How Trump’s Tariffs Are Everywhere and Nowhere

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1:13I'm Stephanie Flanders, Head of Government and Economics at Bloomberg, and this is Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy, what on earth is going to happen next.

1:30This week, we're investigating the curious case of the Everywhere Nowhere tariffs. For as long as Donald Trump has been back in the White House, everybody has been talking about his tariffs. And never more than on April 2nd, when he announced he was liberating the US economy by slapping hefty trade levies on pretty much all of America's trading partners. Since then, we've talked about the level of the tariffs, the negotiations over bringing them down, Politicians and consumers have also talked about how they are adding to inflation, especially in all those big arguments about affordability and the cost of living before and after the recent US off-year elections.

2:09The president recently has himself seemed to admit that tariffs on some key food products like beef and coffee were pushing up costs for households and he wanted to cut them. We've also waited to see how tariffs might hit jobs and profits for American companies. But amid all this talk, we've not seen a lot of real evidence of where exactly the tariffs were hurting. And with the stock market still booming, we've not heard many businesses admit that tariffs were affecting their bottom line. Though, as you'll hear later, recent GDP revisions do suggest that US profits in the second quarter of this year did fall off a cliff.

2:45So who has paid for the tariffs? How have they affected the US economy? and what's the evidence that they're accomplishing any or all of the president's objectives, notably cutting the trade deficit with China? They're the riddles we're hoping to solve on today's show and we've got two great detectives to help us get to the bottom of it. Senior fellow at the Council on Foreign Relations, Brad Setzer, my old friend. He's an expert on global trade and capital flows and his regular blog on the CFR page is called Follow the Money. We worked together approximately half a million years ago, and unlike me, he then went back to the U.S.

3:24Treasury to be Deputy Assistant Secretary for International Economics under President Obama. Brad, great to have you finally on Trumponomics. It's a pleasure, and it wasn't that long ago. We obviously both still look very youthful, but it makes me feel old. It destroys the illusion. Also joining us, as so often, Anna Wong, Chief U.S. Economist for Bloomberg Economics. And before this, she worked at the Federal Reserve, U.S. Treasury, and on to comment at the White House Council of Economic Advisers during Donald Trump's first term. Anna, hi. Hi. I actually also worked for Brad Setzer under Obama administration when he was Deputy Assistant Secretary.

4:03He's my old boss.

4:10Anna, let me start with you. Just remind us how much the average or effective tariff rate on goods coming into the US has gone up. And we've probably lost track of a lot of the negotiations and where things are. But there has been a significant increase in the level of tariffs to come into the US. So the effective tariff rate is roughly around 14.5%, just roughly. Trump administration just announced some exemptions for food imports last Friday. So that should knock off another 0.2 percentage point from that. So you can say roughly around 14-ish percent. From memory, I think it was about two or three coming into this administration.

4:56So it's a pretty significant increase. The question I asked you last week is, who is paying for these tariffs? Where are we seeing it? Yeah, so we look at all the data we have, which is import prices, and you reconstruct a tariff-inclusive import price index. We also looked at PPI, we looked at CPI. So taking all the information together, we have come to this breakdown. It would be about 4 % of the price cost borne by foreigners, 70 % absorbed by any kind of intermediate firms in the U.S. and 26 % absorbed by U.S. consumers through higher prices. When you say it's that certain chunk of it has been absorbed by consumers, that 30%, we're seeing that in prices?

5:44Yes. So we estimate that CPI and core PCE inflation is roughly 0.3 percentage point higher than it would have been without those tariffs. So most of those tariffs passed through are showing up in core goods, CPI, things like house appliances, washing machines, or audio equipment, sports equipment, those type of things. In fact, that 0.3 percentage point addition on core CPI and core PCE inflation, that's quite similar to a top-down model from the Fed too. So at the Fed, we have this back of envelope model on the impact of tariff. So a tariff hit similar to what we see right now in total would have pushed inflation up by 1.1 percentage point, roughly there, according to the Fed model, if there's 100 percent pass-through.

6:41So if there's 0.3 or roughly 30 percent of the pass-through, then that corresponds to roughly 0.3 percentage point addition on CPI. And that's indeed what we have seen in the year-over-year increase of core goods CPI. We have seen that went from negative 0.1%, that's year-over-year core goods CPI, to now 1.5 % year-over-year now. That's a 1.6 percentage point swing. And Brad, we'll get into some of the details, but just sort of on the broad scope of what Anna just said, that 30 % absorbed by consumers, and then it looks like about 60%, 65 % by those kind of intermediate firms who have to pay the tariff at the border.

