1 00:00:00,320 --> 00:00:07,240 Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. 2 00:00:13,960 --> 00:00:17,160 Speaker 2: I'm Stephanie Flanders, head of Government and Economics at Bloomberg, 3 00:00:17,360 --> 00:00:20,400 Speaker 2: and this is Trumppernomics, the podcast that looks at the 4 00:00:20,440 --> 00:00:23,640 Speaker 2: economic world of Donald Trump, how he's already shaped the 5 00:00:23,680 --> 00:00:26,600 Speaker 2: global economy, what on earth is going to happen next? 6 00:00:30,800 --> 00:00:34,920 Speaker 2: This week, we're investigating the curious case of the everywhere 7 00:00:34,960 --> 00:00:37,839 Speaker 2: nowhere tariffs. For as long as Donald Trump has been 8 00:00:37,840 --> 00:00:40,720 Speaker 2: back in the White House, everybody has been talking about 9 00:00:40,840 --> 00:00:43,559 Speaker 2: his tariffs, and never more than on April second, when 10 00:00:43,600 --> 00:00:46,839 Speaker 2: he announced he was liberating the US economy by slapping 11 00:00:46,880 --> 00:00:50,479 Speaker 2: hefty trade levees on pretty much all of America's trading partners. 12 00:00:51,000 --> 00:00:53,600 Speaker 2: Since then, we've talked about the level of the tariffs, 13 00:00:53,760 --> 00:00:58,040 Speaker 2: the negotiations over bringing them down. Politicians and consumers have 14 00:00:58,080 --> 00:01:01,760 Speaker 2: also talked about how they are added to inflation, especially 15 00:01:01,760 --> 00:01:05,119 Speaker 2: in all those big arguments about affordability and the cost 16 00:01:05,120 --> 00:01:09,240 Speaker 2: of living before and after the recent US off year elections. 17 00:01:09,640 --> 00:01:13,280 Speaker 2: The President recently has himself seemed to admit that tariffs 18 00:01:13,280 --> 00:01:15,800 Speaker 2: on some key food products like beef and coffee were 19 00:01:15,880 --> 00:01:18,600 Speaker 2: pushing up costs for households, and he wanted to cut 20 00:01:18,680 --> 00:01:21,800 Speaker 2: them We've also waited to see how tariffs might hit 21 00:01:21,920 --> 00:01:26,319 Speaker 2: jobs and profits for American companies. But amid all this talk, 22 00:01:26,520 --> 00:01:28,680 Speaker 2: we've not seen a lot of real evidence of where 23 00:01:28,840 --> 00:01:32,440 Speaker 2: exactly the tariffs were hurting, and with the stock market 24 00:01:32,520 --> 00:01:36,440 Speaker 2: still booming, we've not heard many businesses admit that tariffs 25 00:01:36,440 --> 00:01:39,240 Speaker 2: were affecting their bottom line, though, as you'll hear later, 26 00:01:39,400 --> 00:01:43,160 Speaker 2: recent GDP revisions do suggest that US profits in the 27 00:01:43,200 --> 00:01:45,720 Speaker 2: second quarter of this year did fall off a cliff. 28 00:01:46,000 --> 00:01:49,160 Speaker 2: So who has paid for the tariffs, how have they 29 00:01:49,200 --> 00:01:52,720 Speaker 2: affected the US economy, and what's the evidence that they're 30 00:01:52,760 --> 00:01:57,600 Speaker 2: accomplishing any or all of the President's objectives, notably cutting 31 00:01:57,600 --> 00:02:03,800 Speaker 2: the trade deficit with China. They're the riddles we're hoping 32 00:02:03,880 --> 00:02:06,600 Speaker 2: to solve on today's show, and we've got two great 33 00:02:06,600 --> 00:02:08,520 Speaker 2: detectives to help us get to the bottom of it. 34 00:02:09,080 --> 00:02:12,120 Speaker 2: Senior fellow at the Council on Foreign Relations Brad Setzer 35 00:02:12,280 --> 00:02:14,680 Speaker 2: my old friend. He's an expert on global trade and 36 00:02:14,720 --> 00:02:17,880 Speaker 2: capital flows, and his regular blog on the CFL page 37 00:02:18,000 --> 00:02:21,480 Speaker 2: is called Follow the Money. We worked together approximately half 38 00:02:21,480 --> 00:02:23,639 Speaker 2: a million years ago, and unlike me, he then went 39 00:02:23,720 --> 00:02:26,360 Speaker 2: back to the US Treasury to be Deputy Assistant Secretary 40 00:02:26,440 --> 00:02:30,080 Speaker 2: for International Economics under President Obama. Brad, great to have 41 00:02:30,120 --> 00:02:31,359 Speaker 2: you finally on Trumponomics. 42 00:02:31,680 --> 00:02:33,560 Speaker 3: N's pleasure, and it wasn't that one. 43 00:02:34,960 --> 00:02:37,240 Speaker 2: We obviously both still look very youthful, but it makes 44 00:02:37,240 --> 00:02:38,040 Speaker 2: me feel old. 45 00:02:39,200 --> 00:02:40,240 Speaker 3: The illusion. 46 00:02:41,320 --> 00:02:44,399 Speaker 2: Also joining us as so often Anna Wong, chief US 47 00:02:44,440 --> 00:02:47,440 Speaker 2: Economists for Bloomberg Economics, and before this she worked at 48 00:02:47,480 --> 00:02:50,680 Speaker 2: the Federal Reserve, US Treasury and on so common at 49 00:02:50,720 --> 00:02:54,040 Speaker 2: the White House Council of Economic Advisors during Donald Trump's 50 00:02:54,080 --> 00:02:54,800 Speaker 2: first term. 51 00:02:55,120 --> 00:02:58,160 Speaker 1: Anna Hi Hi, I actually also worked for a Brad 52 00:02:58,200 --> 00:03:03,079 Speaker 1: Setser under Obama intration when he was Deputy Assistant Secretary. 53 00:03:03,080 --> 00:03:04,400 Speaker 1: He's my old past. 54 00:03:10,520 --> 00:03:13,959 Speaker 2: And let me start with you just remind us how 55 00:03:14,040 --> 00:03:18,800 Speaker 2: much the average or effective tariff rate on goods coming 56 00:03:18,840 --> 00:03:21,080 Speaker 2: into the US has gone up. You know, and we've 57 00:03:21,240 --> 00:03:24,280 Speaker 2: probably lost track of a lot of the negotiations and 58 00:03:24,320 --> 00:03:28,200 Speaker 2: where things are, but there has been a significant increase 59 00:03:28,560 --> 00:03:31,440 Speaker 2: in the level of tariffs to come into the US. 60 00:03:32,320 --> 00:03:37,560 Speaker 1: So the effective tariff rate is roughly around fourteen point 61 00:03:37,560 --> 00:03:42,360 Speaker 1: five percent, just roughly. Administration just announced some exemptions for 62 00:03:42,960 --> 00:03:47,400 Speaker 1: food imports last Friday, so that should knock off another 63 00:03:47,680 --> 00:03:50,760 Speaker 1: point two percentage point from that. So you can say 64 00:03:50,920 --> 00:03:53,240 Speaker 1: roughly around fourteen ish percent. 