WEBVTT - How Trump’s Tariffs Are Everywhere and Nowhere 0:00:00.320 --> 0:00:07.240 Bloomberg Audio Studios, Podcasts, radio news. 0:00:13.960 --> 0:00:17.160 I'm Stephanie Flanders, head of Government and Economics at Bloomberg, 0:00:17.360 --> 0:00:20.400 and this is Trumppernomics, the podcast that looks at the 0:00:20.440 --> 0:00:23.640 economic world of Donald Trump, how he's already shaped the 0:00:23.680 --> 0:00:26.600 global economy, what on earth is going to happen next? 0:00:30.800 --> 0:00:34.920 This week, we're investigating the curious case of the everywhere 0:00:34.960 --> 0:00:37.839 nowhere tariffs. For as long as Donald Trump has been 0:00:37.840 --> 0:00:40.720 back in the White House, everybody has been talking about 0:00:40.840 --> 0:00:43.559 his tariffs, and never more than on April second, when 0:00:43.600 --> 0:00:46.839 he announced he was liberating the US economy by slapping 0:00:46.880 --> 0:00:50.479 hefty trade levees on pretty much all of America's trading partners. 0:00:51.000 --> 0:00:53.600 Since then, we've talked about the level of the tariffs, 0:00:53.760 --> 0:00:58.040 the negotiations over bringing them down. Politicians and consumers have 0:00:58.080 --> 0:01:01.760 also talked about how they are added to inflation, especially 0:01:01.760 --> 0:01:05.119 in all those big arguments about affordability and the cost 0:01:05.120 --> 0:01:09.240 of living before and after the recent US off year elections. 0:01:09.640 --> 0:01:13.280 The President recently has himself seemed to admit that tariffs 0:01:13.280 --> 0:01:15.800 on some key food products like beef and coffee were 0:01:15.880 --> 0:01:18.600 pushing up costs for households, and he wanted to cut 0:01:18.680 --> 0:01:21.800 them We've also waited to see how tariffs might hit 0:01:21.920 --> 0:01:26.319 jobs and profits for American companies. But amid all this talk, 0:01:26.520 --> 0:01:28.680 we've not seen a lot of real evidence of where 0:01:28.840 --> 0:01:32.440 exactly the tariffs were hurting, and with the stock market 0:01:32.520 --> 0:01:36.440 still booming, we've not heard many businesses admit that tariffs 0:01:36.440 --> 0:01:39.240 were affecting their bottom line, though, as you'll hear later, 0:01:39.400 --> 0:01:43.160 recent GDP revisions do suggest that US profits in the 0:01:43.200 --> 0:01:45.720 second quarter of this year did fall off a cliff. 0:01:46.000 --> 0:01:49.160 So who has paid for the tariffs, how have they 0:01:49.200 --> 0:01:52.720 affected the US economy, and what's the evidence that they're 0:01:52.760 --> 0:01:57.600 accomplishing any or all of the President's objectives, notably cutting 0:01:57.600 --> 0:02:03.800 the trade deficit with China. They're the riddles we're hoping 0:02:03.880 --> 0:02:06.600 to solve on today's show, and we've got two great 0:02:06.600 --> 0:02:08.520 detectives to help us get to the bottom of it. 0:02:09.080 --> 0:02:12.120 Senior fellow at the Council on Foreign Relations Brad Setzer 0:02:12.280 --> 0:02:14.680 my old friend. He's an expert on global trade and 0:02:14.720 --> 0:02:17.880 capital flows, and his regular blog on the CFL page 0:02:18.000 --> 0:02:21.480 is called Follow the Money. We worked together approximately half 0:02:21.480 --> 0:02:23.639 a million years ago, and unlike me, he then went 0:02:23.720 --> 0:02:26.360 back to the US Treasury to be Deputy Assistant Secretary 0:02:26.440 --> 0:02:30.080 for International Economics under President Obama. Brad, great to have 0:02:30.120 --> 0:02:31.359 you finally on Trumponomics. 0:02:31.680 --> 0:02:33.560 N's pleasure, and it wasn't that one. 0:02:34.960 --> 0:02:37.240 We obviously both still look very youthful, but it makes 0:02:37.240 --> 0:02:38.040 me feel old. 0:02:39.200 --> 0:02:40.240 The illusion. 