How Trump’s Tariffs Plus Iran War May Help US Manufacturing

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2:13When you look at that tariff chart and say, oh, well, wait a minute, you know, how do the tariffs today compare to what were announced and so forth, you have to also look at the flip side and recognize that we're at the point where, you know, the very largest corporations and our trading partners have said, yes, this is working, this is going to happen. But now, of course, it does have to actually happen.

2:43Stephanie Flanders:I'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 shaken the global economy, and what on earth is going to happen next. In the fog of war, the anniversary of Donald Trump's Liberation Day announcement of tariffs on goods entering the US barely registered. So we thought we'd correct that this week, analysing how the president's tariff policies in his second term have affected the economy, and just as important, whether they've succeeded in the goals the administration set for them, which were to raise federal revenues, cut the US trade deficit and start to revive US-based manufacturing.

3:24Stephanie Flanders:As we record this on Monday, April 13th, it is clear that the deep blow to growth that many feared on that day in the Rose Garden just over a year ago has not materialised. Global trade has held up, and US imports have shifted rather than tanked. Tariffs have also raised hundreds of billions of dollars in new federal revenues, albeit not quite enough to really lower the federal deficit overall. But the mainstream take of economists would be tariffs have not done much to revive domestic manufacturing, and that if the economy showed unexpected resilience last year, well, that was despite the tariffs, not because of them.

4:03Stephanie Flanders:That's the standard take, but there are respected voices who disagree, and Oren Kass is one of them. Oren's been on the show before. He's a prolific economist, writer, and commentator, chief economist at the American Compass, and author of the Understanding America newsletter. I'm pleased to have him back to debate this issue with our chief U.S. economist, Anna Wong, well-known to regular listeners who served both at the Federal Reserve and Mr. Trump's Council of Economic Advisers in his first term. Anna, great to have you. Happy to be here. And Oren, thanks very much for coming back. Oh, thank you for having me, and great to be here with Anna.

4:41Stephanie Flanders:Oren, you wrote recently that the case for Donald Trump's tariffs had strengthened since Liberation Day. How do you see that? Well, I think it goes exactly to the point that you were making in the introduction, that all of the terrible catastrophes that were promised by so many economists simply didn't materialize. I think the best way to think about tariffs, and of course tariffs are one facet of this broader effort at reindustrialization, is that in a sense it's an investment. It is a policy that assumes some amount of upfront cost and disruption and is intended to deliver long-term benefits that are much greater.

5:19To the extent that the costs are simply not nearly as high as people were warning they would be, that obviously makes it a much more attractive investment case. And so do we get the long-term benefits? To some extent, you have to wait and see. To some extent, I think you can see positive signals. But to the extent that the case against doing this was you'll disrupt the global economy, you'll destroy growth, you'll create runaway inflation, et cetera, et cetera, those things just aren't true. And so certainly compared to what you were thinking a year ago, I think you have to be a lot more optimistic now.

5:54Stephanie Flanders:You mentioned in the piece that I was citing just now, Now, one of the arguments is that the tariffs has had less impact because relative to what was announced in the Rose Garden just over a year ago, many of them have not actually been implemented. I think 43 % of imports not subject to tariffs. A lot of the key exemptions were introduced in the days after that announcement. So, you know, that's obviously one response to what you're saying is just that where there's been a lot of pushback, they have been withdrawn, especially in key areas like semiconductor chips and electronics? Well, I think if you look at the criticism and predictions of doom leading up to the Liberation Day announcement, frankly, they were all anchored to an assumption of much less than what Trump actually announced on Liberation Day.

6:44I mean, you can go all the way back to what economists were saying during the campaign simply about Trump's proposal for a 10 % global tariff. And even that, they were saying, would be disastrous. I think Adam Posen from Peterson Institute called it lunacy. And if you look at the chart of the tariff rates as they've evolved over the year, and you just imagine ex ante showing that to economists and saying, what do you think of this? I think we all know they would have made the exact same claims and predictions of disaster. And conversely, to the extent that economists are looking at the tariffs they've actually unfolded and admitting, well, yes, sure, this actual trajectory is reasonable and not disastrous, then that's certainly fine with me.

7:29I will take that and put it in my pocket.

7:32Stephanie Flanders:Right. Well, I guess the sort of other things equal, I guess, is going to kind of come into play here because a lot of those forecasts were about what the impact on the economy is, other things equal. And it turns out there were a lot of other things going on. But Anna, what's your take overall on this point?

