Speaker 1: Bloomberg Audio Studios, Podcasts, radio news.
Speaker 2: I'm Stephanie Flanders, head of Government and Economics at Bloomberg,
Speaker 2: and this is Trumppernomics, the podcast that looks at the
Speaker 2: economic world of Donald Trump, how he's already shaped the
Speaker 2: global economy, what on earth is going to happen next?
Speaker 2: This week, we're investigating the curious case of the everywhere
Speaker 2: nowhere tariffs. For as long as Donald Trump has been
Speaker 2: back in the White House, everybody has been talking about
Speaker 2: his tariffs, and never more than on April second, when
Speaker 2: he announced he was liberating the US economy by slapping
Speaker 2: hefty trade levees on pretty much all of America's trading partners.
Speaker 2: Since then, we've talked about the level of the tariffs,
Speaker 2: the negotiations over bringing them down. Politicians and consumers have
Speaker 2: also talked about how they are added to inflation, especially
Speaker 2: in all those big arguments about affordability and the cost
Speaker 2: of living before and after the recent US off year elections.
Speaker 2: The President recently has himself seemed to admit that tariffs
Speaker 2: on some key food products like beef and coffee were
Speaker 2: pushing up costs for households, and he wanted to cut
Speaker 2: them We've also waited to see how tariffs might hit
Speaker 2: jobs and profits for American companies. But amid all this talk,
Speaker 2: we've not seen a lot of real evidence of where
Speaker 2: exactly the tariffs were hurting, and with the stock market
Speaker 2: still booming, we've not heard many businesses admit that tariffs
Speaker 2: were affecting their bottom line, though, as you'll hear later,
Speaker 2: recent GDP revisions do suggest that US profits in the
Speaker 2: second quarter of this year did fall off a cliff.
Speaker 2: So who has paid for the tariffs, how have they
Speaker 2: affected the US economy, and what's the evidence that they're
Speaker 2: accomplishing any or all of the President's objectives, notably cutting
Speaker 2: the trade deficit with China. They're the riddles we're hoping
Speaker 2: to solve on today's show, and we've got two great
Speaker 2: detectives to help us get to the bottom of it.
Speaker 2: Senior fellow at the Council on Foreign Relations Brad Setzer
Speaker 2: my old friend. He's an expert on global trade and
Speaker 2: capital flows, and his regular blog on the CFL page
Speaker 2: is called Follow the Money. We worked together approximately half
Speaker 2: a million years ago, and unlike me, he then went
Speaker 2: back to the US Treasury to be Deputy Assistant Secretary
Speaker 2: for International Economics under President Obama. Brad, great to have
Speaker 2: you finally on Trumponomics.
Speaker 3: N's pleasure, and it wasn't that one.
Speaker 2: We obviously both still look very youthful, but it makes
Speaker 2: me feel old.
Speaker 3: The illusion.
Speaker 2: Also joining us as so often Anna Wong, chief US
Speaker 2: Economists for Bloomberg Economics, and before this she worked at
Speaker 2: the Federal Reserve, US Treasury and on so common at
Speaker 2: the White House Council of Economic Advisors during Donald Trump's
Speaker 2: first term.
Speaker 1: Anna Hi Hi, I actually also worked for a Brad
Speaker 1: Setser under Obama intration when he was Deputy Assistant Secretary.
Speaker 1: He's my old past.
Speaker 2: And let me start with you just remind us how
Speaker 2: much the average or effective tariff rate on goods coming
Speaker 2: into the US has gone up. You know, and we've
Speaker 2: probably lost track of a lot of the negotiations and
Speaker 2: where things are, but there has been a significant increase
Speaker 2: in the level of tariffs to come into the US.
Speaker 1: So the effective tariff rate is roughly around fourteen point
Speaker 1: five percent, just roughly. Administration just announced some exemptions for
Speaker 1: food imports last Friday, so that should knock off another
Speaker 1: point two percentage point from that. So you can say
Speaker 1: roughly around fourteen ish percent.