0:02:41.320 --> 0:02:44.399 Also joining us as so often Anna Wong, chief US 0:02:44.440 --> 0:02:47.440 Economists for Bloomberg Economics, and before this she worked at 0:02:47.480 --> 0:02:50.680 the Federal Reserve, US Treasury and on so common at 0:02:50.720 --> 0:02:54.040 the White House Council of Economic Advisors during Donald Trump's 0:02:54.080 --> 0:02:54.800 first term. 0:02:55.120 --> 0:02:58.160 Anna Hi Hi, I actually also worked for a Brad 0:02:58.200 --> 0:03:03.079 Setser under Obama intration when he was Deputy Assistant Secretary. 0:03:03.080 --> 0:03:04.400 He's my old past. 0:03:10.520 --> 0:03:13.959 And let me start with you just remind us how 0:03:14.040 --> 0:03:18.800 much the average or effective tariff rate on goods coming 0:03:18.840 --> 0:03:21.080 into the US has gone up. You know, and we've 0:03:21.240 --> 0:03:24.280 probably lost track of a lot of the negotiations and 0:03:24.320 --> 0:03:28.200 where things are, but there has been a significant increase 0:03:28.560 --> 0:03:31.440 in the level of tariffs to come into the US. 0:03:32.320 --> 0:03:37.560 So the effective tariff rate is roughly around fourteen point 0:03:37.560 --> 0:03:42.360 five percent, just roughly. Administration just announced some exemptions for 0:03:42.960 --> 0:03:47.400 food imports last Friday, so that should knock off another 0:03:47.680 --> 0:03:50.760 point two percentage point from that. So you can say 0:03:50.920 --> 0:03:53.240 roughly around fourteen ish percent. 0:03:53.160 --> 0:03:55.040 Memory, I think it was about two or three coming 0:03:55.040 --> 0:03:59.400 into this administration, so it's a pretty significant increase. The 0:03:59.520 --> 0:04:01.960 question I asked you last week is who is paying 0:04:01.960 --> 0:04:03.840 for these tariffs? Where are we seeing it? 0:04:04.160 --> 0:04:07.200 Yeah, so we look at all the data we have, 0:04:07.320 --> 0:04:11.200 which is import prices, and you reconstruct a tariff inclusive 0:04:11.320 --> 0:04:14.920 import price index. We also looked at PPI, We looked 0:04:14.920 --> 0:04:18.599 at CPI. So taking all the information together, we have 0:04:18.720 --> 0:04:22.400 come to this breakdown. It would be about four percent 0:04:22.520 --> 0:04:27.840 of the price cost born by foreigners, seventy percent absorbed 0:04:27.880 --> 0:04:31.680 by any kind of intermediate firms in the US, and 0:04:31.760 --> 0:04:36.200 twenty six percent absorbed by US consumers through higher prices. 0:04:36.720 --> 0:04:38.720 When you say it's that certain chunk of it has 0:04:38.760 --> 0:04:42.640 been absorbed by consumers, that thirty percent we're seeing that 0:04:42.920 --> 0:04:43.680 in prices. 0:04:44.839 --> 0:04:49.760 Yes, So we estimate that CPI and core PCEE inflation 0:04:49.960 --> 0:04:54.200 is a roughly zero point three percentage point higher than 0:04:54.320 --> 0:04:55.279 it would have been. 0:04:55.320 --> 0:04:57.040 Without those tariffs. 0:04:57.400 --> 0:05:00.920 So most of those tariffs passed through are showing up 0:05:01.000 --> 0:05:07.160 in core goods CPI, things like house appliances, washing machines, 0:05:07.360 --> 0:05:11.520 or audio equipment, sports equipments. Those type of things. And 0:05:11.520 --> 0:05:15.159 in fact, that point three percentage point addition on core 0:05:15.240 --> 0:05:19.279 CPI and core pc inflation. That's quite similar to a 0:05:19.440 --> 0:05:22.159 top down model from the FED too. So at the 0:05:22.200 --> 0:05:25.520 FED we have this back of envelope model on the 0:05:25.920 --> 0:05:29.960 impact of tariff. So a tariff hit similar to what 0:05:30.000 --> 0:05:34.080 we see right now in total would have pushed inflation 0:05:34.240 --> 0:05:37.800 up by one point one percentage one roughly there. According 0:05:37.839 --> 0:05:41.320 to the FED model, if there's one hundred percent pass through, 0:05:41.800 --> 0:05:45.080 So if there's point three or roughly thirty percent of 0:05:45.120 --> 0:05:48.039 the pass through, then that corresponds to roughly point three 0:05:48.120 --> 0:05:51.800 percentage point edition on CPI. And that's indeed what we 0:05:51.839 --> 0:05:55.719 have seen in the year over year increase of core 0:05:55.960 --> 0:06:00.480 good CPI. We have seen that went from naked zero 0:06:00.560 --> 0:06:04.600 point one percent that's year over year core good CPI 0:06:05.200 --> 0:06:08.440 to now one point five percent year over year. Now 0:06:08.480 --> 0:06:10.920 that's a one point six percentage point swing. 