7:29Is that roughly how you would look at it? I mean, more or less, yeah. I think a lot of estimates are converging around similar numbers. You can just see from the import price data that foreigners aren't paying it. So then it's just a question of who's absorbing it in the US economy. It has been a slight surprise that only roughly a third looks like it's been passed on to consumers. An unusually high fraction seems like it's been absorbed by the supply chain, by intermediate importers. I mean, obviously at Bloomberg, we are often listening in on earnings calls when companies are announcing their results.

8:03We're tracking profits and earning revisions. And we're also keeping an eye on the stock market, which seems to have been doing pretty well. And even just in this recent earnings season, I seem to remember my colleagues talking about most companies actually beating their expectations on profits. Maybe you first, Brad. Why do you think we're not hearing so much from companies about having to pay these, having to take these higher prices or the tariffs in their margins? Well, I mean, sort of one of the ironies is that the parts of the U.S. economy that generate the super profits, you know, the tech sector, the pharmaceutical sector, they've been entirely exempted from the tariffs.

8:45Why wouldn't NVIDIA be talking about it? Because there isn't yet a tariff on chips. Why is it not impacting Pfizer's bottom line? Well, there isn't yet a tariff on pharmaceuticals. And we've had some kind of crazy fluctuations in trade because of expected tariffs on pharmaceuticals. But at the end of the day, the tariffs haven't hit those sectors. And I guess in other cases, you're seeing offsetting shocks. Like a firm like Caterpillar would normally feel the impact of the steel tariffs, would normally feel the impact of higher tariffs on parts. But there's a lot of demand for generators and for some of the equipment used to make data centers.

9:20So you kind of end up with offsetting shocks and don't have that clear impact on the bottom line. That's the best I can do. It is a bit of a mystery. It does not feel like it's been fully passed on by consumers. We know it hasn't been absorbed by importers. So it implicitly has to be impacting someone's bottom line in those sectors where there are tariffs. Anna, what's your sense of where that, I mean, if you're saying 60 percent is being felt somewhere by corporate America, is this the little guy who's finding they're getting squeezed rather than these big companies we hear on the earnings calls?

9:56Yeah. So the stock market is not the economy. It's very important to know that the S &P 500 only has about 500 firms, but the total U.S. economy has about 7 million firms. You have that on your Twitter handle, don't you, more or less, you know, brackets, you know, the stock market is not the economy. And of which 90 percent of those 7 million firms have only less than 20 employees. And most U.S. firms don't export at all either. And another very specific feature about the stock listed companies is that in total, they generate 30 % of revenues from outside of the US. So offsetting shocks include, for example, the dollar depreciation this year.

10:39And that 10 % dollar depreciation had boosted the revenues, foreign revenues for those S &P 500 firms. So their profits abroad are suddenly, if you're just measuring it in the US, they're worth more. Yes. So if you want to look at the profit situation in the rest of America, primarily these small businesses, we have to look to the national accounts. And there you see a pretty clear evidence of profit hit. So the second quarter GDP corporate profit was revised down significantly from the first estimate of roughly 65 billion to just 7 billion in the revised estimate. 65 turned into seven. I know that particular bit of the national accounts does sometimes jump around a lot, but is that a big revision?

11:26That is a big revision. When you look at this, the change of corporate profits from the second quarter of 2025 compared to the end of 2024, you see that most of that decline are in manufacturing sector, wholesale trade, and transportation, warehousing, motor vehicles. So we are seeing at the aggregate levels, some kind of margin hits, but it's just not showing up in the stock market. That is a very striking number, the profits having gone down from 65 and a half to just under 7 billion in the second quarter. And as you pointed out, Anna, there's evidence that it's the wholesale sector. And when you look a bit deeper into the numbers, are we then likely to see if the corporate sector as a whole, even if it's these kind of smaller businesses that are a little bit below the radar, if they're the ones who are feeling the hit, are we going to see that in jobs?

12:22Is there an economic impact, which we're still waiting to see from that? Yeah, so I think we can always look at these empirical data and then go back to the theoretical models and think about, evaluate how good or bad they were. So going back to this Fed model that internally the divisional of international finance has on the impact of tariff. In 2018, the Fed staff ran assimilation on what a 15 percentage point tariff shock would do to unemployment. And the impact depends on whether the Fed is looking through the impact on prices. So I would say in the current situation, the Fed is looking through it somewhere in between.