Speaker 2: Memory, I think it was about two or three coming
Speaker 2: into this administration, so it's a pretty significant increase. The
Speaker 2: question I asked you last week is who is paying
Speaker 2: for these tariffs? Where are we seeing it?
Speaker 1: Yeah, so we look at all the data we have,
Speaker 1: which is import prices, and you reconstruct a tariff inclusive
Speaker 1: import price index. We also looked at PPI, We looked
Speaker 1: at CPI. So taking all the information together, we have
Speaker 1: come to this breakdown. It would be about four percent
Speaker 1: of the price cost born by foreigners, seventy percent absorbed
Speaker 1: by any kind of intermediate firms in the US, and
Speaker 1: twenty six percent absorbed by US consumers through higher prices.
Speaker 2: When you say it's that certain chunk of it has
Speaker 2: been absorbed by consumers, that thirty percent we're seeing that
Speaker 2: in prices.
Speaker 1: Yes, So we estimate that CPI and core PCEE inflation
Speaker 1: is a roughly zero point three percentage point higher than
Speaker 1: it would have been.
Speaker 3: Without those tariffs.
Speaker 1: So most of those tariffs passed through are showing up
Speaker 1: in core goods CPI, things like house appliances, washing machines,
Speaker 1: or audio equipment, sports equipments. Those type of things. And
Speaker 1: in fact, that point three percentage point addition on core
Speaker 1: CPI and core pc inflation. That's quite similar to a
Speaker 1: top down model from the FED too. So at the
Speaker 1: FED we have this back of envelope model on the
Speaker 1: impact of tariff. So a tariff hit similar to what
Speaker 1: we see right now in total would have pushed inflation
Speaker 1: up by one point one percentage one roughly there. According
Speaker 1: to the FED model, if there's one hundred percent pass through,
Speaker 1: So if there's point three or roughly thirty percent of
Speaker 1: the pass through, then that corresponds to roughly point three
Speaker 1: percentage point edition on CPI. And that's indeed what we
Speaker 1: have seen in the year over year increase of core
Speaker 1: good CPI. We have seen that went from naked zero
Speaker 1: point one percent that's year over year core good CPI
Speaker 1: to now one point five percent year over year. Now
Speaker 1: that's a one point six percentage point swing.
Speaker 2: And Brad just as we'll get into some of the details,
Speaker 2: but just sort of sort of on the broad scope
Speaker 2: of what Anna just said, that thirty percent is absorbed
Speaker 2: by consumers, and then it looks like about sixty sixty
Speaker 2: five percent by those kind of intermediate firms who have
Speaker 2: to pay the tariff at the border. Is that roughly
Speaker 2: how you would look at it.
Speaker 3: I mean, more or less. Yeah, I think a lot
Speaker 3: of estimates are.
Speaker 4: Converging around similar numbers. You can just see from the
Speaker 4: import price data that foreigners aren't paying it, so then
Speaker 4: it's just a question of who's absorbing it in the
Speaker 4: US economy. It has been a slight surprise that only
Speaker 4: roughly a third looks like it's been passed on to consumers,
Speaker 4: an unusually high fraction seems like it's been absorbed by
Speaker 4: the supply chain, by intermediate importers.
Speaker 2: I mean, obviously, Bloomberg, we are often listening in on
Speaker 2: earning schools when companies are announcing their results. We're tracking
Speaker 2: profits and earning revisions, and we're also keeping an eye
Speaker 2: on the stock market, which seems to have been doing
Speaker 2: pretty well. And even just in this recent earning season,
Speaker 2: I seem to remember my colleagues talking about most companies
Speaker 2: actually beating their expectations on profits. Maybe you first bad,
Speaker 2: why do you think we're not hearing so much from
Speaker 2: companies about having to pay these having to take these
Speaker 2: higher prices or the tariffs in their margins.
Speaker 4: Well, I mean sort of One of the ironies is
Speaker 4: that the parts of the US economy that generate the superprofits,
Speaker 4: you know, the tech sector, the pharmaceutical sector, they've been
Speaker 4: entirely exempted from the tariffs.
Speaker 3: Why wouldn't Nvidia be talking.