0:06:11.880 --> 0:06:14.679 And Brad just as we'll get into some of the details, 0:06:14.720 --> 0:06:17.000 but just sort of sort of on the broad scope 0:06:17.040 --> 0:06:20.320 of what Anna just said, that thirty percent is absorbed 0:06:20.320 --> 0:06:23.200 by consumers, and then it looks like about sixty sixty 0:06:23.240 --> 0:06:27.120 five percent by those kind of intermediate firms who have 0:06:27.200 --> 0:06:29.880 to pay the tariff at the border. Is that roughly 0:06:30.000 --> 0:06:31.159 how you would look at it. 0:06:32.279 --> 0:06:33.880 I mean, more or less. Yeah, I think a lot 0:06:33.880 --> 0:06:34.960 of estimates are. 0:06:34.880 --> 0:06:37.920 Converging around similar numbers. You can just see from the 0:06:37.920 --> 0:06:41.640 import price data that foreigners aren't paying it, so then 0:06:41.680 --> 0:06:43.800 it's just a question of who's absorbing it in the 0:06:43.880 --> 0:06:46.880 US economy. It has been a slight surprise that only 0:06:47.240 --> 0:06:50.200 roughly a third looks like it's been passed on to consumers, 0:06:50.440 --> 0:06:53.760 an unusually high fraction seems like it's been absorbed by 0:06:54.320 --> 0:06:56.359 the supply chain, by intermediate importers. 0:06:56.680 --> 0:06:59.520 I mean, obviously, Bloomberg, we are often listening in on 0:06:59.680 --> 0:07:04.240 earning schools when companies are announcing their results. We're tracking 0:07:04.920 --> 0:07:08.720 profits and earning revisions, and we're also keeping an eye 0:07:08.760 --> 0:07:10.480 on the stock market, which seems to have been doing 0:07:10.520 --> 0:07:14.320 pretty well. And even just in this recent earning season, 0:07:14.800 --> 0:07:18.280 I seem to remember my colleagues talking about most companies 0:07:18.320 --> 0:07:22.760 actually beating their expectations on profits. Maybe you first bad, 0:07:23.080 --> 0:07:26.200 why do you think we're not hearing so much from 0:07:26.360 --> 0:07:29.240 companies about having to pay these having to take these 0:07:29.320 --> 0:07:32.520 higher prices or the tariffs in their margins. 0:07:33.840 --> 0:07:35.920 Well, I mean sort of One of the ironies is 0:07:35.960 --> 0:07:39.480 that the parts of the US economy that generate the superprofits, 0:07:39.960 --> 0:07:43.120 you know, the tech sector, the pharmaceutical sector, they've been 0:07:43.240 --> 0:07:44.920 entirely exempted from the tariffs. 0:07:45.280 --> 0:07:46.960 Why wouldn't Nvidia be talking. 0:07:46.800 --> 0:07:49.720 About it because there isn't yet a terraff chips. Why 0:07:49.800 --> 0:07:52.120 is it not impact Advisor's bottom line? Well, there isn't 0:07:52.160 --> 0:07:54.960 yet a tariff on pharmaceuticals, and we've had some kind 0:07:54.960 --> 0:07:59.960 of crazy fluctuations in trade because of expected tariffs on pharmaceuticals. 0:08:00.440 --> 0:08:03.160 But at the end of the day, the tariffs haven't 0:08:03.240 --> 0:08:05.800 hit those sectors, and I guess in other cases you're 0:08:05.800 --> 0:08:10.520 seeing offsetting shocks. Like a firmlike Caterpillar would normally feel 0:08:10.520 --> 0:08:13.680 the impact of the steel tariffs would normally feel the 0:08:13.760 --> 0:08:16.800 impact of higher tariffs on parts, but there's a lot 0:08:16.800 --> 0:08:19.480 of demand for generators and for some of the equipment 0:08:19.560 --> 0:08:21.640 used to make data centers, So you kind of end 0:08:21.720 --> 0:08:25.640 up with offsetting shocks and don't have that clear impact 0:08:25.640 --> 0:08:27.760 on the bottom line. That's the best I can do. 0:08:27.840 --> 0:08:30.040 It is a bit of a mystery. It does not 0:08:30.160 --> 0:08:32.760 feel like it's been fully passed on by consumers. We 0:08:32.880 --> 0:08:36.680 know it hasn't been absorbed by importers, So it implicitly 0:08:36.800 --> 0:08:40.480 has to be impacting someone's bottom line in those sectors 0:08:40.480 --> 0:08:41.280 where there are tariffs. 