13:05So according to the look through strategy, the unemployment rate should be going up by about 0.3 to 0.5 percentage points in the first year after the shock. And I would say that's roughly where we are, because when we start the year, the Wall Street consensus for unemployment rate was about 4.1 at the end of 2025. And now we're looking at 4.5. So in fact, these macro models are performing okay. Brad, if you're looking at the kind of overall impact of these tariffs, they've obviously been very uncertain, unpredictable. And if we were designing a trade policy, we'd probably want, at the very least, we'd probably want something that was a bit more stable and followed a slightly more predictable path.

13:56But if you just were told that the effective tariff rate had gone up from 3 % to around 14 % over the course of six to nine months, and then you looked at these various economic indicators, that change in the openness of the US economy, do you think it's had a less harmful impact than we might have predicted at the beginning of the year? Yeah, modestly less harmful. I mean, largely because businesses have absorbed so much of the one-off shock. It hasn't been all felt by consumers. And so consumers really haven't pared back spending on other goods. Of course, part of it is also that other things are happening.

14:35But for the tariffs, the big increase in spending on data centers and all the investment in AI might have been propelling the U.S. economy quite forward at a pretty fast clip. The strong run-up in the stock market is generating a wealth effect even now, and that is also supporting household consumption. But all told, if you said we've increased tariffs by a percentage point with no offsetting policy changes, and at the end of that six months, consumer prices are only up 30 basis points, that's a little smaller than I would have expected. Now, I do think, and I think Jay Powell thinks as well, that we're going to see a little bit of a lagged increase in the price level.

15:14But in aggregate, it was never at this level, as opposed to the levels that came out after Liberation Day. It was never at a level that I thought was going to lead to a recession. In order to get to a recession, you needed tariffs of more like 20 percent, two percentage points of GDP taken out of the economy. And you needed no offsets, no tax cuts to put money back in. And what we have seen is a much compared to that giant shock, a more manageable shock. and then there have been some offsets. It's not easy. We talked about it before on the show. It's pretty hard for politicians to raise taxes in the current environment.

15:51But the president has raised these taxes and he's made a bunch of revenues. And he's arguably paid a bit of a political price for it. I mean, hence the fall in the price of coffee or the tariff on coffee. Hence the decisions to exempt consumer goods that aren't made in the U.S. from some of the tariffs. even if the aggregate impact has been somewhat more modest than might have been initially expected, it still has impacted certain very salient prices. And it certainly directionally has increased the cost of living, which is an issue here, as you know. So I wouldn't say it's been politically costless.

16:27It just hasn't pushed the economy off a generally growing trajectory.

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17:50Let's sort of change the focus a bit. I guess we should also put in a health warning. Anyone who's a dedicated listener will notice that we've resolutely not talked about the possibility that half of these tariffs are going to get ruled unconstitutional by the Supreme Court. The principal reason why we haven't talked about them is everybody else's. And the slightly less principled is that we just thought every time we did would be guaranteed that the moment we put it out, there would be a decision that would suddenly put everything in question. So when that happens, we will get Brad and Anna back to talk about what that means.

18:21But Brad, outside of China, I suspect you're one of a handful of people who understands the Chinese balance of payments. and you've often pointed to things that people don't want to notice or would rather go away. Of course, one of the key objectives of these tariffs was to reduce the U.S. trade deficit and encourage American producers to make more in the U.S., encourage U.S. consumers to buy more American products. I mean, obviously it is early days, but how is that side of the agenda going? Well, I mean, unfortunately, there's really no impact that there's been a reallocation of production back to the United States.

19:02We're just not seeing a boom in manufacturing and not a boom in the kind of manufacturing that was substitute for China. So just zero evidence, I would say, that is happening. Again, early, but zero is the right number. There was a reallocation of final assembly away from China to Southeast Asia in a quite significant way, and also to Taiwan. If you look at the latest trade numbers out of Taiwan, they're going up like crazy. And that is a function, at least in part, of doing your servers in Taiwan rather than final assembly in China. The interesting thing is that after the latest deal, the deal that was negotiated in Korea, the base tariff on China is going to come down from 30 to 20.

19:47Now, there's legacy tariffs on some goods from the Trump One trade case. And in some cases, those are 25. In some cases, those are 7.5. In some cases, those are zero. But for most of the goods, the new tariffs are either going to be 27.5, which is high, or 20, which is also high. but 20 is not that different from the 19 or 20 now facing Southeast Asia. So structurally, I think there was a lot of movement out of China to do final assembly elsewhere in anticipation of a different tariff structure than has actually emerged. What has emerged, if this sticks, is a tariff structure that's too high on Southeast Asia and too low on China to generate the kind of reallocation away from China that you saw in Trump's first term.