Speaker 4: About it because there isn't yet a terraff chips. Why
Speaker 4: is it not impact Advisor's bottom line? Well, there isn't
Speaker 4: yet a tariff on pharmaceuticals, and we've had some kind
Speaker 4: of crazy fluctuations in trade because of expected tariffs on pharmaceuticals.
Speaker 4: But at the end of the day, the tariffs haven't
Speaker 4: hit those sectors, and I guess in other cases you're
Speaker 4: seeing offsetting shocks. Like a firmlike Caterpillar would normally feel
Speaker 4: the impact of the steel tariffs would normally feel the
Speaker 4: impact of higher tariffs on parts, but there's a lot
Speaker 4: of demand for generators and for some of the equipment
Speaker 4: used to make data centers, So you kind of end
Speaker 4: up with offsetting shocks and don't have that clear impact
Speaker 4: on the bottom line. That's the best I can do.
Speaker 4: It is a bit of a mystery. It does not
Speaker 4: feel like it's been fully passed on by consumers. We
Speaker 4: know it hasn't been absorbed by importers, So it implicitly
Speaker 4: has to be impacting someone's bottom line in those sectors
Speaker 4: where there are tariffs.
Speaker 2: And what's your sense of where that? I mean, if
Speaker 2: you're saying sixty percent is being felt somewhere by corporate America.
Speaker 2: Is this the little guy who's finding the getting squeezed
Speaker 2: rather than these big companies we hear on the earning schools.
Speaker 1: Yeah, so the stock market is not the economy. It's
Speaker 1: very important to know that the S and P five
Speaker 1: hundred only has about five hundred firms, but the total
Speaker 1: US economy has about seven million firms.
Speaker 2: You have that on your Twitter handle, date you more
Speaker 2: or less you know common brackets. You know the stock
Speaker 2: market is not the economy, and of.
Speaker 1: Which ninety percent of those seven million firms have only
Speaker 1: less than twenty employees. And most US firms don't export
Speaker 1: at all either. And another very specific feature about the
Speaker 1: stock listed companies is that in total, they generate thirty
Speaker 1: percent of revenues from outside of the US. So offsetting
Speaker 1: shocks include, for example, the dollar depreciation this year, and
Speaker 1: that ten percent dollar depreciation had boosted the revenues form
Speaker 1: revenues for those SMP five hundred firms.
Speaker 2: So their profits abroad and suddenly if you're just measuring
Speaker 2: it in the US, they're worth more.
Speaker 3: Yes.
Speaker 1: So if you want to look at the profit situation
Speaker 1: in the rest of America, primarily these small businesses, we
Speaker 1: have to look to the national accounts and there you
Speaker 1: see a pretty clear evidence of profit hit. So the
Speaker 1: second quarter GDP corporate profit was revised down significantly from
Speaker 1: the first estimate of roughly sixty five billion to just
Speaker 1: seven billion.
Speaker 2: In the revised estimate, sixty five turned into seven. I
Speaker 2: know it is in that particular bit of the national
Speaker 2: accounts does sometimes jump around a lot, but is that
Speaker 2: a big revision?
Speaker 3: That is a big revision.
Speaker 1: When you look at this the change of corporate profits
Speaker 1: from the second quarter of twenty twenty five compared to
Speaker 1: the end of twenty twenty four, you see that most
Speaker 1: of that decline are in manufacturing sector, wholesale trade and
Speaker 1: transportation warehousing, motor vehicles. So we are seeing at the
Speaker 1: aggregate levels some kind of margin hits, but it's just
Speaker 1: not showing up in the stock market.
Speaker 2: That is a very striking number that the profits having
Speaker 2: gone down for sixty five and a half to just
Speaker 2: down the seven billion in the second quarter, And as
Speaker 2: you pointed out, and there's evidence that it's the wholesale sector.
Speaker 2: And when you look a bit deeper into the numbers,
Speaker 2: are we then likely to see if the corporate sector
Speaker 2: as a whole, even if it's these kind of smaller
Speaker 2: businesses that are a little bit below the radar, if
Speaker 2: they're the ones who are feeling the hit, are we
Speaker 2: going to see that in jobs? Is there an economic
Speaker 2: impact which we're still waiting to see from that?