0:08:41.760 --> 0:08:44.120 And what's your sense of where that? I mean, if 0:08:44.160 --> 0:08:49.120 you're saying sixty percent is being felt somewhere by corporate America. 0:08:49.360 --> 0:08:53.160 Is this the little guy who's finding the getting squeezed 0:08:53.280 --> 0:08:55.600 rather than these big companies we hear on the earning schools. 0:08:56.640 --> 0:09:00.280 Yeah, so the stock market is not the economy. It's 0:09:00.360 --> 0:09:02.360 very important to know that the S and P five 0:09:02.440 --> 0:09:05.560 hundred only has about five hundred firms, but the total 0:09:05.679 --> 0:09:08.559 US economy has about seven million firms. 0:09:08.679 --> 0:09:10.440 You have that on your Twitter handle, date you more 0:09:10.559 --> 0:09:13.280 or less you know common brackets. You know the stock 0:09:13.320 --> 0:09:16.160 market is not the economy, and of. 0:09:16.080 --> 0:09:19.240 Which ninety percent of those seven million firms have only 0:09:19.320 --> 0:09:23.359 less than twenty employees. And most US firms don't export 0:09:23.440 --> 0:09:27.160 at all either. And another very specific feature about the 0:09:27.240 --> 0:09:31.360 stock listed companies is that in total, they generate thirty 0:09:31.400 --> 0:09:35.000 percent of revenues from outside of the US. So offsetting 0:09:35.040 --> 0:09:39.160 shocks include, for example, the dollar depreciation this year, and 0:09:39.200 --> 0:09:43.720 that ten percent dollar depreciation had boosted the revenues form 0:09:43.760 --> 0:09:48.200 revenues for those SMP five hundred firms. 0:09:47.920 --> 0:09:50.520 So their profits abroad and suddenly if you're just measuring 0:09:50.559 --> 0:09:51.960 it in the US, they're worth more. 0:09:52.520 --> 0:09:52.720 Yes. 0:09:53.160 --> 0:09:56.280 So if you want to look at the profit situation 0:09:56.440 --> 0:09:59.640 in the rest of America, primarily these small businesses, we 0:09:59.760 --> 0:10:02.640 have to look to the national accounts and there you 0:10:02.679 --> 0:10:05.760 see a pretty clear evidence of profit hit. So the 0:10:05.800 --> 0:10:11.600 second quarter GDP corporate profit was revised down significantly from 0:10:11.640 --> 0:10:15.920 the first estimate of roughly sixty five billion to just 0:10:16.280 --> 0:10:17.360 seven billion. 0:10:17.520 --> 0:10:21.319 In the revised estimate, sixty five turned into seven. I 0:10:21.320 --> 0:10:23.160 know it is in that particular bit of the national 0:10:23.200 --> 0:10:25.440 accounts does sometimes jump around a lot, but is that 0:10:25.480 --> 0:10:26.320 a big revision? 0:10:26.960 --> 0:10:28.080 That is a big revision. 0:10:28.320 --> 0:10:31.760 When you look at this the change of corporate profits 0:10:31.800 --> 0:10:34.880 from the second quarter of twenty twenty five compared to 0:10:35.000 --> 0:10:38.040 the end of twenty twenty four, you see that most 0:10:38.080 --> 0:10:42.400 of that decline are in manufacturing sector, wholesale trade and 0:10:42.480 --> 0:10:47.400 transportation warehousing, motor vehicles. So we are seeing at the 0:10:47.520 --> 0:10:51.400 aggregate levels some kind of margin hits, but it's just 0:10:51.440 --> 0:10:53.000 not showing up in the stock market. 0:10:53.600 --> 0:10:56.520 That is a very striking number that the profits having 0:10:56.600 --> 0:10:58.439 gone down for sixty five and a half to just 0:10:58.520 --> 0:11:01.920 down the seven billion in the second quarter, And as 0:11:01.960 --> 0:11:05.840 you pointed out, and there's evidence that it's the wholesale sector. 