A case of Schrödinger’s tariffs

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0:33Today is the day that U.S. President Donald Trump's tariff pause was supposed to end. As of Monday, though, that's changed. Trump has now said that he'll extend his pause until August 1st. Now, in the three months since he announced this pause, Trump has worked out a deal with the U.K. Well, it looks like the Brits are over the line first, doesn't it? Donald Trump has signed an executive order reducing tariffs on some UK exports into the United States. He's dropped taxes on Chinese goods from almost 150 percent back down to 30. This morning, a major trade breakthrough and possibly some relief for Americans.

1:15The U.S. and China announcing that both countries will dramatically reduce tariffs. And he's penned some more trade agreements in the last couple of weeks, too. To Wall Street now as investors react to news of a trade deal between the U.S. and Vietnam. Investors now weighing what the deal means for companies that manufacture in Vietnam, like Nike, Columbia Sportswear. But for the last three months, a 10 percent baseline tariff has been in place for most all U.S. imports. And it hasn't had much of a visible impact on the American economy yet. What we saw after April the 2nd was a massive shock that really reverberated first through markets and then the US public and really kind of shook faith in the world's largest economy.

2:02However, a few months on, you know, the sky hasn't fallen in. It still seems like the US economy is doing sort of OK. And the inflation that we expected hasn't landed yet. So what gives? Why hasn't the American economy felt the heat from these tariffs yet?

2:27I'm Safiya Ahmed from The Financial Times, in for Michaela Tendera. Today on Behind the Money, we're talking through what the last 90 days can teach us about Trump's tariffs going forward. And whatever may come next, should the U.S. be bracing for a bigger fallout?

3:00I'm here with the FT's U.S. economics editor, Claire Jones, who has been following the ups and downs of Trump's tariff roller coaster. Claire, welcome to the show. It's a pleasure to be here. Thanks a lot for having me. Yeah, happy to have you. So I want to go back to the chaos of those first few days after President Donald Trump's Liberation Day. He announced tariffs on roughly 150 countries and territories around the world, even on an island that is only home to penguins. So what was the initial reaction in markets, Claire? I think it was one of shock and disbelief. I mean, these were the most aggressive American tariffs we've seen for more than a century.

3:41And not only that, they were worked out on the basis of a formula that no one really understood and that, you know, mainstream trade economists didn't really agree with. And the immediate reaction for this was for trillions to be wiped off global stock indices in the days that followed. Yeah. And so what were economists saying at that point about how these tariffs could impact the U.S. economy? I think most economists thought it would spell doom. I mean, we immediately saw people talking about the risk of a US recession. This was an economy that grew by 2.4 % in 2024. It was doing really, really well when Trump took office.

4:24And people just thought all of that growth or almost all of that growth would be completely wiped out. So midway through April, we saw the IMF knock almost a percentage point of its estimate of US growth. And people were saying that's not nearly gloomy enough. What we also saw was people really starting to price in the risk of another bout of inflation in the US. And the suspicion was that U.S. people would be feeling the impact of a lot less growth and also seeing prices rise at a rate which would really hit them in the pocket.

5:07What happens next is just a week later, on April 9th, Trump decides to pause his tariffs, in large part because of chaos in the Treasury market. His pause calms markets a lot, but Claire says the real relief comes when the US and China back down from their one-on-one trade war. What I think changed it for economists was when Scott Besant went to meet his Chinese counterparts in Geneva in May, and there was a sense in which relations between the US and China were improving. I think that gave economists some sense in which they thought, OK, we're going to see a slowdown. We're going to see more inflation, but we might not see the recession that we feared.

5:55So it sounds like getting the situation with China cooled off was a bit of a reprieve here. I think there's definitely the sense that economists think they need more time. there's been a lot of optimism even among economists who are kind of like you know they're known as the dismal science for a reason I mean they tend to be pretty bearish in a lot of ways but I think the May consumer price index figure was supposed to offer us the first indicators of U.S. consumers really seeing the impact of tariffs the reading for inflation in May was a lot cooler than people expected. And I think that boosted hopes among some people, and I think among the public too, that the impact of tariffs could be less drastic than they thought.

6:48The data that Claire's talking about, it shows that inflation has actually fallen over the last few months. The exact opposite of what economists expected. We've actually gotten closer to the Federal Reserve's target of 2 % inflation, which makes a cut in interest rates more likely. Markets have been hitting record highs. Pretty much by all indicators, the U.S. economy is in decent shape.