7:45Anna Wong:Well, I think certainly on GDP growth and inflation, that it's not as disastrous, as Oren said, as most economists think. Though I have to say it came almost exactly as we expected on inflation front, because we did expect that core PCE would get to 3 % at the end of the year on Liberation Day, and it did get to 3 % at the end of the year, but not higher than that. However, that doesn't mean that there's no negatives from it. Our team does calculate that about 0.2 to 0.3 percentage point increase on the unemployment rate could be due to firms eating the tariff in their profit margin and hence slower hiring as a result.

8:32Anna Wong:So I think there is some negative impact from the tariffs.

8:36Stephanie Flanders:Lauren's responding to the mainstream view and pointing out that it was wrong in the sort of magnitude of the impact. I guess it feels like a less positive argument to say it's damage less than expected as opposed to helping the economy. So I'd quite like to get into where you see the potential for that long term shift in the structure of the economy that the administration was looking for with this, understanding that it wouldn't have just happened in a year. Oren, what would you point to when you talk about we don't yet know whether that investment is going to pay off? You know, what are the encouraging pieces for you?

9:15Well, I think the way to think about it is to map out what would we expect success to look like and then hold ourselves accountable to that. And so, in my mind anyway, the theory of the case has always been imposing tariffs is going to shift relative prices, It's going to ship business cases for where you want to produce and deliver for the American market. And so the initial thing you're going to see is shifts in demand for domestic production because prices have shift. You're going to start to see more demand for industrial production in particular. You're going to start to see output rise. Hopefully, you're going to start to see productivity gains in existing factories.

9:58But then what you really need is, okay, people to respond by saying we are actually going to build new capacity in the United States. And going from concluding that things have in fact changed to figuring out what that means to making plans to putting shovels in the ground, you know, that's a year or two process right there. And so I think one year in, the question has to be, okay, did the manufacturing sector get healthier or weaker? And then as we head into years two and three, you have to actually see those large-scale new investments taking place. And on that basic question, did the manufacturing sector get healthier?

10:36And again, this is a place where you had widespread predictions that this will actively harm manufacturing, this will weaken the sector. I think it's clear that the sector has strengthened. We've seen real productivity growth for the first time in a long time, reversing a long downward trend. We've seen output growth, again, for the first time in a long time, reversing a downward trend. And on the more subjective measures, the so-called purchaser-manager indices that survey people in the industry and ask about conditions, we've seen an uptick significantly, really bringing it all the way back to the very peak of coming out of COVID when things were at their strongest.

11:13So those are what I would be looking for. And I would say, frankly, I wish the investment numbers were a little higher right now. It's certainly not all roses, but it all points to a manufacturing sector that is responding to tariffs in the way we would want it to respond, not sort of weakening and getting counterproductive effects.

11:32Stephanie Flanders:Do you think by and large, though, the response is likely to be, if only because of the need to compete in the world, there's going to be much more around automation than around creating jobs? I mean, we have seen still another 80 ,000 manufacturing jobs go since the beginning of last year, and that's, you know, continuing a long trend. Well, I think, you know, those things are not mutually exclusive, automation and employment. To the contrary, I think they're complementary. The decline in productivity in U.S. manufacturing has made it less competitive, has made those jobs worse jobs. It is increasing automation, increasing productivity that is going to make the U.S.

12:13sector more competitive and effective and is going to increase demand and output. And that's what's going to create the employment opportunities. And so, you know, it's certainly not the case that you're going to employ as many people in the United States in manufacturing as you would if it were 1960 and you were using 1960 technology and trying to produce 2026 output. But that's never been the history of manufacturing. For a long period of time, we got strong manufacturing productivity gains with very strong employment in the sector. The question is whether you're getting demand for domestic manufacturing and you're getting healthy growth and output.

12:53And that's what I think the tariffs really focus on.

12:55Stephanie Flanders:You know, a lot of people would say the test of this is whether or not they've lowered the trade deficit. Just on that understanding that it's a long-term thing and there's lots of factors. What has happened to the U.S. trade deficit since Donald Trump came into office?

13:09Anna Wong:So in 2024, the trade deficit as a share of GDP was hovering around the 3 % figure of GDP. And in the first quarter, it was even 4.2 % of GDP as firms were front-running the tariffs. So since then, the trade deficit has fallen to more like around 2.5 %-ish of GDP. But if you look at the details, what's even more striking is that all U.S. imports in non-strategic sector, non-semiconductor goods, non-capital goods, has fallen roughly 10 % below pre-2025 trend. And what is actually keeping the trade deficit as large as it is right now is actually U.S. imports of capital goods like semiconductors, which is even stronger, much stronger than the years before.