0:11:06.000 --> 0:11:08.040 And when you look a bit deeper into the numbers, 0:11:08.480 --> 0:11:12.280 are we then likely to see if the corporate sector 0:11:12.320 --> 0:11:14.440 as a whole, even if it's these kind of smaller 0:11:14.480 --> 0:11:17.360 businesses that are a little bit below the radar, if 0:11:17.360 --> 0:11:20.600 they're the ones who are feeling the hit, are we 0:11:20.679 --> 0:11:23.120 going to see that in jobs? Is there an economic 0:11:23.160 --> 0:11:25.800 impact which we're still waiting to see from that? 0:11:26.760 --> 0:11:29.880 Yeah, So I think we can always look at these 0:11:30.240 --> 0:11:34.520 empirical data and then go back to the theoretical models 0:11:34.520 --> 0:11:37.280 and think about evaluate how good or bad they are. 0:11:37.320 --> 0:11:40.959 So going back to this FED model that internally the 0:11:41.120 --> 0:11:45.360 Divisional of International Finance has on the impact of tariff. 0:11:45.640 --> 0:11:49.600 In twenty eighteen, the FED staff ran assimilation on what 0:11:49.679 --> 0:11:53.920 a fifteen percentage point tariff shock would do the unemployment 0:11:54.400 --> 0:11:57.600 and the impact depends on whether the FED is looking 0:11:57.640 --> 0:12:01.360 through the impact on prices. So I would say in 0:12:01.400 --> 0:12:04.680 the current situation, the FED is looking through it somewhere 0:12:04.720 --> 0:12:09.000 in between. So according to the lookthrough strategy, the unemployment 0:12:09.120 --> 0:12:11.880 rate should be going up by about zero point three 0:12:12.000 --> 0:12:17.240 two point five percentage points in the first year after 0:12:17.280 --> 0:12:20.920 the shock, and I would say that's roughly where we are, 0:12:21.000 --> 0:12:24.640 because when we start the year, the Wall Street consensus 0:12:24.679 --> 0:12:28.480 for unemployment rate was about four point one at the 0:12:28.600 --> 0:12:31.720 end of twenty twenty five, and now we're looking at 0:12:31.760 --> 0:12:36.200 four point five. So in fact, these macro models are 0:12:36.240 --> 0:12:38.640 performing okay, Brad. 0:12:38.679 --> 0:12:41.360 If you're looking at the kind of overall impact of 0:12:41.400 --> 0:12:48.000 these tarerts, they've obviously been very uncertain, unpredictable, and if 0:12:48.000 --> 0:12:50.559 we were designing a trade policy, we'd probably want the 0:12:50.679 --> 0:12:52.520 very least. We probably want something that was a bit 0:12:52.600 --> 0:12:56.840 more stable and followed a slightly more predictable path. But 0:12:57.360 --> 0:13:01.319 if you just were told that the effective tariff rate 0:13:01.360 --> 0:13:05.320 had gone up from three percent to around fourteen percent 0:13:05.920 --> 0:13:08.199 over the course of six to nine months, and then 0:13:08.240 --> 0:13:12.040 you looked at these various economic indicators that change in 0:13:12.120 --> 0:13:14.959 the openness of the US economy, do you think it's 0:13:14.960 --> 0:13:17.480 had a less harmful impact than we might have predicted 0:13:17.520 --> 0:13:18.480 at the beginning of the year. 0:13:19.679 --> 0:13:21.040 Yeah, modestly less harmful. 0:13:21.040 --> 0:13:24.840 I mean, largely because businesses have absorbed so much of 0:13:24.880 --> 0:13:27.760 the one off shock, it hasn't been all felt by consumers, 0:13:28.280 --> 0:13:31.960 and so consumers really haven't paired back spending on other goods. 0:13:32.480 --> 0:13:34.400 Of course, part of it is also that other things 0:13:34.400 --> 0:13:37.960 are happening. But for the tariffs, the big increase in 0:13:38.520 --> 0:13:41.679 spending on data centers and all the investment in AI 0:13:41.840 --> 0:13:45.040 might have been propelling the US economy quite forward at 0:13:45.040 --> 0:13:47.720 a pretty fast clip. The strong run up in the 0:13:47.720 --> 0:13:50.760 stock market is generating a wealth effect even now, and 0:13:50.800 --> 0:13:54.840 that is also supporting household consumption. But all told, if 0:13:54.840 --> 0:13:57.920 you said we've reincreased teriffs by a percentage point with 0:13:58.040 --> 0:14:01.719 no offsetting policy changes, and at the end of that 0:14:02.040 --> 0:14:05.760 six months consumer prices are only up thirty basis points, 0:14:05.960 --> 0:14:08.400 that's a little smaller than I would have expected. Now, 0:14:08.400 --> 0:14:11.040 I do think, and I think Jay Powell thinks as well, 0:14:11.360 --> 0:14:12.599 that we're going to see a little bit of a 0:14:12.679 --> 0:14:14.679 lagged increase in the price level. 