7:16So Claire, the burning question here. Why haven't we felt the impacts of the tariffs that Trump didn't pause? So I think one of the reasons is Trump has taken an approach that's been a little bit more conciliatory than people might have expected at the start of April. And in fact, you know, we ended up seeing this idea that there was a taco trade, a kind of Trump always chickens out idea kind of start to percolate. Another big factor has been the build-up of inventories before the tariffs were introduced. We saw US imports soar to levels. we'd never seen before in March. So there is a sense in which U.S.

8:04companies knew that some form of tariff was coming, even though the aggressiveness of the tariffs might surprise them. And they were in a position to get ahead of that a little bit and stock up. This means that a lot of the foreign goods U.S. consumers are buying now made it into the country before any tariffs went into effect back in April. So that's one reason why consumers haven't really felt the pain yet. But there is another. The world has a lot of stuff right now, thanks to China. We know that domestic demand in China has been quite weak, and that's led Beijing to focus on building up manufacturing capacity and export capacity.

8:48And what that's led to is, in some industries, a lot of relatively cheap products flooding global markets. But is the consensus right now, is it still that we are waiting to see more impact from the original tariffs, the ones that weren't paused? I think most of the effects are still to come. Look, we're at a point where there's still a lot of uncertainty out there. Firms don't know how much they're going to need to pass on to their customers, how much the companies they import goods from are going to stomach themselves. So even though the data at the moment suggests we're still doing okay, you know, not only is inflation not as bad as we feared, the labour market remains pretty strong.

9:34It's all looking okay, but that doesn't mean that we're not in for a few shaky months as the summer goes on. So with these tariffs, it's kind of a Case of Schrodinger's tariffs, if we might call it that, right? They're there, but we don't feel them. I love that. Schrodinger's tariffs. That's great. But companies are having to pay more to import goods. In May of this year, the U.S. collected a record$24 billion in customs duties. So I'd assume that one way for companies to offset that cost would be by raising prices for consumers. So why haven't we seen that happen yet? I mean, we offer some products, but it's a very limited amount of products.

10:18I mean, I think a big factor here is definitely the stockpiling that took place. Firms in general are a little bit reluctant to pass on price increases in an environment where their rivals might not be doing the same. So they might be waiting to see what their rivals are doing before they decide to really raise prices for fear of really losing market share. I think another aspect of it is because most of our income, we don't necessarily spend on foreign produced goods. You know, the US is what economists call quite a closed economy, which means a lot is produced domestically and especially services.

11:03So a lot of, you know, what we're doing day to day is just not really impacted by tariffs because it is domestically produced.

11:17The future of fixed income investing will continue to blur the lines between public and private markets. Nuveen's credit platform was built to navigate this shifting landscape, channeling capital toward the businesses, infrastructure and energy solutions that are shaping tomorrow's economy, all while aiming to deliver the resilience and returns that portfolios seek today. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible. So Claire, we're recording this on Monday, a couple of days before the pause was officially meant to be lifted.

11:54Where do things stand right now? What has been going on recently? So we've seen a few things, some quite positive. It seems as though the administration has come to a deal with Vietnam. So it'll be interesting to see what comes of that. And then later on today, the White House has said it will send out a number of letters to a number of countries outlining what they propose the tariff will be once the extended pause, not of July the 9th, but now August the 1st, kicks in. Okay, so I want to now discuss what could happen going forward. So scenario number one, we're at this point of Schrodinger's tariffs, as we're calling them.

12:45They're there, but we don't really feel them yet. Let's say things don't change a ton once this tariff pause is over. Trump sticks to his 10 % blanket tariffs, his China tariff. In this scenario, to what extent are we still waiting for the other shoe to drop? I think the question highlights how bizarre the situation is that we find ourselves in. On the campaign trail, when Trump was talking about a 10 % tariff, people were pretty shocked by that because it was the sort of level that we hadn't seen for many generations in the US. We've seen trade barriers collapse more or less constantly since the end of World War II.

13:26But now we're in a world where I think if you outline that scenario to most economists, the most people in financial markets, they'd kind of think, growth will be a bit weaker. Prices might be a bit higher. But, you know, we could live with that. Now, what about the possibility that businesses run out of their stockpiled goods and then end up having to pass on some of the costs of the tariffs to consumers? Would that look like a 10 % price increase because it's a 10 % tariff? I think we've seen it's very hard to tell how companies would react. And that's what we saw with the 2018 tariffs as well.