65 00:03:53,160 --> 00:03:55,040 Speaker 2: Memory, I think it was about two or three coming 66 00:03:55,040 --> 00:03:59,400 Speaker 2: into this administration, so it's a pretty significant increase. The 67 00:03:59,520 --> 00:04:01,960 Speaker 2: question I asked you last week is who is paying 68 00:04:01,960 --> 00:04:03,840 Speaker 2: for these tariffs? Where are we seeing it? 69 00:04:04,160 --> 00:04:07,200 Speaker 1: Yeah, so we look at all the data we have, 70 00:04:07,320 --> 00:04:11,200 Speaker 1: which is import prices, and you reconstruct a tariff inclusive 71 00:04:11,320 --> 00:04:14,920 Speaker 1: import price index. We also looked at PPI, We looked 72 00:04:14,920 --> 00:04:18,599 Speaker 1: at CPI. So taking all the information together, we have 73 00:04:18,720 --> 00:04:22,400 Speaker 1: come to this breakdown. It would be about four percent 74 00:04:22,520 --> 00:04:27,840 Speaker 1: of the price cost born by foreigners, seventy percent absorbed 75 00:04:27,880 --> 00:04:31,680 Speaker 1: by any kind of intermediate firms in the US, and 76 00:04:31,760 --> 00:04:36,200 Speaker 1: twenty six percent absorbed by US consumers through higher prices. 77 00:04:36,720 --> 00:04:38,720 Speaker 2: When you say it's that certain chunk of it has 78 00:04:38,760 --> 00:04:42,640 Speaker 2: been absorbed by consumers, that thirty percent we're seeing that 79 00:04:42,920 --> 00:04:43,680 Speaker 2: in prices. 80 00:04:44,839 --> 00:04:49,760 Speaker 1: Yes, So we estimate that CPI and core PCEE inflation 81 00:04:49,960 --> 00:04:54,200 Speaker 1: is a roughly zero point three percentage point higher than 82 00:04:54,320 --> 00:04:55,279 Speaker 1: it would have been. 83 00:04:55,320 --> 00:04:57,040 Speaker 3: Without those tariffs. 84 00:04:57,400 --> 00:05:00,920 Speaker 1: So most of those tariffs passed through are showing up 85 00:05:01,000 --> 00:05:07,160 Speaker 1: in core goods CPI, things like house appliances, washing machines, 86 00:05:07,360 --> 00:05:11,520 Speaker 1: or audio equipment, sports equipments. Those type of things. And 87 00:05:11,520 --> 00:05:15,159 Speaker 1: in fact, that point three percentage point addition on core 88 00:05:15,240 --> 00:05:19,279 Speaker 1: CPI and core pc inflation. That's quite similar to a 89 00:05:19,440 --> 00:05:22,159 Speaker 1: top down model from the FED too. So at the 90 00:05:22,200 --> 00:05:25,520 Speaker 1: FED we have this back of envelope model on the 91 00:05:25,920 --> 00:05:29,960 Speaker 1: impact of tariff. So a tariff hit similar to what 92 00:05:30,000 --> 00:05:34,080 Speaker 1: we see right now in total would have pushed inflation 93 00:05:34,240 --> 00:05:37,800 Speaker 1: up by one point one percentage one roughly there. According 94 00:05:37,839 --> 00:05:41,320 Speaker 1: to the FED model, if there's one hundred percent pass through, 95 00:05:41,800 --> 00:05:45,080 Speaker 1: So if there's point three or roughly thirty percent of 96 00:05:45,120 --> 00:05:48,039 Speaker 1: the pass through, then that corresponds to roughly point three 97 00:05:48,120 --> 00:05:51,800 Speaker 1: percentage point edition on CPI. And that's indeed what we 98 00:05:51,839 --> 00:05:55,719 Speaker 1: have seen in the year over year increase of core 99 00:05:55,960 --> 00:06:00,480 Speaker 1: good CPI. We have seen that went from naked zero 100 00:06:00,560 --> 00:06:04,600 Speaker 1: point one percent that's year over year core good CPI 101 00:06:05,200 --> 00:06:08,440 Speaker 1: to now one point five percent year over year. Now 102 00:06:08,480 --> 00:06:10,920 Speaker 1: that's a one point six percentage point swing. 103 00:06:11,880 --> 00:06:14,679 Speaker 2: And Brad just as we'll get into some of the details, 104 00:06:14,720 --> 00:06:17,000 Speaker 2: but just sort of sort of on the broad scope 105 00:06:17,040 --> 00:06:20,320 Speaker 2: of what Anna just said, that thirty percent is absorbed 106 00:06:20,320 --> 00:06:23,200 Speaker 2: by consumers, and then it looks like about sixty sixty 107 00:06:23,240 --> 00:06:27,120 Speaker 2: five percent by those kind of intermediate firms who have 108 00:06:27,200 --> 00:06:29,880 Speaker 2: to pay the tariff at the border. Is that roughly 109 00:06:30,000 --> 00:06:31,159 Speaker 2: how you would look at it. 110 00:06:32,279 --> 00:06:33,880 Speaker 3: I mean, more or less. Yeah, I think a lot 111 00:06:33,880 --> 00:06:34,960 Speaker 3: of estimates are. 112 00:06:34,880 --> 00:06:37,920 Speaker 4: Converging around similar numbers. You can just see from the 113 00:06:37,920 --> 00:06:41,640 Speaker 4: import price data that foreigners aren't paying it, so then 114 00:06:41,680 --> 00:06:43,800 Speaker 4: it's just a question of who's absorbing it in the 115 00:06:43,880 --> 00:06:46,880 Speaker 4: US economy. It has been a slight surprise that only 116 00:06:47,240 --> 00:06:50,200 Speaker 4: roughly a third looks like it's been passed on to consumers, 117 00:06:50,440 --> 00:06:53,760 Speaker 4: an unusually high fraction seems like it's been absorbed by 118 00:06:54,320 --> 00:06:56,359 Speaker 4: the supply chain, by intermediate importers. 119 00:06:56,680 --> 00:06:59,520 Speaker 2: I mean, obviously, Bloomberg, we are often listening in on 120 00:06:59,680 --> 00:07:04,240 Speaker 2: earning schools when companies are announcing their results. We're tracking 121 00:07:04,920 --> 00:07:08,720 Speaker 2: profits and earning revisions, and we're also keeping an eye 122 00:07:08,760 --> 00:07:10,480 Speaker 2: on the stock market, which seems to have been doing 123 00:07:10,520 --> 00:07:14,320 Speaker 2: pretty well. And even just in this recent earning season, 124 00:07:14,800 --> 00:07:18,280 Speaker 2: I seem to remember my colleagues talking about most companies 125 00:07:18,320 --> 00:07:22,760 Speaker 2: actually beating their expectations on profits. Maybe you first bad, 126 00:07:23,080 --> 00:07:26,200 Speaker 2: why do you think we're not hearing so much from 127 00:07:26,360 --> 00:07:29,240 Speaker 2: companies about having to pay these having to take these 128 00:07:29,320 --> 00:07:32,520 Speaker 2: higher prices or the tariffs in their margins. 129 00:07:33,840 --> 00:07:35,920 Speaker 4: Well, I mean sort of One of the ironies is 130 00:07:35,960 --> 00:07:39,480 Speaker 4: that the parts of the US economy that generate the superprofits, 131 00:07:39,960 --> 00:07:43,120 Speaker 4: you know, the tech sector, the pharmaceutical sector, they've been 132 00:07:43,240 --> 00:07:44,920 Speaker 4: entirely exempted from the tariffs. 133 00:07:45,280 --> 00:07:46,960 Speaker 3: Why wouldn't Nvidia be talking. 