0:14:14.960 --> 0:14:18.080 But in aggregate, it was never at. 0:14:17.880 --> 0:14:20.400 This level as opposed to the levels that came out 0:14:20.440 --> 0:14:23.600 after Liberation Day. It was never at a level that 0:14:23.720 --> 0:14:25.960 I thought was going to lead to a recession. In 0:14:26.040 --> 0:14:28.040 order to get to a recession, you needed tariffs of 0:14:28.120 --> 0:14:31.840 more like twenty percent two percentage points of GDP taken 0:14:31.840 --> 0:14:34.480 out of the economy, and you needed no offsets, no 0:14:34.640 --> 0:14:37.640 tax cuts to put money back in. And what we 0:14:37.720 --> 0:14:40.840 have seen is a much compared to that giant shock, 0:14:41.480 --> 0:14:44.440 a more manageable shock, and then there have been some offsets. 0:14:45.600 --> 0:14:47.760 It's not easy. We talked about it before on the show. 0:14:47.800 --> 0:14:50.080 It's pretty hard for politicians to raise taxes in the 0:14:50.080 --> 0:14:53.840 current environment. But the President has raised these taxes and 0:14:53.880 --> 0:14:56.280 he's made a bunch of revenues. 0:14:56.040 --> 0:14:57.840 And then he's arguably paid a bit of a political 0:14:57.840 --> 0:15:00.240 price for it. I mean, hence the fall in the 0:15:00.240 --> 0:15:03.400 price of coffee, or the tariffy on coffee, hence the 0:15:03.760 --> 0:15:08.920 decisions to exempt consumer goods that aren't made in the US. 0:15:08.640 --> 0:15:09.720 From some of the tariffs. 0:15:10.080 --> 0:15:13.360 Even if the aggregate impact has been somewhat more modest 0:15:13.400 --> 0:15:16.720 than might have been initially expected, it still has impacted 0:15:16.760 --> 0:15:22.120 certain very salient prices, and it certainly directionally has increased 0:15:22.160 --> 0:15:24.400 the cost of living, which is an issue here as 0:15:24.440 --> 0:15:27.800 you know. So I wouldn't say it's been politically costless. 0:15:28.120 --> 0:15:47.840 It just hasn't pushed the economy off a generally growing trajectory. 0:15:49.040 --> 0:15:51.880 Let's sort of change the focus a bit. I guess 0:15:51.880 --> 0:15:53.880 we should also put in a health warning. Anyone who's 0:15:53.880 --> 0:15:56.680 a dedicated listener will notice that we've resolutely not talked 0:15:56.680 --> 0:15:59.600 about the possibility that half of these tariffs are going 0:15:59.640 --> 0:16:03.720 to get unconstitutional by the Supreme Court. The principal reason 0:16:03.720 --> 0:16:06.800 why we haven't talked about them is everybody else's, and 0:16:06.800 --> 0:16:09.080 the slightly less principled is that we just thought every 0:16:09.120 --> 0:16:11.160 time we did would be guarantee that the moment we 0:16:11.240 --> 0:16:13.040 put it out there would be a decision that would 0:16:13.080 --> 0:16:16.720 suddenly put everything in question. So when that happens, we 0:16:16.760 --> 0:16:19.200 will get Brad and Anna back to talk about what 0:16:19.680 --> 0:16:23.000 that means. But Brad, outside of China, I suspect you're 0:16:23.000 --> 0:16:26.640 one of a handful of people who understands the Chinese 0:16:26.680 --> 0:16:30.480 balance of payments, and you've often pointed to things that 0:16:30.560 --> 0:16:33.200 people don't want to notice or would rather go away. 0:16:33.920 --> 0:16:37.200 Of course, one of the key objectives of these tariffs 0:16:37.560 --> 0:16:41.680 was to reduce the US trade deficit and encourage American 0:16:42.240 --> 0:16:46.000 producers to make more in the US, encourage US consumers 0:16:46.000 --> 0:16:49.000 to buy more American products. I mean, we obviously it 0:16:49.040 --> 0:16:52.800 is early days, but how is that side of the 0:16:52.840 --> 0:16:54.960 agenda going well? 0:16:55.040 --> 0:16:58.040 I mean, unfortunately, there's really no impact that there's been 0:16:58.080 --> 0:17:02.120 a reallocation of production to the United States. We're just 0:17:02.160 --> 0:17:06.600 not seeing a boom in manufacturing, and not a boom 0:17:06.600 --> 0:17:09.320 in the kind of manufacturing that was substitute for China. 