14:08There's a really nice research paper by two University of Chicago economists and one guy at the Fed who note that if we go back to Trump's first term, when in 2018 he imposed a tariff on foreign made washing machines, the tariffs on foreign manufactured washing machines increased the price for US consumers. But not only that, they also increased the price of dryers, which weren't exposed to any tariffs during Trump's first term by more or less the same amount. And for domestically manufactured washing machines, their prices also went up too. I think, you know, people might have heard that there was going to be a 10 % tariff and thought the prices on all goods would rise by 10 % as a result.

15:04Whereas in fact, it's very hard to tell what will or won't end up being affected by the tariffs. Okay, so now, Claire, I want to discuss the second scenario, which is that things do change quite drastically. First of all, at this point, what is your sense of what we may see happen on July 9th? Well, the fact that these letters are going to go out Monday to say higher tariffs will kick in August the 1st, has in effect moved a lot of the pressure back from July the 9th to the following month. However, there's still this sense in which, you know, we're probably not going to go back to a world that was quite as bad as it was on April the 2nd.

15:52But it looks as though from later on in the summer onwards, we are going to see higher tariffs on some countries compared with the 10 % we've got now. We already see that, you know, Trump's made a deal with Vietnam, not 10%, but 20%. And that kind of gives a sense that we'll end up somewhere in between where we've been over the past few months and where we were in early April. And so in that situation, if we end up somewhere in the middle, what does that look like in terms of markets and the economy? So there's two elements of that. One is that just extending the pause still leaves you with this issue of uncertainty where businesses and foreign governments don't really know what's going on.

16:42Do we feel like we've got something in the middle that's set in stone? Or do we feel like, you know, this is just a placeholder and there's more to come, but we don't quite know what? I think that's a big factor in that. In terms of where we end up in the middle, I just think it's a matter of where that point is. The larger the average effective tariff rate, the more severe the risk to US inflation and growth in US jobs. And the greater the chance that this isn't just a one-off price shock and that it's something that endures and really seeps into the public mindset. And we also know that for Biden, US inflation costs him very dearly.

17:29And I think even though Trump can potentially blame something else for US inflation other than his tariffs, people really, really don't like it when prices go up. And it's a political risk too. Claire says that economists project that for every 10 % hike in tariffs globally, there could be a half to a full percent price increase across the board. And the higher tariffs go, the more likely it is that things could spiral. There's always a risk with inflation that it becomes self-fulfilling. So what does that mean? What it means is that if people see prices go up, they start thinking, oh, well, I need to be paid more.

18:14So they up their expectations of, you know wages in negotiations and you know what does that lead to as well maybe other companies think like oh I've got to pay my staff more so I'm going to raise my costs or I'm seeing a firm down the road do the same so I'm going to raise my costs too and you get to that point where inflation becomes like it was in the late 70s or early 80s or even what we saw post-covid for a little bit where it becomes a vicious cycle, where it gets embedded into the economy and you get high prices perpetuating high prices and it just then it becomes very, very difficult to control.

18:58So Claire, what would you say is the biggest worry for whenever new tariffs go into effect and like the potential aftermath from those. What is kind of the worst case scenario at this point? The worst case scenario, I think, is that we end up with a series of never ending deadlines that the uncertainty that we've had just doesn't really go away where, you know, okay, we see a few trade deals signed here and there, but really that it remains a very, very uncertain landscape. And that's something that US shoppers, businesses in America and also foreign governments just really won't know quite how to respond to.

19:46And when you're stuck with a scenario like that, it just it gradually drags on economic growth. Right. So kind of just that the roller coaster doesn't end. There's no resolution. Yeah, I think that's it. Right. It's the never ending roller coaster. at some point you just want to say stop it and get off. All right. Well, Claire, thank you for coming on the show. No problem at all. Real pleasure. Thank you.

20:16Today's episode was hosted by me, Safiya Ahmed. It was also produced by me, Katya Kumkova and Michaela Tendera. Sound design and mixing was done by CM Giovinco. And original music is by Dennis Brown. Topher Forjas is the FT's acting co-head of audio. Thanks for listening.

20:59infrastructure and energy solutions that are shaping tomorrow's economy, all while aiming to deliver the resilience and returns that portfolios seek today. Nuveen. Invest like the future is watching. Visit nuveen.com slash future to learn more. Investing involves risk. Principal loss is possible.