134 00:07:46,800 --> 00:07:49,720 Speaker 4: About it because there isn't yet a terraff chips. Why 135 00:07:49,800 --> 00:07:52,120 Speaker 4: is it not impact Advisor's bottom line? Well, there isn't 136 00:07:52,160 --> 00:07:54,960 Speaker 4: yet a tariff on pharmaceuticals, and we've had some kind 137 00:07:54,960 --> 00:07:59,960 Speaker 4: of crazy fluctuations in trade because of expected tariffs on pharmaceuticals. 138 00:08:00,440 --> 00:08:03,160 Speaker 4: But at the end of the day, the tariffs haven't 139 00:08:03,240 --> 00:08:05,800 Speaker 4: hit those sectors, and I guess in other cases you're 140 00:08:05,800 --> 00:08:10,520 Speaker 4: seeing offsetting shocks. Like a firmlike Caterpillar would normally feel 141 00:08:10,520 --> 00:08:13,680 Speaker 4: the impact of the steel tariffs would normally feel the 142 00:08:13,760 --> 00:08:16,800 Speaker 4: impact of higher tariffs on parts, but there's a lot 143 00:08:16,800 --> 00:08:19,480 Speaker 4: of demand for generators and for some of the equipment 144 00:08:19,560 --> 00:08:21,640 Speaker 4: used to make data centers, So you kind of end 145 00:08:21,720 --> 00:08:25,640 Speaker 4: up with offsetting shocks and don't have that clear impact 146 00:08:25,640 --> 00:08:27,760 Speaker 4: on the bottom line. That's the best I can do. 147 00:08:27,840 --> 00:08:30,040 Speaker 4: It is a bit of a mystery. It does not 148 00:08:30,160 --> 00:08:32,760 Speaker 4: feel like it's been fully passed on by consumers. We 149 00:08:32,880 --> 00:08:36,680 Speaker 4: know it hasn't been absorbed by importers, So it implicitly 150 00:08:36,800 --> 00:08:40,480 Speaker 4: has to be impacting someone's bottom line in those sectors 151 00:08:40,480 --> 00:08:41,280 Speaker 4: where there are tariffs. 152 00:08:41,760 --> 00:08:44,120 Speaker 2: And what's your sense of where that? I mean, if 153 00:08:44,160 --> 00:08:49,120 Speaker 2: you're saying sixty percent is being felt somewhere by corporate America. 154 00:08:49,360 --> 00:08:53,160 Speaker 2: Is this the little guy who's finding the getting squeezed 155 00:08:53,280 --> 00:08:55,600 Speaker 2: rather than these big companies we hear on the earning schools. 156 00:08:56,640 --> 00:09:00,280 Speaker 1: Yeah, so the stock market is not the economy. It's 157 00:09:00,360 --> 00:09:02,360 Speaker 1: very important to know that the S and P five 158 00:09:02,440 --> 00:09:05,560 Speaker 1: hundred only has about five hundred firms, but the total 159 00:09:05,679 --> 00:09:08,559 Speaker 1: US economy has about seven million firms. 160 00:09:08,679 --> 00:09:10,440 Speaker 2: You have that on your Twitter handle, date you more 161 00:09:10,559 --> 00:09:13,280 Speaker 2: or less you know common brackets. You know the stock 162 00:09:13,320 --> 00:09:16,160 Speaker 2: market is not the economy, and of. 163 00:09:16,080 --> 00:09:19,240 Speaker 1: Which ninety percent of those seven million firms have only 164 00:09:19,320 --> 00:09:23,359 Speaker 1: less than twenty employees. And most US firms don't export 165 00:09:23,440 --> 00:09:27,160 Speaker 1: at all either. And another very specific feature about the 166 00:09:27,240 --> 00:09:31,360 Speaker 1: stock listed companies is that in total, they generate thirty 167 00:09:31,400 --> 00:09:35,000 Speaker 1: percent of revenues from outside of the US. So offsetting 168 00:09:35,040 --> 00:09:39,160 Speaker 1: shocks include, for example, the dollar depreciation this year, and 169 00:09:39,200 --> 00:09:43,720 Speaker 1: that ten percent dollar depreciation had boosted the revenues form 170 00:09:43,760 --> 00:09:48,200 Speaker 1: revenues for those SMP five hundred firms. 171 00:09:47,920 --> 00:09:50,520 Speaker 2: So their profits abroad and suddenly if you're just measuring 172 00:09:50,559 --> 00:09:51,960 Speaker 2: it in the US, they're worth more. 173 00:09:52,520 --> 00:09:52,720 Speaker 3: Yes. 174 00:09:53,160 --> 00:09:56,280 Speaker 1: So if you want to look at the profit situation 175 00:09:56,440 --> 00:09:59,640 Speaker 1: in the rest of America, primarily these small businesses, we 176 00:09:59,760 --> 00:10:02,640 Speaker 1: have to look to the national accounts and there you 177 00:10:02,679 --> 00:10:05,760 Speaker 1: see a pretty clear evidence of profit hit. So the 178 00:10:05,800 --> 00:10:11,600 Speaker 1: second quarter GDP corporate profit was revised down significantly from 179 00:10:11,640 --> 00:10:15,920 Speaker 1: the first estimate of roughly sixty five billion to just 180 00:10:16,280 --> 00:10:17,360 Speaker 1: seven billion. 181 00:10:17,520 --> 00:10:21,319 Speaker 2: In the revised estimate, sixty five turned into seven. I 182 00:10:21,320 --> 00:10:23,160 Speaker 2: know it is in that particular bit of the national 183 00:10:23,200 --> 00:10:25,440 Speaker 2: accounts does sometimes jump around a lot, but is that 184 00:10:25,480 --> 00:10:26,320 Speaker 2: a big revision? 185 00:10:26,960 --> 00:10:28,080 Speaker 3: That is a big revision. 186 00:10:28,320 --> 00:10:31,760 Speaker 1: When you look at this the change of corporate profits 187 00:10:31,800 --> 00:10:34,880 Speaker 1: from the second quarter of twenty twenty five compared to 188 00:10:35,000 --> 00:10:38,040 Speaker 1: the end of twenty twenty four, you see that most 189 00:10:38,080 --> 00:10:42,400 Speaker 1: of that decline are in manufacturing sector, wholesale trade and 190 00:10:42,480 --> 00:10:47,400 Speaker 1: transportation warehousing, motor vehicles. So we are seeing at the 191 00:10:47,520 --> 00:10:51,400 Speaker 1: aggregate levels some kind of margin hits, but it's just 192 00:10:51,440 --> 00:10:53,000 Speaker 1: not showing up in the stock market. 193 00:10:53,600 --> 00:10:56,520 Speaker 2: That is a very striking number that the profits having 194 00:10:56,600 --> 00:10:58,439 Speaker 2: gone down for sixty five and a half to just 195 00:10:58,520 --> 00:11:01,920 Speaker 2: down the seven billion in the second quarter, And as 196 00:11:01,960 --> 00:11:05,840 Speaker 2: you pointed out, and there's evidence that it's the wholesale sector. 