International Observation | How "War Taxes" Erode the U.S. Economy

Xinhua News Agency, Beijing, April 7 — Topic: How “war taxes” erode the U.S. economy

Xinhua News Agency reporter Su Liang

“War taxes are hurting U.S. businesses and consumers!” As the fighting in the Middle East drags on, more and more people in the U.S. business community have realized that the U.S. attacks on Iran are, in effect, a “tax” on the American public. The disruptions caused by the war, like a virus, transmit through economic chains layer by layer, eventually seeping into the “capillaries” of everyday life in society and rebounding on the U.S. economy—already trapped under high tariffs and high inflation pressure.

Data released on April 6 by the Institute for Supply Management in the United States show that, among the service sector accounting for more than two-thirds of U.S. economic activity, March growth came in below expectations, costs rose significantly, and employment contracted. A series of signals indicate that the U.S.-Iran war scenario is further increasing America’s “inflation stickiness,” making businesses more cautious and causing ordinary people to “tighten their wallets.”

“Equivalent to taxing the public”

The non-manufacturing Purchasing Managers’ Index (PMI), compiled by the Institute for Supply Management in the United States through extensive surveys of companies, is a set of data that includes a range of indicators, such as purchasing prices and employment. The data use 50 as the “boom-or-bust line”: above 50 means the indicators expand, while below 50 means they contract.

The latest figures for March show that the purchasing prices index reached 70.7, the highest value since October 2022; it rose 7.7 from this year’s February, with the month-on-month increase hitting the highest level in 13 years. The employment index shifted from expansion to contraction, recording only 45.2, the lowest since December 2023. In other words, since the U.S. and Iran war scenario began, U.S. companies’ operating costs have been rising steadily, while hiring and expansion intentions have clearly declined.

Pressure on the supply side is rapidly transmitted to the consumption side. Recently, many market developments have raised concerns among ordinary Americans—

Airlines such as JetBlue Airways and United Airlines have announced increases in checked baggage fees one after another; logistics operators such as United Parcel Service and FedEx have raised fuel surcharges; the e-commerce platform Amazon announced that it will temporarily impose a 3.5% fuel and logistics surcharge on third-party sellers in the United States and Canada; the U.S. Postal Service announced that it will levy a fuel surcharge on packages for the first time in history, with the rate reaching as high as 8%…

Dakin Van de Berg, an analyst at Vontier Life Insurance, said that the rise in energy prices triggered by the U.S.-Iran war scenario will affect every aspect of goods and services, effectively amounting to a “tax” on the American public. If the duration is short, consumers may still be able to “absorb” it using savings; if it lasts long, it will undermine consumer confidence and drag down economic growth.

“Double squeeze” on supply and demand

A report by the British Financial Times said that in the first quarter of this year, the trading volume of used electric vehicles in the United States increased rapidly. In addition to early lease-return vehicles flowing back into the market, the rise in sales of used electric vehicles largely stems from U.S. consumers “actively seeking to hedge” when facing rising energy prices, by adjusting their consumption structure to relieve some of the pressure that high inflation brings to daily life.

Some analysts said that the current U.S. economy is facing a “double squeeze” on supply and demand. On the one hand, the supply side faces broadly rising prices for energy, raw materials, and labor, with inflation running high, continuously pushing up companies’ operating costs. On the other hand, the demand side faces declining purchasing power, with large fluctuations in the number of orders, compressing companies’ gross margins.

The two pressures overlap, creating a vicious cycle—economic slowdown leads companies to shrink operations and reduce hiring, which dampens income growth; this in turn weakens consumer confidence, ultimately dragging down overall growth momentum.

Steve Miller, chair of the ISM Service Industries Business Survey Committee of the Institute for Supply Management in the United States, said that geopolitical tensions have replaced the tariffs previously imposed by the U.S. government as the biggest source of uncertainty for the U.S. economic development. While the United States has not yet escaped the inflation pressure caused by indiscriminate tariffs, the U.S.-Iran war scenario is again pushing the price level higher.

Some analysts believe that in an environment where there is insufficient动力 for economic growth, high inflation will significantly increase the difficulty of macroeconomic policy management and raise the risk of the U.S. economy sliding into “stagflation.”

“The skunk at the party”

Beth Hammack, president of the Federal Reserve Bank of Cleveland, currently has a rotating vote at the Federal Open Market Committee. In an interview with the media on April 6, Hammack said that given that the duration of the U.S.-Iran war scenario has already exceeded earlier expectations, if inflation continues to stay above the 2% goal, the Federal Reserve may be forced to maintain— or even further tighten—policy. The Cleveland Fed estimates that U.S. inflation in April could reach 3.5%, the highest point since 2024.

A survey organized in recent days by Wisdom Research Systems Co. showed that economists surveyed generally believe that the annualized inflation rate in the United States in March will rise significantly, possibly increasing from 2.4% in February to 3.1%, well above the Federal Reserve’s target. Many market observers expect that Federal Reserve policy may be “turning hawkish.”

“The skunk at the party!” JPMorgan Chase CEO Jamie Dimon used this metaphor to describe the inflation brought by the conflict—sudden and disappointing. He warned that fluctuations in energy and commodity prices could transmit throughout the entire economic system, forcing the Federal Reserve to maintain high interest rates for a longer period, thereby posing risks to the economy and financial system.

The market broadly believes that if interest rates remain high for a long time, it will drive up auto loan, mortgage, and credit card rates, increase borrowing costs for businesses, and further curb the recovery of the economy. Against a backdrop of stubbornly high inflation, the Federal Reserve faces a policy dilemma of “stuck between a rock and a hard place.”

Overall, the disruptions brought by the fighting in the Middle East are being transmitted to the U.S. economy through multiple channels, including energy, costs, and expectations. If the conflict continues, the “war tax” effects may become even more pronounced, intensifying the rebound against the U.S. economy at a deeper level.