How Trump’s Tariffs Are Everywhere and Nowhere

Episode Summary

Executive Summary: The episode examines whether Trump’s tariffs are actually being borne by foreign exporters, U.S. consumers, or domestic firms. Guests conclude foreigners are paying little; consumers have absorbed only part of the cost; and most of the burden is hitting U.S. intermediaries and smaller firms. Tariffs have raised prices and squeezed profits, but broader forces like AI spending, stock-market wealth effects, and exemptions have muted macro damage. There is little evidence tariffs have reduced imports from China or reshored manufacturing.

Main Topics: Who is paying for Trump’s tariffs? (Priority: 5/5): The hosts and guests assess the incidence of tariffs using import prices, CPI, PPI, and national accounts. The conclusion is that foreign exporters are not absorbing much; the burden falls mainly on U.S. firms and consumers. Inflation and consumer price pass-through (Priority: 5/5): Anna Wong estimates tariffs have added around 0.3 percentage points to core inflation, mostly in core goods such as appliances and sports equipment, with consumers absorbing roughly a quarter of the cost. Corporate margins, profits, and sectoral effects (Priority: 4/5): Brad Setser and Anna Wong explain why the stock market can look strong while tariff pain shows up in sectors like manufacturing, wholesale, and transportation, especially among smaller firms rather than large listed companies. Why the market and earnings calls look resilient (Priority: 4/5): Much of corporate America appears insulated by exemptions for tech and pharma, offsetting demand from AI/data-center investment, and a weaker dollar boosting overseas earnings. Trade deficit and China de-risking (Priority: 5/5): Despite the tariff shock, there is little evidence of a smaller U.S. trade deficit or meaningful reshoring. Some supply chains moved from China to Southeast Asia or Taiwan, but not back to the U.S. Policy uncertainty and macro outlook (Priority: 3/5): The guests say tariff policy has been erratic and complex, making measurement difficult. Still, they do not see recession-level damage; instead, they expect more pressure on labor markets and gradual inflation effects.

Key Arguments: Foreign exporters are largely not paying the tariffs; import price data suggest the burden stays outside foreign prices. U.S. consumers have absorbed only part of the cost, with most of the rest borne by domestic firms and intermediaries. Tariffs have raised core inflation modestly, but the effect is smaller than many feared because pass-through is incomplete. Large public companies can look healthy because the most profitable sectors were exempted or offset by AI-driven demand and a weaker dollar. National accounts show corporate profits fell sharply in Q2, especially in manufacturing and wholesale, indicating hidden margin pressure. The tariffs have not yet produced a manufacturing boom or a meaningful shift of production back to the United States. The trade deficit has not clearly fallen; instead, trade has been distorted by front-running, gold imports, pharma flows, and supply-chain rerouting. The Fed’s framework suggests tariffs can push up unemployment modestly, and the bigger concern may be labor-market weakness rather than runaway inflation.

Data Points: Effective U.S. tariff rate: ~14.5% (roughly 14% after food-import exemptions) - Anna Wong’s estimate of the current average tariff burden on goods entering the U.S. Pre-Trump effective tariff rate: ~2% to 3% - Referenced as the approximate tariff level before this administration. Tariff incidence on foreigners: 4% - Anna Wong’s breakdown of who is paying for tariffs based on import prices and related data. Tariff incidence on U.S. intermediate firms: 70% - Estimated share absorbed by domestic firms in the supply chain. Tariff incidence on U.S. consumers: 26% - Estimated share passed through to consumers through higher prices. Tariff impact on inflation: ~0.3 percentage points - Estimated increase in CPI and core PCE inflation from tariffs. Core goods CPI change: from -0.1% YoY to 1.5% YoY - Used to illustrate tariff pass-through into goods inflation. Fed model inflation shock: ~1.1 percentage points - If tariffs had 100% pass-through, according to the Fed’s back-of-envelope model. U.S. corporate profit revision Q2: from $65 billion to $7 billion - Revised national accounts estimate cited by Anna Wong. Unemployment forecast change: from 4.1% to 4.5% - Wall Street consensus for end-2025 unemployment shifted upward over the year. Expected unemployment impact: 0.3 to 0.5 percentage points - Fed simulation referenced by Anna Wong for a 15-point tariff shock under a look-through approach. Stock-listed firms’ foreign revenue share: 30% - Anna Wong notes large listed firms derive about a third of revenues from outside the U.S. U.S. firms with fewer than 20 employees: 90% - Used to emphasize why stock-market performance does not reflect the whole economy. Services share of CPI: about 75% - Anna Wong notes the U.S. economy is largely services-driven. Labor share of income: about two-thirds - Used to argue labor-market conditions will drive inflation ahead. Dollar move: ~10% depreciation - Cited as a factor boosting foreign revenues for S&P 500 companies. China tariff level after latest deal: 30% to 20% - Brad Setser says the base tariff on China is set to fall under the latest negotiated deal. Tariffs on some goods from Trump 1 trade cases: 25%, 7.5%, or 0% - Brad Setzer describes legacy tariffs that remain in place on various goods.

Pivotal Quotes: "“The stock market is not the economy.”" — Anna Wong: Used to explain why strong public-company earnings can coexist with broader profit pressure in the real economy. "“So far the trade deficit has not gone down.”" — Brad Setser: Direct answer to whether tariffs are reducing imports and the U.S. trade deficit. "“There is zero evidence, I would say, that is happening.”" — Brad Setser: His assessment that tariffs have not yet caused production to move back to the United States.

Implications: Tariffs are raising costs and squeezing parts of corporate America, but not enough to derail the economy. Expect more modest inflation pressure, continued labor-market risk, and little near-term evidence of reshoring or a smaller China trade deficit.