197 00:11:06,000 --> 00:11:08,040 Speaker 2: And when you look a bit deeper into the numbers, 198 00:11:08,480 --> 00:11:12,280 Speaker 2: are we then likely to see if the corporate sector 199 00:11:12,320 --> 00:11:14,440 Speaker 2: as a whole, even if it's these kind of smaller 200 00:11:14,480 --> 00:11:17,360 Speaker 2: businesses that are a little bit below the radar, if 201 00:11:17,360 --> 00:11:20,600 Speaker 2: they're the ones who are feeling the hit, are we 202 00:11:20,679 --> 00:11:23,120 Speaker 2: going to see that in jobs? Is there an economic 203 00:11:23,160 --> 00:11:25,800 Speaker 2: impact which we're still waiting to see from that? 204 00:11:26,760 --> 00:11:29,880 Speaker 1: Yeah, So I think we can always look at these 205 00:11:30,240 --> 00:11:34,520 Speaker 1: empirical data and then go back to the theoretical models 206 00:11:34,520 --> 00:11:37,280 Speaker 1: and think about evaluate how good or bad they are. 207 00:11:37,320 --> 00:11:40,959 Speaker 1: So going back to this FED model that internally the 208 00:11:41,120 --> 00:11:45,360 Speaker 1: Divisional of International Finance has on the impact of tariff. 209 00:11:45,640 --> 00:11:49,600 Speaker 1: In twenty eighteen, the FED staff ran assimilation on what 210 00:11:49,679 --> 00:11:53,920 Speaker 1: a fifteen percentage point tariff shock would do the unemployment 211 00:11:54,400 --> 00:11:57,600 Speaker 1: and the impact depends on whether the FED is looking 212 00:11:57,640 --> 00:12:01,360 Speaker 1: through the impact on prices. So I would say in 213 00:12:01,400 --> 00:12:04,680 Speaker 1: the current situation, the FED is looking through it somewhere 214 00:12:04,720 --> 00:12:09,000 Speaker 1: in between. So according to the lookthrough strategy, the unemployment 215 00:12:09,120 --> 00:12:11,880 Speaker 1: rate should be going up by about zero point three 216 00:12:12,000 --> 00:12:17,240 Speaker 1: two point five percentage points in the first year after 217 00:12:17,280 --> 00:12:20,920 Speaker 1: the shock, and I would say that's roughly where we are, 218 00:12:21,000 --> 00:12:24,640 Speaker 1: because when we start the year, the Wall Street consensus 219 00:12:24,679 --> 00:12:28,480 Speaker 1: for unemployment rate was about four point one at the 220 00:12:28,600 --> 00:12:31,720 Speaker 1: end of twenty twenty five, and now we're looking at 221 00:12:31,760 --> 00:12:36,200 Speaker 1: four point five. So in fact, these macro models are 222 00:12:36,240 --> 00:12:38,640 Speaker 1: performing okay, Brad. 223 00:12:38,679 --> 00:12:41,360 Speaker 2: If you're looking at the kind of overall impact of 224 00:12:41,400 --> 00:12:48,000 Speaker 2: these tarerts, they've obviously been very uncertain, unpredictable, and if 225 00:12:48,000 --> 00:12:50,559 Speaker 2: we were designing a trade policy, we'd probably want the 226 00:12:50,679 --> 00:12:52,520 Speaker 2: very least. We probably want something that was a bit 227 00:12:52,600 --> 00:12:56,840 Speaker 2: more stable and followed a slightly more predictable path. But 228 00:12:57,360 --> 00:13:01,319 Speaker 2: if you just were told that the effective tariff rate 229 00:13:01,360 --> 00:13:05,320 Speaker 2: had gone up from three percent to around fourteen percent 230 00:13:05,920 --> 00:13:08,199 Speaker 2: over the course of six to nine months, and then 231 00:13:08,240 --> 00:13:12,040 Speaker 2: you looked at these various economic indicators that change in 232 00:13:12,120 --> 00:13:14,959 Speaker 2: the openness of the US economy, do you think it's 233 00:13:14,960 --> 00:13:17,480 Speaker 2: had a less harmful impact than we might have predicted 234 00:13:17,520 --> 00:13:18,480 Speaker 2: at the beginning of the year. 235 00:13:19,679 --> 00:13:21,040 Speaker 3: Yeah, modestly less harmful. 236 00:13:21,040 --> 00:13:24,840 Speaker 4: I mean, largely because businesses have absorbed so much of 237 00:13:24,880 --> 00:13:27,760 Speaker 4: the one off shock, it hasn't been all felt by consumers, 238 00:13:28,280 --> 00:13:31,960 Speaker 4: and so consumers really haven't paired back spending on other goods. 239 00:13:32,480 --> 00:13:34,400 Speaker 4: Of course, part of it is also that other things 240 00:13:34,400 --> 00:13:37,960 Speaker 4: are happening. But for the tariffs, the big increase in 241 00:13:38,520 --> 00:13:41,679 Speaker 4: spending on data centers and all the investment in AI 242 00:13:41,840 --> 00:13:45,040 Speaker 4: might have been propelling the US economy quite forward at 243 00:13:45,040 --> 00:13:47,720 Speaker 4: a pretty fast clip. The strong run up in the 244 00:13:47,720 --> 00:13:50,760 Speaker 4: stock market is generating a wealth effect even now, and 245 00:13:50,800 --> 00:13:54,840 Speaker 4: that is also supporting household consumption. But all told, if 246 00:13:54,840 --> 00:13:57,920 Speaker 4: you said we've reincreased teriffs by a percentage point with 247 00:13:58,040 --> 00:14:01,719 Speaker 4: no offsetting policy changes, and at the end of that 248 00:14:02,040 --> 00:14:05,760 Speaker 4: six months consumer prices are only up thirty basis points, 249 00:14:05,960 --> 00:14:08,400 Speaker 4: that's a little smaller than I would have expected. Now, 250 00:14:08,400 --> 00:14:11,040 Speaker 4: I do think, and I think Jay Powell thinks as well, 251 00:14:11,360 --> 00:14:12,599 Speaker 4: that we're going to see a little bit of a 252 00:14:12,679 --> 00:14:14,679 Speaker 4: lagged increase in the price level. 253 00:14:14,960 --> 00:14:18,080 Speaker 3: But in aggregate, it was never at. 254 00:14:17,880 --> 00:14:20,400 Speaker 4: This level as opposed to the levels that came out 255 00:14:20,440 --> 00:14:23,600 Speaker 4: after Liberation Day. It was never at a level that 256 00:14:23,720 --> 00:14:25,960 Speaker 4: I thought was going to lead to a recession. In 257 00:14:26,040 --> 00:14:28,040 Speaker 4: order to get to a recession, you needed tariffs of 258 00:14:28,120 --> 00:14:31,840 Speaker 4: more like twenty percent two percentage points of GDP taken 259 00:14:31,840 --> 00:14:34,480 Speaker 4: out of the economy, and you needed no offsets, no 260 00:14:34,640 --> 00:14:37,640 Speaker 4: tax cuts to put money back in. And what we 261 00:14:37,720 --> 00:14:40,840 Speaker 4: have seen is a much compared to that giant shock, 262 00:14:41,480 --> 00:14:44,440 Speaker 4: a more manageable shock, and then there have been some offsets. 263 00:14:45,600 --> 00:14:47,760 Speaker 2: It's not easy. We talked about it before on the show. 264 00:14:47,800 --> 00:14:50,080 Speaker 2: It's pretty hard for politicians to raise taxes in the 265 00:14:50,080 --> 00:14:53,840 Speaker 2: current environment. But the President has raised these taxes and 266 00:14:53,880 --> 00:14:56,280 Speaker 2: he's made a bunch of revenues. 