0:17:09.800 --> 0:17:11.560 So just zero evidence. 0:17:11.560 --> 0:17:14.040 I would say that is happening again early, but zero 0:17:14.640 --> 0:17:18.679 is the right number. There was a reallocation of final 0:17:18.720 --> 0:17:23.320 assembly away from China to Southeast Asia in a quite 0:17:23.400 --> 0:17:26.399 significant way, and also to Taiwan. If you look at 0:17:26.400 --> 0:17:28.760 the latest trade numbers out of Taiwan, they're going up 0:17:28.840 --> 0:17:31.480 like crazy, and that is a function at least in 0:17:31.560 --> 0:17:34.480 part of doing your servers in Taiwan rather than finyal 0:17:34.520 --> 0:17:38.040 assembly in China. The interesting thing is that after the 0:17:38.119 --> 0:17:42.400 latest deal, the deal that was negotiated in Korea, the 0:17:42.440 --> 0:17:44.920 base tariff on China is going to come down from 0:17:45.000 --> 0:17:48.919 thirty to twenty. Now there's legacy tariffs on some goods 0:17:48.920 --> 0:17:52.439 from the Trump one trade case, and in some cases 0:17:52.480 --> 0:17:54.440 those are twenty five. In some cases those are seven 0:17:54.440 --> 0:17:56.720 and a half, some cases those are zero. But for 0:17:56.920 --> 0:17:59.560 most of the goods it's the new tariffs are either 0:17:59.560 --> 0:18:01.600 going to be twenty seven and a half, which is high, 0:18:01.920 --> 0:18:04.840 or twenty which is also high. But twenty is not 0:18:04.960 --> 0:18:08.840 that different from the nineteen or twenty now facing Southeast Asia. 0:18:09.400 --> 0:18:11.280 So structurally, I. 0:18:11.320 --> 0:18:13.359 Think there was a lot of movement out of China 0:18:13.400 --> 0:18:17.000 to do final assembly elsewhere in anticipation of a different 0:18:17.119 --> 0:18:21.119 terra structure than has actually emerged. What has emerged, if 0:18:21.160 --> 0:18:23.879 this sticks, is a terra structure that's too high on 0:18:23.960 --> 0:18:27.520 Southeast Asia and too low on China to generate the 0:18:27.640 --> 0:18:30.760 kind of reallocation away from China that you saw on 0:18:30.800 --> 0:18:34.520 Trump's first term, and it's still too small, particularly with 0:18:34.600 --> 0:18:38.240 the exchange rate moves, to get much production coming back 0:18:38.280 --> 0:18:38.720 to the US. 0:18:38.800 --> 0:18:40.399 That's really interesting. I mean, I think a lot of 0:18:40.560 --> 0:18:43.359 fair amounted people will say it's pretty hard to just 0:18:43.440 --> 0:18:45.520 quickly build a factory, and so we might not see 0:18:45.520 --> 0:18:47.720 that physical production move. But I think if your main 0:18:47.760 --> 0:18:53.240 goal is to wean the US off a particular right 0:18:53.359 --> 0:18:56.160 liiance on China, and that's obviously been a goal that's 0:18:56.160 --> 0:18:59.159 also carried through from the first Trump administration through the 0:18:59.200 --> 0:19:04.240 Biden years, that is a very striking conclusion from the 0:19:04.400 --> 0:19:08.280 recent trade deal, and actually some of our geoeconomists analysts 0:19:08.320 --> 0:19:10.639 we're making the same point. It seems odd to be 0:19:11.200 --> 0:19:14.200 in effect penalizing some of the countries that are trying 0:19:14.240 --> 0:19:16.639 to compete with China, whose basket we might want to 0:19:16.640 --> 0:19:20.320 put more eggs in. But anna the trade deficit is 0:19:20.359 --> 0:19:23.000 there a sense? Is the composition of the trade deficit fit? 0:19:23.040 --> 0:19:26.160 I mean, have we reduced the amount of imports coming 0:19:26.200 --> 0:19:27.879 into the US with these tariffs? 0:19:28.960 --> 0:19:31.719 I can offer a perspective on what these earning calls 0:19:31.760 --> 0:19:35.320 are saying. So Bloomberg Economics and Bloomberg Intelligence have been 0:19:35.400 --> 0:19:39.040 using AI extraction technology to extract all the TERRORFF related 0:19:39.119 --> 0:19:43.000 quotes from the earnings transcripts so far, and what I 0:19:43.040 --> 0:19:45.840 have seen is at number one, a theme that emerges. 