Speaker 1: Yeah, So I think we can always look at these
Speaker 1: empirical data and then go back to the theoretical models
Speaker 1: and think about evaluate how good or bad they are.
Speaker 1: So going back to this FED model that internally the
Speaker 1: Divisional of International Finance has on the impact of tariff.
Speaker 1: In twenty eighteen, the FED staff ran assimilation on what
Speaker 1: a fifteen percentage point tariff shock would do the unemployment
Speaker 1: and the impact depends on whether the FED is looking
Speaker 1: through the impact on prices. So I would say in
Speaker 1: the current situation, the FED is looking through it somewhere
Speaker 1: in between. So according to the lookthrough strategy, the unemployment
Speaker 1: rate should be going up by about zero point three
Speaker 1: two point five percentage points in the first year after
Speaker 1: the shock, and I would say that's roughly where we are,
Speaker 1: because when we start the year, the Wall Street consensus
Speaker 1: for unemployment rate was about four point one at the
Speaker 1: end of twenty twenty five, and now we're looking at
Speaker 1: four point five. So in fact, these macro models are
Speaker 1: performing okay, Brad.
Speaker 2: If you're looking at the kind of overall impact of
Speaker 2: these tarerts, they've obviously been very uncertain, unpredictable, and if
Speaker 2: we were designing a trade policy, we'd probably want the
Speaker 2: very least. We probably want something that was a bit
Speaker 2: more stable and followed a slightly more predictable path. But
Speaker 2: if you just were told that the effective tariff rate
Speaker 2: had gone up from three percent to around fourteen percent
Speaker 2: over the course of six to nine months, and then
Speaker 2: you looked at these various economic indicators that change in
Speaker 2: the openness of the US economy, do you think it's
Speaker 2: had a less harmful impact than we might have predicted
Speaker 2: at the beginning of the year.
Speaker 3: Yeah, modestly less harmful.
Speaker 4: I mean, largely because businesses have absorbed so much of
Speaker 4: the one off shock, it hasn't been all felt by consumers,
Speaker 4: and so consumers really haven't paired back spending on other goods.
Speaker 4: Of course, part of it is also that other things
Speaker 4: are happening. But for the tariffs, the big increase in
Speaker 4: spending on data centers and all the investment in AI
Speaker 4: might have been propelling the US economy quite forward at
Speaker 4: a pretty fast clip. The strong run up in the
Speaker 4: stock market is generating a wealth effect even now, and
Speaker 4: that is also supporting household consumption. But all told, if
Speaker 4: you said we've reincreased teriffs by a percentage point with
Speaker 4: no offsetting policy changes, and at the end of that
Speaker 4: six months consumer prices are only up thirty basis points,
Speaker 4: that's a little smaller than I would have expected. Now,
Speaker 4: I do think, and I think Jay Powell thinks as well,
Speaker 4: that we're going to see a little bit of a
Speaker 4: lagged increase in the price level.
Speaker 3: But in aggregate, it was never at.
Speaker 4: This level as opposed to the levels that came out
Speaker 4: after Liberation Day. It was never at a level that
Speaker 4: I thought was going to lead to a recession. In
Speaker 4: order to get to a recession, you needed tariffs of
Speaker 4: more like twenty percent two percentage points of GDP taken
Speaker 4: out of the economy, and you needed no offsets, no
Speaker 4: tax cuts to put money back in. And what we
Speaker 4: have seen is a much compared to that giant shock,
Speaker 4: a more manageable shock, and then there have been some offsets.
Speaker 2: It's not easy. We talked about it before on the show.
Speaker 2: It's pretty hard for politicians to raise taxes in the
Speaker 2: current environment. But the President has raised these taxes and
Speaker 2: he's made a bunch of revenues.
Speaker 4: And then he's arguably paid a bit of a political
Speaker 4: price for it. I mean, hence the fall in the
Speaker 4: price of coffee, or the tariffy on coffee, hence the
Speaker 4: decisions to exempt consumer goods that aren't made in the US.