267 00:14:56,040 --> 00:14:57,840 Speaker 4: And then he's arguably paid a bit of a political 268 00:14:57,840 --> 00:15:00,240 Speaker 4: price for it. I mean, hence the fall in the 269 00:15:00,240 --> 00:15:03,400 Speaker 4: price of coffee, or the tariffy on coffee, hence the 270 00:15:03,760 --> 00:15:08,920 Speaker 4: decisions to exempt consumer goods that aren't made in the US. 271 00:15:08,640 --> 00:15:09,720 Speaker 3: From some of the tariffs. 272 00:15:10,080 --> 00:15:13,360 Speaker 4: Even if the aggregate impact has been somewhat more modest 273 00:15:13,400 --> 00:15:16,720 Speaker 4: than might have been initially expected, it still has impacted 274 00:15:16,760 --> 00:15:22,120 Speaker 4: certain very salient prices, and it certainly directionally has increased 275 00:15:22,160 --> 00:15:24,400 Speaker 4: the cost of living, which is an issue here as 276 00:15:24,440 --> 00:15:27,800 Speaker 4: you know. So I wouldn't say it's been politically costless. 277 00:15:28,120 --> 00:15:47,840 Speaker 4: It just hasn't pushed the economy off a generally growing trajectory. 278 00:15:49,040 --> 00:15:51,880 Speaker 2: Let's sort of change the focus a bit. I guess 279 00:15:51,880 --> 00:15:53,880 Speaker 2: we should also put in a health warning. Anyone who's 280 00:15:53,880 --> 00:15:56,680 Speaker 2: a dedicated listener will notice that we've resolutely not talked 281 00:15:56,680 --> 00:15:59,600 Speaker 2: about the possibility that half of these tariffs are going 282 00:15:59,640 --> 00:16:03,720 Speaker 2: to get unconstitutional by the Supreme Court. The principal reason 283 00:16:03,720 --> 00:16:06,800 Speaker 2: why we haven't talked about them is everybody else's, and 284 00:16:06,800 --> 00:16:09,080 Speaker 2: the slightly less principled is that we just thought every 285 00:16:09,120 --> 00:16:11,160 Speaker 2: time we did would be guarantee that the moment we 286 00:16:11,240 --> 00:16:13,040 Speaker 2: put it out there would be a decision that would 287 00:16:13,080 --> 00:16:16,720 Speaker 2: suddenly put everything in question. So when that happens, we 288 00:16:16,760 --> 00:16:19,200 Speaker 2: will get Brad and Anna back to talk about what 289 00:16:19,680 --> 00:16:23,000 Speaker 2: that means. But Brad, outside of China, I suspect you're 290 00:16:23,000 --> 00:16:26,640 Speaker 2: one of a handful of people who understands the Chinese 291 00:16:26,680 --> 00:16:30,480 Speaker 2: balance of payments, and you've often pointed to things that 292 00:16:30,560 --> 00:16:33,200 Speaker 2: people don't want to notice or would rather go away. 293 00:16:33,920 --> 00:16:37,200 Speaker 2: Of course, one of the key objectives of these tariffs 294 00:16:37,560 --> 00:16:41,680 Speaker 2: was to reduce the US trade deficit and encourage American 295 00:16:42,240 --> 00:16:46,000 Speaker 2: producers to make more in the US, encourage US consumers 296 00:16:46,000 --> 00:16:49,000 Speaker 2: to buy more American products. I mean, we obviously it 297 00:16:49,040 --> 00:16:52,800 Speaker 2: is early days, but how is that side of the 298 00:16:52,840 --> 00:16:54,960 Speaker 2: agenda going well? 299 00:16:55,040 --> 00:16:58,040 Speaker 4: I mean, unfortunately, there's really no impact that there's been 300 00:16:58,080 --> 00:17:02,120 Speaker 4: a reallocation of production to the United States. We're just 301 00:17:02,160 --> 00:17:06,600 Speaker 4: not seeing a boom in manufacturing, and not a boom 302 00:17:06,600 --> 00:17:09,320 Speaker 4: in the kind of manufacturing that was substitute for China. 303 00:17:09,800 --> 00:17:11,560 Speaker 3: So just zero evidence. 304 00:17:11,560 --> 00:17:14,040 Speaker 4: I would say that is happening again early, but zero 305 00:17:14,640 --> 00:17:18,679 Speaker 4: is the right number. There was a reallocation of final 306 00:17:18,720 --> 00:17:23,320 Speaker 4: assembly away from China to Southeast Asia in a quite 307 00:17:23,400 --> 00:17:26,399 Speaker 4: significant way, and also to Taiwan. If you look at 308 00:17:26,400 --> 00:17:28,760 Speaker 4: the latest trade numbers out of Taiwan, they're going up 309 00:17:28,840 --> 00:17:31,480 Speaker 4: like crazy, and that is a function at least in 310 00:17:31,560 --> 00:17:34,480 Speaker 4: part of doing your servers in Taiwan rather than finyal 311 00:17:34,520 --> 00:17:38,040 Speaker 4: assembly in China. The interesting thing is that after the 312 00:17:38,119 --> 00:17:42,400 Speaker 4: latest deal, the deal that was negotiated in Korea, the 313 00:17:42,440 --> 00:17:44,920 Speaker 4: base tariff on China is going to come down from 314 00:17:45,000 --> 00:17:48,919 Speaker 4: thirty to twenty. Now there's legacy tariffs on some goods 315 00:17:48,920 --> 00:17:52,439 Speaker 4: from the Trump one trade case, and in some cases 316 00:17:52,480 --> 00:17:54,440 Speaker 4: those are twenty five. In some cases those are seven 317 00:17:54,440 --> 00:17:56,720 Speaker 4: and a half, some cases those are zero. But for 318 00:17:56,920 --> 00:17:59,560 Speaker 4: most of the goods it's the new tariffs are either 319 00:17:59,560 --> 00:18:01,600 Speaker 4: going to be twenty seven and a half, which is high, 320 00:18:01,920 --> 00:18:04,840 Speaker 4: or twenty which is also high. But twenty is not 321 00:18:04,960 --> 00:18:08,840 Speaker 4: that different from the nineteen or twenty now facing Southeast Asia. 322 00:18:09,400 --> 00:18:11,280 Speaker 3: So structurally, I. 323 00:18:11,320 --> 00:18:13,359 Speaker 4: Think there was a lot of movement out of China 324 00:18:13,400 --> 00:18:17,000 Speaker 4: to do final assembly elsewhere in anticipation of a different 325 00:18:17,119 --> 00:18:21,119 Speaker 4: terra structure than has actually emerged. What has emerged, if 326 00:18:21,160 --> 00:18:23,879 Speaker 4: this sticks, is a terra structure that's too high on 327 00:18:23,960 --> 00:18:27,520 Speaker 4: Southeast Asia and too low on China to generate the 328 00:18:27,640 --> 00:18:30,760 Speaker 4: kind of reallocation away from China that you saw on 329 00:18:30,800 --> 00:18:34,520 Speaker 4: Trump's first term, and it's still too small, particularly with 330 00:18:34,600 --> 00:18:38,240 Speaker 4: the exchange rate moves, to get much production coming back 331 00:18:38,280 --> 00:18:38,720 Speaker 4: to the US. 332 00:18:38,800 --> 00:18:40,399 Speaker 2: That's really interesting. I mean, I think a lot of 333 00:18:40,560 --> 00:18:43,359 Speaker 2: fair amounted people will say it's pretty hard to just 334 00:18:43,440 --> 00:18:45,520 Speaker 2: quickly build a factory, and so we might not see 335 00:18:45,520 --> 00:18:47,720 Speaker 2: that physical production move. But I think if your main 