer said its findings are consistent with increasing trade diversion since the beginning of Donald Trump’s second presidency.

"What we're doing is really just descriptive, which is looking at the data, and ... we're just looking at an average of the price. We're not saying the price moves because a tariff has changed." (See MNI: US Tariffs To Cut EZ Value-Added By 0.5%-Austrian Cenbank)

"This is an additional data point to check whether the explanation holds up... it might help when you have two competing [hypotheses], to say which one is consistent with this evidence." Prayer said, noting that the latest data are consistent with potentially disinflationary trade diversion.

Still, the effect on UK price levels is not yet clearly visible.

"It doesn't look in our findings as if UK prices have fallen a lot, as you might expect, if there was a lot of trade diversion."

In a recent speech, the MPC’s Taylor saw disinflationary trade effects, and pointed to “signs of substantial trade diversion into the UK and also into the EU... with the latter more clearly evident.” (See MNI: BOE Needs More Varied Scenarios - Bean, McMahon)

UK IMPACT SO FAR

Prayer's work, while broadly supporting this picture, downplays the impact so far but he noted that the picture could be different if goods are weighted in the import basket.  

Among consumer prices, "there are some goods that are more important than others... we've been very hands off, and we've said we just want to see an average of all products, regardless of whether a country is importing a lot or only very little,” Prayer said. “It gives us a sense of how this is moving in general.” 

"If you think that the prices for very important imported products have stayed the same, then the actual impact on the economy will be very different from that."

Prayer and Garofalo also find a more pronounced drop in U.S. import prices than the official U.S. import price index suggests. That means "either the prices... where the U.S. imports a lot haven't changed as much as the prices for goods where the U.S. doesn't import as much, or the composition of U.S. imports has changed to favour more expensive products."