| The concept of global economic fragmentation was, until recently, centered on “friend-shoring.” Former US Treasury Secretary Janet Yellen was a big advocate, pushing the idea of shifting production out of China and toward allies, or at least “partners” such as India and Vietnam. As she put it on a visit to New Delhi, for too long had the West been “overly dependent on risky countries.” Russia’s full-scale invasion of Ukraine in 2022 made obvious the vulnerability of Germany and other European nations to the Kremlin, given their reliance on Russian fossil fuels. Friend-shoring was the solution. But what if you have no friends? President Donald Trump has unleashed a raft of tariff threats against not just America’s geopolitical rivals, but longstanding treaty allies. His stated priority on the campaign trail was to cut out foreign goods regardless of the country of production. Still, it’s unclear whether the 78-year-old’s almost-daily threats are sincere or an attempt at negotiation. Taken at face value, Trump’s approach doesn’t make much sense, given it fails to exempt inputs vital to any increase in American manufacturing — such as steel and aluminum. Levies on those items are set to hit 25% on March 12, if Trump follows through. Machinery and other equipment useful for production lines as of this month already bear a 10% surtax if it comes from China. If it’s even possible, it would take decades, not years, to bring US output close to the point of consumption, Morgan Stanley economists warned this week. US consumers reckon they know what that means: longer-term inflation expectations just hit a three-decade high, which for Trump is problematic, since a key reason for his victory over former Vice President Kamala Harris was his promise to immediately lower inflation. This week in the New Economy | The global supply chain amounts to a $14 trillion universe, accounting for some 15% of world GDP, Rajeev Sibal and Mayank Phadke wrote in the Feb. 17 Morgan Stanley report. That’s the result of more than half a dozen rounds of reciprocal reductions in trade barriers dating back to 1947, along with many narrower multilateral trade deals. It’s also the result of countless billions of dollars of investment in production lines and the construction of logistics links from trucks and warehouses to container ships. Even after years of friend-shoring efforts, the data show how enduring that chain of efficiency has proven. The Morgan Stanley team took a look at one particular product that appeared to have seen dramatic change. The manufacture of electrical transformers is led by European and Asian companies, with their exports mainly coming out of Asia. Since Trump launched his trade war against China in 2018, imports of transformers from that nation have trended steadily lower. Mexico, meantime, saw its exports of transformers to its free-trade partner to the north more than double. Friend-shoring in action? Alas. That rise “nearly equals the value of Mexican transformer imports from Asia. The productive capacity of electric transformers seems to not have shifted even if the trade patterns have,” Sibal and Phadke wrote.  An electrical transformer at a gas-fired power plant in Leipzig, Germany Photographer: Krisztian Bocsi/Bloomberg That said, production shifts to the US are indeed afoot. Against a backdrop of surging power needs thanks in part to artificial intelligence, Germany’s Siemens Energy is expanding its footprint in North Carolina, while France’s Schneider Electric is building out capacity in Tennessee. Change takes time, and America “is still expected to import over 50% of its transformers by 2030,” Sibal and Phadke said, drawing on Bloomberg New Energy Finance data. Their bottom line? “Fully reorienting supply chains at the scale that policy demands will take decades and come at a high price,” they wrote. That’s not the timeframe Trump has been touting. When this week he threatened to impose tariffs on automobile, semiconductor and pharmaceutical imports of around 25%, he also warned his levies on microchips and drugs would go “very substantially higher over a course of a year.” Given that producers wouldn’t face tariffs if they made their products in the US, “we want to give them a little bit of a chance,” in terms of time to make the change, Trump said. But again, the reasoning behind this caveat (when taken at face value) isn’t based in reality. Semiconductor fabs, which require not just ultra-clean production facilities but highly trained workers, don’t get thrown up in a matter of months. It takes years. Which means that, if Trump’s promised tariffs actually materialize, they will either compress companies’ margins or boost end-user prices, or both. “While the cost/benefit outcome of broadly-based tariffs is debatable, what’s not debatable is that the cost will be felt much faster than any potential benefit,” Benjamin Tal, deputy chief economist at CIBC Capital Markets, wrote in a note this week. “You cannot impose tariffs on a well-oiled machine that was established on a free trade infrastructure and expect things to change overnight.” The Bloomberg Economics team led by Tom Orlik calculates that, if Trump follows through on all of his tariff threats since he returned to the White House, that could mean a 1.2% climb in US prices (against a backdrop where inflation is still closer to 3% than 2%) and a 2% decline in GDP. Trump’s “vulnerability is that by the time of the mid-term elections, the only visible outcome will be the economic disruption of tariffs in terms of inflation, jobs, and output,” Tal at CIBC wrote. —Chris Anstey. | 