336 00:18:47,760 --> 00:18:53,240 Speaker 2: goal is to wean the US off a particular right 337 00:18:53,359 --> 00:18:56,160 Speaker 2: liiance on China, and that's obviously been a goal that's 338 00:18:56,160 --> 00:18:59,159 Speaker 2: also carried through from the first Trump administration through the 339 00:18:59,200 --> 00:19:04,240 Speaker 2: Biden years, that is a very striking conclusion from the 340 00:19:04,400 --> 00:19:08,280 Speaker 2: recent trade deal, and actually some of our geoeconomists analysts 341 00:19:08,320 --> 00:19:10,639 Speaker 2: we're making the same point. It seems odd to be 342 00:19:11,200 --> 00:19:14,200 Speaker 2: in effect penalizing some of the countries that are trying 343 00:19:14,240 --> 00:19:16,639 Speaker 2: to compete with China, whose basket we might want to 344 00:19:16,640 --> 00:19:20,320 Speaker 2: put more eggs in. But anna the trade deficit is 345 00:19:20,359 --> 00:19:23,000 Speaker 2: there a sense? Is the composition of the trade deficit fit? 346 00:19:23,040 --> 00:19:26,160 Speaker 2: I mean, have we reduced the amount of imports coming 347 00:19:26,200 --> 00:19:27,879 Speaker 2: into the US with these tariffs? 348 00:19:28,960 --> 00:19:31,719 Speaker 1: I can offer a perspective on what these earning calls 349 00:19:31,760 --> 00:19:35,320 Speaker 1: are saying. So Bloomberg Economics and Bloomberg Intelligence have been 350 00:19:35,400 --> 00:19:39,040 Speaker 1: using AI extraction technology to extract all the TERRORFF related 351 00:19:39,119 --> 00:19:43,000 Speaker 1: quotes from the earnings transcripts so far, and what I 352 00:19:43,040 --> 00:19:45,840 Speaker 1: have seen is at number one, a theme that emerges. 353 00:19:46,000 --> 00:19:49,720 Speaker 1: As Brad said, there are many other offsetting things that's 354 00:19:49,840 --> 00:19:54,920 Speaker 1: happening outside of this tariff space that's helping beef up 355 00:19:55,000 --> 00:19:59,359 Speaker 1: the margins of firms like AI, and also deregulations on 356 00:19:59,480 --> 00:20:04,120 Speaker 1: environmental stuff on autos. However, the second most dominant theme, 357 00:20:04,160 --> 00:20:07,879 Speaker 1: I would say is how firms mitigate these tariff costs. 358 00:20:08,240 --> 00:20:13,400 Speaker 1: And I see a lot of firms mentioning sourcing more 359 00:20:13,440 --> 00:20:17,399 Speaker 1: efficient sourcing outside of China, and in fact, many of 360 00:20:17,440 --> 00:20:21,359 Speaker 1: these firms are projecting forward guidance saying that in twenty 361 00:20:21,480 --> 00:20:25,680 Speaker 1: twenty six their effective tariff rate would be lower. I mean, 362 00:20:25,720 --> 00:20:29,000 Speaker 1: regardless of what the statutory tarif rate is because many 363 00:20:29,040 --> 00:20:32,640 Speaker 1: of the supply chain mitigation strategies they put in this 364 00:20:32,720 --> 00:20:36,560 Speaker 1: year will be in full operation next year, and all 365 00:20:36,560 --> 00:20:40,399 Speaker 1: of it surrounds sourcing outside of China. And I looked 366 00:20:40,400 --> 00:20:43,159 Speaker 1: at those statements and I wonder, well, but what if 367 00:20:43,200 --> 00:20:47,920 Speaker 1: there's a US China deal that lower the Chinese tariff 368 00:20:48,240 --> 00:20:51,560 Speaker 1: and to below the Southeast Asian because many of these 369 00:20:51,800 --> 00:20:55,960 Speaker 1: mitigation strategy involved moving to Southeast Asia or to the 370 00:20:56,040 --> 00:21:01,400 Speaker 1: USMCA region. As of now, this positive pigure partly hinges 371 00:21:01,520 --> 00:21:04,520 Speaker 1: on these mitigation strategies. 372 00:21:04,920 --> 00:21:07,200 Speaker 2: That's interesting. They thought that was the one sure thing, 373 00:21:07,359 --> 00:21:09,080 Speaker 2: was that there would want to be a bit less 374 00:21:09,119 --> 00:21:11,000 Speaker 2: reliant on China, and then it turns out maybe they 375 00:21:11,000 --> 00:21:14,160 Speaker 2: didn't need it. I am kind of intrigued. He's been 376 00:21:14,280 --> 00:21:18,800 Speaker 2: so variable and unstable in his trade policies that you've 377 00:21:18,840 --> 00:21:21,359 Speaker 2: told us in the past. Producers were possibly not raising 378 00:21:21,400 --> 00:21:23,160 Speaker 2: prices because they thought, well, I might have to cut 379 00:21:23,160 --> 00:21:25,320 Speaker 2: prices again. You know, they may all go away in 380 00:21:25,359 --> 00:21:28,920 Speaker 2: a week's time. And at the same time, the threat 381 00:21:28,960 --> 00:21:31,640 Speaker 2: of tariffs or the reality of tariffs, was making them 382 00:21:31,680 --> 00:21:34,520 Speaker 2: do all these cost cutting things. If the tariffs then 383 00:21:34,600 --> 00:21:37,439 Speaker 2: go away, down the road, he would have helped increase 384 00:21:37,480 --> 00:21:39,120 Speaker 2: the efficiency of US business. 385 00:21:38,880 --> 00:21:43,000 Speaker 1: Right probably, But if the tariff were to suddenly go away, 386 00:21:43,200 --> 00:21:46,240 Speaker 1: for example with the Supreme Court ruling, it would be 387 00:21:46,320 --> 00:21:50,480 Speaker 1: super polish for the market. Because when you read these 388 00:21:50,760 --> 00:21:55,000 Speaker 1: earning transcripts, what struck me is that had there not 389 00:21:55,119 --> 00:21:58,960 Speaker 1: been tariffs, these profit margins would be through the roof. 390 00:21:59,200 --> 00:22:03,080 Speaker 1: Like even with tariffs, they're already talking about it being 391 00:22:03,200 --> 00:22:07,680 Speaker 1: really good, and even Ford and GM of these big 392 00:22:07,720 --> 00:22:10,639 Speaker 1: auto makers are talking about how they're finally getting to 393 00:22:10,800 --> 00:22:13,840 Speaker 1: margins of eight to ten percent, and the auto sector 394 00:22:13,880 --> 00:22:14,720 Speaker 1: is so resilient. 395 00:22:14,800 --> 00:22:15,520 Speaker 3: In fact, for. 396 00:22:15,600 --> 00:22:20,560 Speaker 1: Them, the tariff is creating domestic protectionalism, I mean, which 397 00:22:20,600 --> 00:22:24,120 Speaker 1: is benefiting them from their perspective, even though it does 398 00:22:24,200 --> 00:22:26,840 Speaker 1: create a more than one billion tariff costs for some 399 00:22:26,880 --> 00:22:30,640 Speaker 1: of these auto firms. But the original intent of tariff 400 00:22:30,800 --> 00:22:35,359 Speaker 1: is domestic protectionalism, and some firms, for example in auto 401 00:22:35,440 --> 00:22:38,600 Speaker 1: and steel sectors, are seeing some of that. 402 00:22:39,200 --> 00:22:42,320 Speaker 2: Brad quite a lot of voters for Donald Trump thought 403 00:22:42,359 --> 00:22:46,440 Speaker 2: this was just about buying fewer goods from the rest 404 00:22:46,440 --> 00:22:49,760 Speaker 2: of the world, and we have made those goods more 405 00:22:49,800 --> 00:22:53,440 Speaker 2: expensive to some degree, have we reduced the amount coming 406 00:22:53,520 --> 00:22:57,080 Speaker 2: into the country we have the tariffs reduced the number 407 00:22:57,080 --> 00:22:58,520 Speaker 2: of imports coming into the country. 