Dem
47
GOP
53
After months of threatening new tariffs, Donald Trump finally pulled the trigger yesterday. He declared a national economic "emergency" and used his new emergency powers to impose the tariffs. Somewhere, Reed Smoot and Willis Hawley are smiling since some of the new tariffs will hit 1930s levels. There will be a baseline tariff of 10% on all countries, along with extra high tariffs on some specific countries. Over 60 countries will be hit with tariffs above the 10% baseline.
China will be hit the hardest, with a new 34% tariff on top of the 20% tariff Trump already imposed. If you want a new iPhone, get it before Saturday, when the new tariffs kick in. The total tariff on India will be 26%, on Japan will be 24%, and on the European Union 20%.
Economist Justin Wolfers noted that the U.S. will now have the highest tariffs in the industrialized world. They will literally be off the charts:
Trump is arguing that the tariffs will bring back manufacturing jobs, but that is very unlikely. It might help somewhat in industries that the U.S. already has, like car manufacturing. If Japanese cars go up in price, Ford and General Motors could sell more cars (unless they get greedy and raise their prices to match those of the Japanese cars). On the other hand, they import a lot of the steel used in their cars, so their costs may go up, canceling out the tariffs on Japanese cars. Even worse, though, is that many industries depend on (imported) steel, and their costs will go up and make their finished products even less competitive, causing them to shed jobs. Could U.S. steel production go up? Maybe for specialty steels that are already being made in the U.S. but building a new steel factory is neither cheap nor easy—and nobody wants it in their backyard.
However, for products that are not made in the U.S. at all, or barely, will companies rush to build new factories to make them when the tariffs might be gone by the time the factories are finished? It's very risky and many companies are risk-averse. Is some company going to build a factory to make shoes in the U.S. because the price of cheap shoes from Asia has gone up maybe 20%? Most CEOs will see that as too risky, especially since the Trump tariffs might disappear at any moment, depending on Trump's mood, or else as soon as a new administration takes power. In some cases, like semiconductor chips, a new factory costs tens of billions of dollars. Companies aren't going to make that kind of investment unless they have a strong business case separate from mercurial tariffs. Intel is building one in Ohio and TSMC is building one in Arizona, but those are being subsidized by Joe Biden's CHIPS and Science Act; tariffs don't play any role there.
The situation for pharmaceuticals is even worse. Many generic drugs come from India, which was hit with a 26% tariff. But even if U.S. drug companies wanted to spend tens of billions of dollars building new factories, they would have to contend with the fact that many of the raw materials they need also come from abroad. In the short term, and maybe in the long term, they will just increase prices.
Tariffs will cause pain. How will the pain be distributed? Certainly, the tariffs will raise the cost of living for everyone, but the hit will be much greater for lower-income people because they use most of their income to buy things (other than stocks) and the cheapest things often come from overseas and thus will be hit by tariffs. Axios crunched some numbers and came up with this graphic showing the expected effects on different income groups. It assumes an average tariff of 20%. This is just an estimate, since it depends on how much stuff a person buys from China at 34% tariff vs. 24% for Japan, and 10% for some other countries:
In this model, the poorest 20% of Americans will see their disposable income be reduced by 5.5%, on top of the inflation unrelated to tariffs. For people in the middle, the hit is 3.3%, but will still amount to $3,800/year. The top 20% will suffer more if there is a tariff-induced recession and stock prices fall.
The tariffs will hit groceries (some of which come from Mexico), cars (which come from many countries), and housing materials (also from many countries). Some people will make that up and more from the tax cuts Trump is trying to get through Congress, but most likely only very high income people will be so fortunate.
Trump is already making a pitch that people should expect some pain, but it is for the greater good. Historically, Americans are not keen on doing things for the greater good if it hurts them personally. Jimmy Carter strongly believed that the climate crisis was one of the most serious challenges the U.S. was facing. He called it the moral equivalent of war. He famously gave an address in front of a fire wearing a cardigan sweater to try to convince people to set their thermostats a degree or two lower and put on a sweater. In later speeches, he used the word "sacrifice" hundreds of times. He was rewarded by being defeated for reelection. George W. Bush, on the other hand, got this. After 9/11, he didn't call for sacrifices to catch the perps and rebuild. No, he told people to go shopping. They liked that.