Speaker 3: From some of the tariffs.
Speaker 4: Even if the aggregate impact has been somewhat more modest
Speaker 4: than might have been initially expected, it still has impacted
Speaker 4: certain very salient prices, and it certainly directionally has increased
Speaker 4: the cost of living, which is an issue here as
Speaker 4: you know. So I wouldn't say it's been politically costless.
Speaker 4: It just hasn't pushed the economy off a generally growing trajectory.
Speaker 2: Let's sort of change the focus a bit. I guess
Speaker 2: we should also put in a health warning. Anyone who's
Speaker 2: a dedicated listener will notice that we've resolutely not talked
Speaker 2: about the possibility that half of these tariffs are going
Speaker 2: to get unconstitutional by the Supreme Court. The principal reason
Speaker 2: why we haven't talked about them is everybody else's, and
Speaker 2: the slightly less principled is that we just thought every
Speaker 2: time we did would be guarantee that the moment we
Speaker 2: put it out there would be a decision that would
Speaker 2: suddenly put everything in question. So when that happens, we
Speaker 2: will get Brad and Anna back to talk about what
Speaker 2: that means. But Brad, outside of China, I suspect you're
Speaker 2: one of a handful of people who understands the Chinese
Speaker 2: balance of payments, and you've often pointed to things that
Speaker 2: people don't want to notice or would rather go away.
Speaker 2: Of course, one of the key objectives of these tariffs
Speaker 2: was to reduce the US trade deficit and encourage American
Speaker 2: producers to make more in the US, encourage US consumers
Speaker 2: to buy more American products. I mean, we obviously it
Speaker 2: is early days, but how is that side of the
Speaker 2: agenda going well?
Speaker 4: I mean, unfortunately, there's really no impact that there's been
Speaker 4: a reallocation of production to the United States. We're just
Speaker 4: not seeing a boom in manufacturing, and not a boom
Speaker 4: in the kind of manufacturing that was substitute for China.
Speaker 3: So just zero evidence.
Speaker 4: I would say that is happening again early, but zero
Speaker 4: is the right number. There was a reallocation of final
Speaker 4: assembly away from China to Southeast Asia in a quite
Speaker 4: significant way, and also to Taiwan. If you look at
Speaker 4: the latest trade numbers out of Taiwan, they're going up
Speaker 4: like crazy, and that is a function at least in
Speaker 4: part of doing your servers in Taiwan rather than finyal
Speaker 4: assembly in China. The interesting thing is that after the
Speaker 4: latest deal, the deal that was negotiated in Korea, the
Speaker 4: base tariff on China is going to come down from
Speaker 4: thirty to twenty. Now there's legacy tariffs on some goods
Speaker 4: from the Trump one trade case, and in some cases
Speaker 4: those are twenty five. In some cases those are seven
Speaker 4: and a half, some cases those are zero. But for
Speaker 4: most of the goods it's the new tariffs are either
Speaker 4: going to be twenty seven and a half, which is high,
Speaker 4: or twenty which is also high. But twenty is not
Speaker 4: that different from the nineteen or twenty now facing Southeast Asia.
Speaker 3: So structurally, I.
Speaker 4: Think there was a lot of movement out of China
Speaker 4: to do final assembly elsewhere in anticipation of a different
Speaker 4: terra structure than has actually emerged. What has emerged, if
Speaker 4: this sticks, is a terra structure that's too high on
Speaker 4: Southeast Asia and too low on China to generate the
Speaker 4: kind of reallocation away from China that you saw on
Speaker 4: Trump's first term, and it's still too small, particularly with
Speaker 4: the exchange rate moves, to get much production coming back
Speaker 4: to the US.