408 00:22:58,680 --> 00:23:00,560 Speaker 4: I'll start with a dodge in the come back and 409 00:23:00,600 --> 00:23:03,760 Speaker 4: actually answer the question. The dodges of course we lack 410 00:23:03,840 --> 00:23:06,119 Speaker 4: trade data for the past two months because the government. 411 00:23:07,560 --> 00:23:11,680 Speaker 4: The correct answer is that so far the trade deficit 412 00:23:11,720 --> 00:23:14,960 Speaker 4: has not gone down. And then the further component of 413 00:23:14,960 --> 00:23:17,680 Speaker 4: that answer is we've had some of the most crazy 414 00:23:17,720 --> 00:23:21,600 Speaker 4: swings in the trade data in human history, tied to 415 00:23:21,800 --> 00:23:24,400 Speaker 4: swings in products that didn't end up having any tariffs. 416 00:23:24,680 --> 00:23:27,080 Speaker 4: So we have this huge surgeon gold imports in the 417 00:23:27,080 --> 00:23:30,159 Speaker 4: first quarter because everybody was afraid that gold was going 418 00:23:30,200 --> 00:23:32,840 Speaker 4: to get tariffed. Well, guess what, Gold didn't get hit 419 00:23:32,880 --> 00:23:35,439 Speaker 4: by any tariffs, and now some of that gold's flying 420 00:23:35,520 --> 00:23:39,040 Speaker 4: out of the US back to London. People were terrified 421 00:23:39,080 --> 00:23:41,960 Speaker 4: that the high value added pharmaceuticals were going to be 422 00:23:42,040 --> 00:23:44,800 Speaker 4: tariffed and that was going to undermine all these tax 423 00:23:44,840 --> 00:23:48,320 Speaker 4: efficient supply chains ie produced in Ireland to avoid payan 424 00:23:48,440 --> 00:23:52,199 Speaker 4: US corporate income tax. So you have gigantic quantities, not 425 00:23:52,280 --> 00:23:57,680 Speaker 4: big quantities physically, but valueized, crazy numbers of pharmaceuticals coming 426 00:23:57,720 --> 00:24:00,600 Speaker 4: into the US in the first quarter and so forth. 427 00:24:01,040 --> 00:24:02,240 Speaker 3: That turned out not. 428 00:24:02,240 --> 00:24:05,840 Speaker 4: To be necessary because pharmaceutical companies are doing deals. 429 00:24:06,600 --> 00:24:08,920 Speaker 3: Who knows quite what's going to happen with those deals. 430 00:24:09,000 --> 00:24:11,400 Speaker 4: Maybe they'll be more fill and finish, but the net 431 00:24:11,440 --> 00:24:15,080 Speaker 4: effect was you had these giant swings and distortions with 432 00:24:15,359 --> 00:24:19,280 Speaker 4: no actual tariff being imposed. When you look through that, 433 00:24:19,720 --> 00:24:22,840 Speaker 4: imports are not really down. And when you look further 434 00:24:23,000 --> 00:24:25,639 Speaker 4: through that, I think you'll see that imports in some 435 00:24:25,880 --> 00:24:29,359 Speaker 4: sectors that have been heavily tariffed, like autos, are a 436 00:24:29,359 --> 00:24:33,439 Speaker 4: little down, and then imports in sectors that are tied 437 00:24:33,480 --> 00:24:38,960 Speaker 4: to capital expenditure in data centers and so forth, and 438 00:24:39,000 --> 00:24:42,040 Speaker 4: which have not been heavily tariffed are up and up 439 00:24:42,080 --> 00:24:45,879 Speaker 4: a lot. So the aggregate will mask a lot of 440 00:24:45,880 --> 00:24:50,320 Speaker 4: different stories. But we're not currently trending towards a smaller deficit. 441 00:24:50,880 --> 00:24:52,760 Speaker 4: I think there's a lot of reasons for that, one 442 00:24:52,800 --> 00:24:56,160 Speaker 4: of which is that a big boom in capital expenditures 443 00:24:56,200 --> 00:24:59,959 Speaker 4: normally pulls and imports, and we still rely on imported chips. 444 00:25:00,080 --> 00:25:03,439 Speaker 4: The build out of TSMC and Arizona's taken time, and 445 00:25:03,520 --> 00:25:05,920 Speaker 4: so you know, you really are seeing big increases in 446 00:25:06,000 --> 00:25:09,359 Speaker 4: imports in those categories, and I fully expect that to 447 00:25:09,400 --> 00:25:11,600 Speaker 4: be the dominant theme of the second half and the 448 00:25:11,640 --> 00:25:16,879 Speaker 4: trade data once we get the data, just on this reallocation. 449 00:25:17,680 --> 00:25:20,880 Speaker 4: For a firm like Apple, the fentanyl tariff which used 450 00:25:20,880 --> 00:25:23,800 Speaker 4: to be twenty percent and now ten that was hitting 451 00:25:23,880 --> 00:25:27,760 Speaker 4: them because the fentanyl tariff didn't have any exclusions. For 452 00:25:27,840 --> 00:25:31,359 Speaker 4: the reciprocal tariff, which was the tariff on everybody else, 453 00:25:31,760 --> 00:25:35,520 Speaker 4: you had an electronics and semiconductor's exclusion. Now that electronics 454 00:25:35,560 --> 00:25:40,399 Speaker 4: and semiconductctor exclusion did not include game stations. We are 455 00:25:40,480 --> 00:25:42,960 Speaker 4: kind of weird and arbitrary and where you draw the limit. 456 00:25:43,119 --> 00:25:47,040 Speaker 4: And that's true across the board. So Apple's mitigation strategy 457 00:25:47,640 --> 00:25:50,560 Speaker 4: would just be get out of China. For some others, 458 00:25:50,600 --> 00:25:54,200 Speaker 4: your mitigation strategy was initially to go to Southeast Asia 459 00:25:54,240 --> 00:25:57,400 Speaker 4: because it was much lower ten than on China. That 460 00:25:57,440 --> 00:26:00,720 Speaker 4: mitigation strategy may not work as well going forward, and 461 00:26:00,800 --> 00:26:04,359 Speaker 4: your next mitigation strategies final assembly in Mexico or Central 462 00:26:04,400 --> 00:26:09,199 Speaker 4: America where you have very strong exclusions, presuming that the 463 00:26:09,280 --> 00:26:13,159 Speaker 4: USMCA renegotiation doesn't change things. To me, one of the 464 00:26:13,200 --> 00:26:16,840 Speaker 4: surprises though, is that in the macro data, you would 465 00:26:16,840 --> 00:26:19,240 Speaker 4: think all this policy uncertainty would have had a bigger 466 00:26:19,240 --> 00:26:23,760 Speaker 4: impact and you really just don't see the policy uncertainty 467 00:26:23,800 --> 00:26:27,119 Speaker 4: impact yet. But it really has made life difficult for 468 00:26:27,160 --> 00:26:29,320 Speaker 4: a lot of firms. And I mean it's made life 469 00:26:29,359 --> 00:26:31,159 Speaker 4: difficult for a lot of analysts. I always put a 470 00:26:31,240 --> 00:26:34,360 Speaker 4: star next to the estimates of the effective teriff rate 471 00:26:34,440 --> 00:26:40,000 Speaker 4: because some tack, some tariffs don't stack, there are exclusions, 472 00:26:40,040 --> 00:26:41,160 Speaker 4: there are rebates. 