How Trump’s Tariffs Are Everywhere and Nowhere

Episode Summary

Executive Summary: The episode examines Trump’s tariffs and finds they have raised U.S. import costs and prices, but the burden has been split mostly between U.S. firms and consumers rather than foreign exporters. Inflation and some profits have been affected, yet the broader economy has held up thanks to AI-driven investment, a strong stock market, and other offsets. The tariffs have not meaningfully reduced the trade deficit or brought production back to the U.S., and their China-diversion effects appear weaker than intended.

Main Topics: Who is paying for Trump’s tariffs? (Priority: 5/5): Anna Wong and Brad Setser estimate the tariff burden is mostly absorbed inside the U.S. economy: intermediate firms bear the largest share, consumers absorb a smaller but visible portion, and foreigners pay very little. Tariffs’ effect on inflation and prices (Priority: 5/5): The discussion focuses on evidence that tariffs are showing up in core goods prices and nudging inflation higher, especially for appliances, washing machines, audio equipment, and sports goods. Why corporate earnings still look strong (Priority: 4/5): Big public companies have not uniformly shown tariff pain because many high-profit sectors are exempt, other shocks offset tariff costs, and stock-market gains plus AI spending are supporting demand. Impact on profits and smaller firms (Priority: 4/5): National accounts suggest profit damage is more visible in manufacturing, wholesale trade, and transportation than in the S&P 500, implying smaller and less visible firms may be bearing more of the cost. Trade deficit and China reallocation (Priority: 5/5): The tariffs have not yet reduced the overall U.S. trade deficit or brought production back to America, and recent tariff structures may be too high on allies and too low on China to force major relocation. Policy uncertainty, exemptions, and supply-chain adaptation (Priority: 4/5): Frequent policy changes, exemptions, and stackable tariffs create confusion, while firms respond by rerouting sourcing to Southeast Asia, Mexico, and USMCA partners rather than reshoring. Fed implications and labor-market risk (Priority: 4/5): The speakers argue tariff pass-through and AI-related hiring pressure could create more downside risk to employment than to inflation, shaping how the Fed should interpret the data.

Key Arguments: Tariffs have increased the effective U.S. import tax sharply, but most of the cost is being absorbed domestically rather than by foreign exporters. Roughly one-third of tariff costs have been passed to consumers, while the rest is largely borne by intermediate U.S. firms. Tariff-related inflation is measurable but modest so far, adding about 0.3 percentage points to core CPI/core PCE. Corporate America’s headline earnings have been cushioned by exemptions, offsetting demand, AI investment, and a strong stock market. The biggest profit hits show up in sectors outside the stock market’s core index, especially manufacturing, wholesale trade, and transportation. Tariffs have not yet delivered the core Trump objective of shrinking the trade deficit or restoring U.S. manufacturing production. Reallocation away from China is happening partly to Southeast Asia and Taiwan, but current tariff levels may not create enough incentive to reshore to the U.S. Policy volatility and exemptions make the tariff regime hard to measure and encourage firms to delay price changes or restructure supply chains. The Fed’s main worry should be labor-market downside risk, not just inflation, because tariffs and AI both reduce hiring pressure.

Data Points: Effective U.S. tariff rate: ~14.5% - Anna Wong says the current effective tariff rate is roughly 14.5%, down slightly after recent food-import exemptions. Effective tariff rate before Trump administration: ~2-3% - Used as a comparison to show how large the tariff increase has been. Tariff burden borne by foreigners: ~4% - Anna’s estimate of the share absorbed by foreign exporters. Tariff burden borne by intermediate U.S. firms: ~70% - Largest share of tariff costs absorbed in the U.S. supply chain. Tariff burden borne by consumers: ~26% - Share passed through to U.S. households through higher prices. Inflation impact on core CPI/core PCE: ~0.3 percentage points higher - Bloomberg Economics estimates tariff pass-through has raised inflation by about 0.3 points. Core goods CPI year-over-year: from -0.1% to 1.5% - Anna cites this rise as evidence of tariff pass-through into goods prices. Fed model inflation effect at 100% pass-through: ~1.1 percentage points - Anna references a Fed back-of-envelope model for a full-pass-through scenario. U.S. GDP corporate profits revision, Q2: from ~$65 billion to ~$7 billion - Anna points to a large downward revision in second-quarter corporate profits. Wall Street unemployment forecast for end-2025: from 4.1% to 4.5% - Used to suggest tariffs are contributing to a modest deterioration in labor-market expectations. Stock-market company coverage: ~500 firms in S&P 500 - Anna contrasts public-market coverage with the much larger universe of U.S. firms. Total number of U.S. firms: ~7 million - Anna uses this to argue the stock market is not the same as the economy. Small-firm share: 90% have fewer than 20 employees - Shows how much of the economy is not represented by large listed companies. Foreign-revenue share of S&P 500 firms: ~30% - Explains why a weaker dollar can offset tariff pressure for listed multinationals. Dollar move: ~10% depreciation - Anna says this boosted foreign revenues for S&P 500 firms when translated back into dollars. China tariff level: 30% down to 20% - Brad describes the new tariff path for China after the Korea-negotiated deal. Tariffs on some Chinese goods: 27.5% - Brad says many goods still face very high levies. Legacy tariffs on some goods: 25%, 7.5%, or 0% - He notes older tariffs from Trump 1 remain in place on some products. Reciprocal tariff plus exclusions: electronics and semiconductors excluded; game stations not excluded - Brad uses this to illustrate arbitrary tariff design.

Pivotal Quotes: "The stock market is not the economy." — Anna Wong: Used to explain why S&P 500 earnings can look strong while many smaller firms still feel tariff pressure. "There’s really no impact that there’s been a reallocation of production back to the United States. We’re just not seeing a boom in manufacturing." — Brad Setser: Direct assessment of whether tariffs are reshoring production. "Tariffs are a lot easier to talk about than to find in the real life economy." — Stephanie Flanders: Closing takeaway that captures the episode’s central conclusion about mixed, hard-to-see real-world effects.

Implications: Tariffs are raising costs and nudging inflation, but their biggest effects are hidden in supply chains and smaller firms. They have not yet reshored production or cut the deficit, while AI and strong markets mask the damage. Future Fed and trade-policy debates will hinge on labor impacts and tariff durability.