0:19:46.000 --> 0:19:49.720 As Brad said, there are many other offsetting things that's 0:19:49.840 --> 0:19:54.920 happening outside of this tariff space that's helping beef up 0:19:55.000 --> 0:19:59.359 the margins of firms like AI, and also deregulations on 0:19:59.480 --> 0:20:04.120 environmental stuff on autos. However, the second most dominant theme, 0:20:04.160 --> 0:20:07.879 I would say is how firms mitigate these tariff costs. 0:20:08.240 --> 0:20:13.400 And I see a lot of firms mentioning sourcing more 0:20:13.440 --> 0:20:17.399 efficient sourcing outside of China, and in fact, many of 0:20:17.440 --> 0:20:21.359 these firms are projecting forward guidance saying that in twenty 0:20:21.480 --> 0:20:25.680 twenty six their effective tariff rate would be lower. I mean, 0:20:25.720 --> 0:20:29.000 regardless of what the statutory tarif rate is because many 0:20:29.040 --> 0:20:32.640 of the supply chain mitigation strategies they put in this 0:20:32.720 --> 0:20:36.560 year will be in full operation next year, and all 0:20:36.560 --> 0:20:40.399 of it surrounds sourcing outside of China. And I looked 0:20:40.400 --> 0:20:43.159 at those statements and I wonder, well, but what if 0:20:43.200 --> 0:20:47.920 there's a US China deal that lower the Chinese tariff 0:20:48.240 --> 0:20:51.560 and to below the Southeast Asian because many of these 0:20:51.800 --> 0:20:55.960 mitigation strategy involved moving to Southeast Asia or to the 0:20:56.040 --> 0:21:01.400 USMCA region. As of now, this positive pigure partly hinges 0:21:01.520 --> 0:21:04.520 on these mitigation strategies. 0:21:04.920 --> 0:21:07.200 That's interesting. They thought that was the one sure thing, 0:21:07.359 --> 0:21:09.080 was that there would want to be a bit less 0:21:09.119 --> 0:21:11.000 reliant on China, and then it turns out maybe they 0:21:11.000 --> 0:21:14.160 didn't need it. I am kind of intrigued. He's been 0:21:14.280 --> 0:21:18.800 so variable and unstable in his trade policies that you've 0:21:18.840 --> 0:21:21.359 told us in the past. Producers were possibly not raising 0:21:21.400 --> 0:21:23.160 prices because they thought, well, I might have to cut 0:21:23.160 --> 0:21:25.320 prices again. You know, they may all go away in 0:21:25.359 --> 0:21:28.920 a week's time. And at the same time, the threat 0:21:28.960 --> 0:21:31.640 of tariffs or the reality of tariffs, was making them 0:21:31.680 --> 0:21:34.520 do all these cost cutting things. If the tariffs then 0:21:34.600 --> 0:21:37.439 go away, down the road, he would have helped increase 0:21:37.480 --> 0:21:39.120 the efficiency of US business. 0:21:38.880 --> 0:21:43.000 Right probably, But if the tariff were to suddenly go away, 0:21:43.200 --> 0:21:46.240 for example with the Supreme Court ruling, it would be 0:21:46.320 --> 0:21:50.480 super polish for the market. Because when you read these 0:21:50.760 --> 0:21:55.000 earning transcripts, what struck me is that had there not 0:21:55.119 --> 0:21:58.960 been tariffs, these profit margins would be through the roof. 0:21:59.200 --> 0:22:03.080 Like even with tariffs, they're already talking about it being 0:22:03.200 --> 0:22:07.680 really good, and even Ford and GM of these big 0:22:07.720 --> 0:22:10.639 auto makers are talking about how they're finally getting to 0:22:10.800 --> 0:22:13.840 margins of eight to ten percent, and the auto sector 0:22:13.880 --> 0:22:14.720 is so resilient. 0:22:14.800 --> 0:22:15.520 In fact, for. 0:22:15.600 --> 0:22:20.560 Them, the tariff is creating domestic protectionalism, I mean, which 0:22:20.600 --> 0:22:24.120 is benefiting them from their perspective, even though it does 0:22:24.200 --> 0:22:26.840 create a more than one billion tariff costs for some 0:22:26.880 --> 0:22:30.640 of these auto firms. But the original intent of tariff 0:22:30.800 --> 0:22:35.359 is domestic protectionalism, and some firms, for example in auto 0:22:35.440 --> 0:22:38.600