Speaker 2: That's really interesting. I mean, I think a lot of
Speaker 2: fair amounted people will say it's pretty hard to just
Speaker 2: quickly build a factory, and so we might not see
Speaker 2: that physical production move. But I think if your main
Speaker 2: goal is to wean the US off a particular right
Speaker 2: liiance on China, and that's obviously been a goal that's
Speaker 2: also carried through from the first Trump administration through the
Speaker 2: Biden years, that is a very striking conclusion from the
Speaker 2: recent trade deal, and actually some of our geoeconomists analysts
Speaker 2: we're making the same point. It seems odd to be
Speaker 2: in effect penalizing some of the countries that are trying
Speaker 2: to compete with China, whose basket we might want to
Speaker 2: put more eggs in. But anna the trade deficit is
Speaker 2: there a sense? Is the composition of the trade deficit fit?
Speaker 2: I mean, have we reduced the amount of imports coming
Speaker 2: into the US with these tariffs?
Speaker 1: I can offer a perspective on what these earning calls
Speaker 1: are saying. So Bloomberg Economics and Bloomberg Intelligence have been
Speaker 1: using AI extraction technology to extract all the TERRORFF related
Speaker 1: quotes from the earnings transcripts so far, and what I
Speaker 1: have seen is at number one, a theme that emerges.
Speaker 1: As Brad said, there are many other offsetting things that's
Speaker 1: happening outside of this tariff space that's helping beef up
Speaker 1: the margins of firms like AI, and also deregulations on
Speaker 1: environmental stuff on autos. However, the second most dominant theme,
Speaker 1: I would say is how firms mitigate these tariff costs.
Speaker 1: And I see a lot of firms mentioning sourcing more
Speaker 1: efficient sourcing outside of China, and in fact, many of
Speaker 1: these firms are projecting forward guidance saying that in twenty
Speaker 1: twenty six their effective tariff rate would be lower. I mean,
Speaker 1: regardless of what the statutory tarif rate is because many
Speaker 1: of the supply chain mitigation strategies they put in this
Speaker 1: year will be in full operation next year, and all
Speaker 1: of it surrounds sourcing outside of China. And I looked
Speaker 1: at those statements and I wonder, well, but what if
Speaker 1: there's a US China deal that lower the Chinese tariff
Speaker 1: and to below the Southeast Asian because many of these
Speaker 1: mitigation strategy involved moving to Southeast Asia or to the
Speaker 1: USMCA region. As of now, this positive pigure partly hinges
Speaker 1: on these mitigation strategies.
Speaker 2: That's interesting. They thought that was the one sure thing,
Speaker 2: was that there would want to be a bit less
Speaker 2: reliant on China, and then it turns out maybe they
Speaker 2: didn't need it. I am kind of intrigued. He's been
Speaker 2: so variable and unstable in his trade policies that you've
Speaker 2: told us in the past. Producers were possibly not raising
Speaker 2: prices because they thought, well, I might have to cut
Speaker 2: prices again. You know, they may all go away in
Speaker 2: a week's time. And at the same time, the threat
Speaker 2: of tariffs or the reality of tariffs, was making them
Speaker 2: do all these cost cutting things. If the tariffs then
Speaker 2: go away, down the road, he would have helped increase
Speaker 2: the efficiency of US business.
Speaker 1: Right probably, But if the tariff were to suddenly go away,
Speaker 1: for example with the Supreme Court ruling, it would be
Speaker 1: super polish for the market. Because when you read these
Speaker 1: earning transcripts, what struck me is that had there not
Speaker 1: been tariffs, these profit margins would be through the roof.
Speaker 1: Like even with tariffs, they're already talking about it being
Speaker 1: really good, and even Ford and GM of these big
Speaker 1: auto makers are talking about how they're finally getting to
Speaker 1: margins of eight to ten percent, and the auto sector
Speaker 1: is so resilient.
Speaker 3: In fact, for.
Speaker 1: Them, the tariff is creating domestic protectionalism, I mean, which
Speaker 1: is benefiting them from their perspective, even though it does
Speaker 1: create a more than one billion tariff costs for some
Speaker 1: of these auto firms. But the original intent of tariff
Speaker 1: is domestic protectionalism, and some firms, for example in auto
Speaker 1: and steel sectors, are seeing some of that.