20:32And it's still too small, particularly with the exchange rate moves, to get much production coming back to the U.S. That's really interesting. I mean, I think a lot of fair-minded people will say it's pretty hard to just quickly build a factory. And so we might not see that physical production move. But I think if your main goal is to wean the U.S. off a particular reliance on China, and that's obviously been a goal that's also carried through from the first Trump administration through the Biden years, That is a very striking conclusion from the recent trade deal. And actually, some of our geoeconomist analysts were making the same point.

21:10It seems odd to be, in effect, penalizing some of the countries that are trying to compete with China, whose basket we might want to put more eggs in. But Anna, the trade deficit, is there a sense, is the composition of the trade deficit fit? I mean, have we reduced the amount of imports coming into the U.S. with these tariffs? I can offer a perspective on what these earning calls are saying. So Bloomberg Economics and Bloomberg Intelligence have been using AI extraction technology to extract all the tariff-related quotes from the earnings transcripts so far. And what I have seen is that, number one, a theme that emerges, as Brad said, there are many other offsetting things that's happening outside of this tariff space that's helping beef up the margins of firms like AI and also deregulations on environmental stuff on autos.

22:02However, the second most dominant theme, I would say, is how firms mitigate these tariff costs. And I see a lot of firms mentioning sourcing, more efficient sourcing outside of China. And in fact, many of these firms are projecting forward guidance saying that in 2026, their effective tariff rate would be lower. I mean, regardless of what the statutory tariff rate is, because many of the supply chain mitigation strategies they put in this year will be in full operation next year. And all of it surrounds sourcing outside of China. And I looked at those statements and I wonder, well, but what if there's a U.S.-China deal that lower the Chinese tariff to below the Southeast Asia?

22:51because many of these mitigation strategies involve moving to Southeast Asia or to the USMCA region. As of now, this positive picture partly hinges on these mitigation strategies. That's interesting. They thought that was the one sure thing, was that they would want to be a bit less reliant on China, and then it turns out maybe they didn't need it. I am kind of intrigued. He's been so variable and unstable in his trade policies that you've told us in the past producers were possibly not raising prices because they thought, well, I might have to cut prices again. They may all go away in a week's time.

23:27And at the same time, the threat of tariffs or the reality of tariffs was making them do all these cost-cutting things. If the tariffs then go away down the road, he will have helped increase the efficiency of U.S. business, right? Probably, but if the tariff were to suddenly go away, for example, with the Supreme Court ruling, it would be super bullish for the market. Because when you read these earning transcripts, what struck me is that had there not been tariffs, these profit margins would be through the roof. Like even with tariffs, they're already talking about it being really good. And even Ford and GM, these big auto makers, are talking about how they're finally getting to margins of 8 % to 10%.

24:13And the auto sector is so resilient. In fact, for them, the tariff is creating domestic protectionism. I mean, which is benefiting them from their perspective, even though it does create more than one billion tariff costs for some of these auto firms. But the original intent of tariff is domestic protectionism. And some firms, for example, in auto and steel sectors are seeing some of that. Brad, quite a lot of voters for Donald Trump thought this was just about buying fewer goods from the rest of the world. And we have made those goods more expensive to some degree. Have we reduced the amount coming into the country?

24:56Or have the tariffs reduced the number of imports coming into the country? I'll start with a dodge and then come back and actually answer the question. The dodge is, of course, we lack trade data for the past two months because the government... Fair point. The correct answer is that so far the trade deficit has not gone down. And then the further component of that answer is we've had some of the most crazy swings in the trade data in human history tied to swings in products that didn't end up having any tariffs. So we have this huge surge in gold imports in the first quarter because everybody was afraid that gold was going to get tariffed.

25:32Well, guess what? Gold didn't get hit by any tariffs. And now some of that gold's flying out of the U.S. back to London. People were terrified that the high-value-added pharmaceuticals were going to be tariffed. And that was going to undermine all these tax-efficient supply chains, i.e., produce in Ireland to avoid paying U.S. corporate income tax. So you have gigantic quantities, not big quantities physically, but value-wise, crazy numbers of pharmaceuticals coming into the U.S. in the first quarter and so forth. That turned out not to be necessary because pharmaceutical companies are doing deals.