473 00:26:41,560 --> 00:26:43,320 Speaker 3: It has become insanely complex. 474 00:26:44,320 --> 00:26:47,520 Speaker 2: Anna, I guess all these things always have to come 475 00:26:47,600 --> 00:26:50,199 Speaker 2: back to the FED. You said yourself their model for 476 00:26:50,240 --> 00:26:52,680 Speaker 2: thinking about things and the effect of tariffs was sort 477 00:26:52,720 --> 00:26:57,639 Speaker 2: of broadly holding up the fact that consumers are taking 478 00:26:57,680 --> 00:27:01,040 Speaker 2: about a third of this on the chin and then 479 00:27:01,080 --> 00:27:04,360 Speaker 2: you're seeing the rest in various ways in the corporate America, 480 00:27:04,480 --> 00:27:07,280 Speaker 2: but it's not really as obvious because there's so much 481 00:27:07,280 --> 00:27:11,520 Speaker 2: stuff going on. Does that affect how they might be 482 00:27:11,560 --> 00:27:14,880 Speaker 2: thinking about inflation coming down the track? I mean, one 483 00:27:14,880 --> 00:27:17,439 Speaker 2: thing I heard you say was maybe there isn't this 484 00:27:17,520 --> 00:27:19,800 Speaker 2: isn't a lagged effect. We may have seen most of 485 00:27:19,800 --> 00:27:21,440 Speaker 2: what we're going to see, Is that right? 486 00:27:21,960 --> 00:27:22,560 Speaker 3: Yeah? 487 00:27:22,720 --> 00:27:26,080 Speaker 1: I think what we are seeing right now reflect well 488 00:27:26,200 --> 00:27:29,640 Speaker 1: one of the model's forecasts. It's not the same result 489 00:27:29,840 --> 00:27:33,480 Speaker 1: as what the Fed's research has been saying earlier this year, 490 00:27:33,560 --> 00:27:36,760 Speaker 1: but it matches the result of one particular model from 491 00:27:36,840 --> 00:27:40,280 Speaker 1: twenty eighteen, which is most of it would be absorbed 492 00:27:40,280 --> 00:27:42,920 Speaker 1: by firms and hence there will be the hit would 493 00:27:42,920 --> 00:27:45,320 Speaker 1: be on the labor market. So at the end of 494 00:27:45,359 --> 00:27:50,439 Speaker 1: the day, the US economy is mostly a service driven economy. 495 00:27:50,600 --> 00:27:52,160 Speaker 3: You look at the CPI. 496 00:27:51,800 --> 00:27:56,879 Speaker 1: Index, about three quarters are services sectors, only a quarters 497 00:27:57,119 --> 00:28:00,159 Speaker 1: goods sector. Also, if you look at it from the 498 00:28:00,240 --> 00:28:04,680 Speaker 1: income perspective, two thirds of the US is labor share, 499 00:28:04,880 --> 00:28:08,600 Speaker 1: the rest is capital share. So what will happen to 500 00:28:08,760 --> 00:28:13,639 Speaker 1: inflation in the next twelve months, importantly will be driven 501 00:28:13,800 --> 00:28:17,160 Speaker 1: by the labor market. And there are so many things 502 00:28:17,240 --> 00:28:20,520 Speaker 1: that's heading the labor market. Aside from tariff there's also 503 00:28:20,600 --> 00:28:25,119 Speaker 1: the issue of is AI reducing hiring, which is another 504 00:28:25,640 --> 00:28:29,800 Speaker 1: almost as big as an issue as a driver as tariffs. 505 00:28:29,800 --> 00:28:33,000 Speaker 1: And my answer to that is, I think both tariffs 506 00:28:33,040 --> 00:28:37,119 Speaker 1: and AI point toward the direction of a drag, a 507 00:28:37,160 --> 00:28:40,080 Speaker 1: major drag to the labor market. If I were the FED, 508 00:28:40,520 --> 00:28:42,840 Speaker 1: I would be more worried about downside risks to the 509 00:28:42,880 --> 00:28:43,520 Speaker 1: labor market. 510 00:28:44,000 --> 00:28:48,200 Speaker 2: Right. So my takeaway from this is just because we 511 00:28:48,240 --> 00:28:51,640 Speaker 2: did promise we would sort of answer those riddles that 512 00:28:51,720 --> 00:28:56,520 Speaker 2: I posed at the start questions households. We see and 513 00:28:56,640 --> 00:29:00,520 Speaker 2: hear people talking about affordability and high cost of things. 514 00:29:00,880 --> 00:29:03,080 Speaker 2: They are clearly feeling the pain, and some of that 515 00:29:03,280 --> 00:29:06,400 Speaker 2: is about tariffs, but there's an awful lot of other 516 00:29:06,440 --> 00:29:10,760 Speaker 2: things that are affecting their costs and their outlook. Corporate 517 00:29:10,760 --> 00:29:14,360 Speaker 2: America paying about two thirds of the tariffs. It's not 518 00:29:14,400 --> 00:29:19,720 Speaker 2: being paid by foreign exporters. But there's so much other 519 00:29:19,760 --> 00:29:24,400 Speaker 2: good news in corporate America now with AI and other 520 00:29:24,480 --> 00:29:27,719 Speaker 2: things that the bad news associated with tariffs is literally 521 00:29:27,800 --> 00:29:29,920 Speaker 2: getting lost in the mix. So I guess that might 522 00:29:29,920 --> 00:29:31,960 Speaker 2: take aways that they tarifs are a lot easier to 523 00:29:32,000 --> 00:29:34,800 Speaker 2: talk about than to find in the real life economy. 524 00:29:35,080 --> 00:29:38,560 Speaker 2: Anna Wong, Brad Setter, thank you so much, thank you, 525 00:29:39,120 --> 00:29:53,360 Speaker 2: thank you, thanks for listening to Trumpnomics from Bloomberg. It 526 00:29:53,400 --> 00:29:55,880 Speaker 2: was hosted by me Stephanie Flanders, and I was joined 527 00:29:55,880 --> 00:29:59,280 Speaker 2: by Brad Setter, Senior fellow at the Council of Foreign Relations, 528 00:30:00,160 --> 00:30:04,520 Speaker 2: what Chief US economist for Bloomberg Economics. Trumponomics was produced 529 00:30:04,520 --> 00:30:07,760 Speaker 2: by Samasadi and Moses and with help from Amy Keen. 530 00:30:08,480 --> 00:30:11,640 Speaker 2: Sound design was by Blake Maples. And Kelly Gary and 531 00:30:11,760 --> 00:30:15,400 Speaker 2: Sage Bowman is Bloomberg's head of podcasts, and to help 532 00:30:15,400 --> 00:30:18,720 Speaker 2: others find us and enjoy us, please rate and review 533 00:30:18,760 --> 00:30:20,800 Speaker 2: it highly wherever you listen to podcasts.