Speaker 2: Brad quite a lot of voters for Donald Trump thought
Speaker 2: this was just about buying fewer goods from the rest
Speaker 2: of the world, and we have made those goods more
Speaker 2: expensive to some degree, have we reduced the amount coming
Speaker 2: into the country we have the tariffs reduced the number
Speaker 2: of imports coming into the country.
Speaker 4: I'll start with a dodge in the come back and
Speaker 4: actually answer the question. The dodges of course we lack
Speaker 4: trade data for the past two months because the government.
Speaker 4: The correct answer is that so far the trade deficit
Speaker 4: has not gone down. And then the further component of
Speaker 4: that answer is we've had some of the most crazy
Speaker 4: swings in the trade data in human history, tied to
Speaker 4: swings in products that didn't end up having any tariffs.
Speaker 4: So we have this huge surgeon gold imports in the
Speaker 4: first quarter because everybody was afraid that gold was going
Speaker 4: to get tariffed. Well, guess what, Gold didn't get hit
Speaker 4: by any tariffs, and now some of that gold's flying
Speaker 4: out of the US back to London. People were terrified
Speaker 4: that the high value added pharmaceuticals were going to be
Speaker 4: tariffed and that was going to undermine all these tax
Speaker 4: efficient supply chains ie produced in Ireland to avoid payan
Speaker 4: US corporate income tax. So you have gigantic quantities, not
Speaker 4: big quantities physically, but valueized, crazy numbers of pharmaceuticals coming
Speaker 4: into the US in the first quarter and so forth.
Speaker 3: That turned out not.
Speaker 4: To be necessary because pharmaceutical companies are doing deals.
Speaker 3: Who knows quite what's going to happen with those deals.
Speaker 4: Maybe they'll be more fill and finish, but the net
Speaker 4: effect was you had these giant swings and distortions with
Speaker 4: no actual tariff being imposed. When you look through that,
Speaker 4: imports are not really down. And when you look further
Speaker 4: through that, I think you'll see that imports in some
Speaker 4: sectors that have been heavily tariffed, like autos, are a
Speaker 4: little down, and then imports in sectors that are tied
Speaker 4: to capital expenditure in data centers and so forth, and
Speaker 4: which have not been heavily tariffed are up and up
Speaker 4: a lot. So the aggregate will mask a lot of
Speaker 4: different stories. But we're not currently trending towards a smaller deficit.
Speaker 4: I think there's a lot of reasons for that, one
Speaker 4: of which is that a big boom in capital expenditures
Speaker 4: normally pulls and imports, and we still rely on imported chips.
Speaker 4: The build out of TSMC and Arizona's taken time, and
Speaker 4: so you know, you really are seeing big increases in
Speaker 4: imports in those categories, and I fully expect that to
Speaker 4: be the dominant theme of the second half and the
Speaker 4: trade data once we get the data, just on this reallocation.
Speaker 4: For a firm like Apple, the fentanyl tariff which used
Speaker 4: to be twenty percent and now ten that was hitting
Speaker 4: them because the fentanyl tariff didn't have any exclusions. For
Speaker 4: the reciprocal tariff, which was the tariff on everybody else,
Speaker 4: you had an electronics and semiconductor's exclusion. Now that electronics
Speaker 4: and semiconductctor exclusion did not include game stations. We are
Speaker 4: kind of weird and arbitrary and where you draw the limit.
Speaker 4: And that's true across the board. So Apple's mitigation strategy
Speaker 4: would just be get out of China. For some others,
Speaker 4: your mitigation strategy was initially to go to Southeast Asia
Speaker 4: because it was much lower ten than on China. That
Speaker 4: mitigation strategy may not work as well going forward, and
Speaker 4: your next mitigation strategies final assembly in Mexico or Central
Speaker 4: America where you have very strong exclusions, presuming that the
Speaker 4: USMCA renegotiation doesn't change things. To me, one of the
Speaker 4: surprises though, is that in the macro data, you would
Speaker 4: think all this policy uncertainty would have had a bigger
Speaker 4: impact and you really just don't see the policy uncertainty
Speaker 4: impact yet. But it really has made life difficult for
Speaker 4: a lot of firms. And I mean it's made life
Speaker 4: difficult for a lot of analysts. I always put a
Speaker 4: star next to the estimates of the effective teriff rate
Speaker 4: because some tack, some tariffs don't stack, there are exclusions,
Speaker 4: there are rebates.