Will Trump be able to sell the idea that the short-term pain is worth waiting for long-term gain? He and his advisers plan to blanket the airwaves telling people to ignore the prices at the supermarket and believe in him. Maybe that will work, but people who are already hard-pressed to pay their bills are not likely going to be happy with higher bills now in return for a promise that some day there might be more jobs in Michigan—even people who live in Michigan won't be satisfied with that.
CBS released a YouGov poll on Monday. It showed that 56% of adults opposed tariffs while 44% approved of them. However, 72% expected prices to go up in the short term. Americans have no idea what "short term" means, though. Maybe steel companies and drug companies and other companies will now race to build new factories in America, but even if they have the money and plans ready to go, it will be years before cheaper products begin rolling off the assembly lines. There will be years of higher prices first. "Give it a decade" is one version of "short term," but the average pro-tariff American is likely thinking in terms of months, not years or decades. We also suspect that much of that 44% is people who don't really understand how tariffs work, and who have embraced the fantasy version of Econ 101 being pitched by Trump.
Yesterday, the Senate voted on a resolution calling for an end to the "emergency" and thus an end to the tariffs. The measure was approved 51-48, with all of the Democrats and independents being joined by four Republicans: Susan Collins (ME), Mitch McConnell (KY), Lisa Murkowski (AK) and Rand Paul (KY). The bill is just symbolic, but it does suggest that if the tariffs are painful, there could eventually be Republican votes in both chambers to shut them down. Thom Tillis (R-NC) and Ron Johnson (R-WI) have also been carping about the tariffs, and those two, plus the four senators from yesterday, would put the anti-tariff forces in shouting distance of a filibuster-proof majority. And once half a dozen Republicans have broken ranks, one can imagine some of the farming-state senators crossing the aisle, too. Chuck Grassley (R-IA) seems an obvious possibility, and the two Republicans from Nebraska, or from Oklahoma, or from Texas, or from Indiana could join him (not to mention Joni Ernst, the other Iowa Republican). It's also plausible that the requisite number of Republicans in the House could be persuaded to sign a discharge petition and force a vote on an anti-tariff bill; some combination of purple-district members, farming-state members, targeted-state members (e.g., from Kentucky, which is particularly easy to punish with counter-tariffs, because so much whiskey comes from there), libertarians, etc. A Republican rebellion against Trump is not imminent, especially since the members are really hoping he backs down yet again. However, if he stays the course, and if the pain is great, a rebellion is certainly possible, especially given what happened in Wisconsin on Tuesday.
Early this morning, stock markets opened in Europe. Investors there were not happy. Futures on the S & P 500, which allow investors to bet in the direction of the index, dropped 3%. NASDAQ futures also dropped 3%. Other benchmarks also dropped around 2%. The value of the U.S. dollar dropped 1%. The initial reaction suggests that nobody believed that Trump was actually going to pull the trigger and were surprised when he finally did it. Do you remember the old story of the little shepherd boy who cried "tariff" and when the villagers came, there was no tariff?
The amount each company dropped seemed to be related to how vulnerable they are. Shares of Adidas and Puma, which make shoes in Vietnam (hit by a 46% tariff) dropped 9%. Maybe going barefoot will become all the rage this summer. Maersk, the shipping giant, dropped 7%. Big banks dropped 4%.
We will learn more when the U.S. markets open, but the stock market is not really a good gauge of the economy. It is more of an indicator of mass hysteria. Also, when stocks drop, some investors see this as a bargain and buy them up, raising prices. The main reason this is even important is that Trump sees the stock market as an indicator of his value and a sinking market makes him angry. And what really makes him furious is that he has figured out how to punish newspapers, media companies, law firms, and universities, but he hasn't figured out a way to punish the stock market yet. Maybe Treasury Secretary Scott Bessent knows a trick or two he can try. So far, all he has mustered is a six-word barely concealed warning: "Doing anything rash would be unwise." Will other countries be deterred from responding? We shall see. (V & Z)