Speaker 3: It has become insanely complex.
Speaker 2: Anna, I guess all these things always have to come
Speaker 2: back to the FED. You said yourself their model for
Speaker 2: thinking about things and the effect of tariffs was sort
Speaker 2: of broadly holding up the fact that consumers are taking
Speaker 2: about a third of this on the chin and then
Speaker 2: you're seeing the rest in various ways in the corporate America,
Speaker 2: but it's not really as obvious because there's so much
Speaker 2: stuff going on. Does that affect how they might be
Speaker 2: thinking about inflation coming down the track? I mean, one
Speaker 2: thing I heard you say was maybe there isn't this
Speaker 2: isn't a lagged effect. We may have seen most of
Speaker 2: what we're going to see, Is that right?
Speaker 3: Yeah?
Speaker 1: I think what we are seeing right now reflect well
Speaker 1: one of the model's forecasts. It's not the same result
Speaker 1: as what the Fed's research has been saying earlier this year,
Speaker 1: but it matches the result of one particular model from
Speaker 1: twenty eighteen, which is most of it would be absorbed
Speaker 1: by firms and hence there will be the hit would
Speaker 1: be on the labor market. So at the end of
Speaker 1: the day, the US economy is mostly a service driven economy.
Speaker 3: You look at the CPI.
Speaker 1: Index, about three quarters are services sectors, only a quarters
Speaker 1: goods sector. Also, if you look at it from the
Speaker 1: income perspective, two thirds of the US is labor share,
Speaker 1: the rest is capital share. So what will happen to
Speaker 1: inflation in the next twelve months, importantly will be driven
Speaker 1: by the labor market. And there are so many things
Speaker 1: that's heading the labor market. Aside from tariff there's also
Speaker 1: the issue of is AI reducing hiring, which is another
Speaker 1: almost as big as an issue as a driver as tariffs.
Speaker 1: And my answer to that is, I think both tariffs
Speaker 1: and AI point toward the direction of a drag, a
Speaker 1: major drag to the labor market. If I were the FED,
Speaker 1: I would be more worried about downside risks to the
Speaker 1: labor market.
Speaker 2: Right. So my takeaway from this is just because we
Speaker 2: did promise we would sort of answer those riddles that
Speaker 2: I posed at the start questions households. We see and
Speaker 2: hear people talking about affordability and high cost of things.
Speaker 2: They are clearly feeling the pain, and some of that
Speaker 2: is about tariffs, but there's an awful lot of other
Speaker 2: things that are affecting their costs and their outlook. Corporate
Speaker 2: America paying about two thirds of the tariffs. It's not
Speaker 2: being paid by foreign exporters. But there's so much other
Speaker 2: good news in corporate America now with AI and other
Speaker 2: things that the bad news associated with tariffs is literally
Speaker 2: getting lost in the mix. So I guess that might
Speaker 2: take aways that they tarifs are a lot easier to
Speaker 2: talk about than to find in the real life economy.
Speaker 2: Anna Wong, Brad Setter, thank you so much, thank you,
Speaker 2: thank you, thanks for listening to Trumpnomics from Bloomberg. It
Speaker 2: was hosted by me Stephanie Flanders, and I was joined
Speaker 2: by Brad Setter, Senior fellow at the Council of Foreign Relations,
Speaker 2: what Chief US economist for Bloomberg Economics. Trumponomics was produced
Speaker 2: by Samasadi and Moses and with help from Amy Keen.
Speaker 2: Sound design was by Blake Maples. And Kelly Gary and
Speaker 2: Sage Bowman is Bloomberg's head of podcasts, and to help
Speaker 2: others find us and enjoy us, please rate and review
Speaker 2: it highly wherever you listen to podcasts.