14:09Anna Wong:So without that AI story, the U.S. trade deficit probably would have narrowed much more.

14:15Stephanie Flanders:And Anna, one thing that you've highlighted throughout the year has been all this investment in data centers and the AI investments really kind of juicing the rest of GDP. And that is explicitly a sector that has been more or less excluded from tariffs. So just very soon after the Rose Garden announcement, all of those NVIDIA chips from Taiwan and other aspects of that were made tariff free. If we hadn't had that data center boom ongoing in the U.S., would we be saying something different? Would it be clearer, that damage, or perhaps more noticeable, the damage from the tariffs? And I guess the related thing is, if that's the big success story, it's a success story that has been completely independent of tariffs and seemed to have benefited from being without tariffs.

15:01Anna Wong:I think most economists, including our team, would agree that the AI boom contributed to almost one percentage point of GDP in the first half of 2025 during the quarter when there was the Liberation Day shock. So definitely AI served as a key cushioning factor to this shock. But I think to the question of, are we seeing improvement in the manufacturing sector as a result of the tariff policies? So maybe a good way to look at it is to look at exactly where, which pockets in the manufacturing sector is seeing some upturn. And for sure, semiconductors. But we are also seeing improvement in aerospace and defense, very strong, in fact, improvement in aerospace and defense and metals and mining.

15:53Anna Wong:And I thought the metals and mining is the most interesting one because for decades, mining industry in the U.S. has been decimated. And now we have 50 % tariffs on steel and aluminum. And as an economist, I would say that to disentangle the effect of tariffs, metals is the place where it's relatively cleaner than all the other things. I think that the story that Oren is telling about increased capacity orders for factory capacity building coming online in 2026 and beyond, I see, and I'm reading, as anyone would, these industry reports on steel and aluminum. And there are definitely factories coming online.

16:39Anna Wong:For example, just the aluminum. U.S. does not have aluminum smelting capacity for decades. And there was an announcement last year that they are going to finally start to start smelting aluminum in the U.S. So I think the way I would qualify Oren's argument a bit by saying that there are pockets of strength in the manufacturing sector driven perhaps by domestic protectionism. We saw a similar effect on metals industry in 2018 as well. So when the steel and aluminum tariffs came on, then you see increased production and capacity in the sector. However, the story of 2018 and 2019, that tariff wave, is that when Section 301 for China came on, and that led to a more broad-based trade uncertainty shock on everything else, the investment of everything else started going down, which offset the gains from the metals industry.

17:39Anna Wong:So I think an ongoing question for this year for us to evaluate is whether this year we're going to see the trade policy uncertainty shock go away.

17:48Stephanie Flanders:We keep saying that. Peter out. We keep thinking it will, but then there's a whole other round. We'll see, I guess.

17:54Anna Wong:Yes, yes. And theoretically, investment, whatever delayed investment happened because of this uncertainty, should be rebouncing. And if Oran's thesis holds true, then this tapering of uncertainty combined with these higher incentives to produce should lead to a very strong, more broader base manufacturing gains outside of steel and aluminum and these metals industries.

18:20Stephanie Flanders:I like the fact that we're just getting on to the goals of the administration when it comes to the restarting domestic production in these strategic sectors and whether this is the right way to do it or whether there are other things that have been going on to support some of those sectors. Do you buy what Anna's saying about the sort of nuance in which bits of manufacturing and which parts of industry are doing better? And I guess the related thing when you think about the strength of the defence industry, for example, I mean, obviously, there's other things going on there. There's the state of the world, but also a big increase in defense spending in the U.S.

18:56Stephanie Flanders:Are there ways of encouraging these strategic sectors, if that is the goal, that will have fewer downsides than this very broad brush approach to tariffs? I agree entirely with Anna about sort of looking at it in this, you know, sector by sector way. And I would highlight two other things related to that. One is, it speaks to the way that tariffs are one piece of a broader strategy. And for instance, on critical minerals and mining, you're seeing significant investments that are being pushed by an active industrial policy out of Washington, by very aggressive multilateral agreements that they're in the process of establishing.

19:36And so it's not tariffs alone. Obviously, in the semiconductor space, yes, the Trump administration exempted a lot of incoming chips, but that's in the context of the CHIPS Act and the very aggressive effort that is leading to a massive investment boom and expansion of productive capacity in advanced semiconductors. And so if you look at what the administration has said it wants to do now, they are proposing to explicitly establish a policy that says you get those exemptions from the tariffs as long as you are actively investing in bringing capacity online in the U.S. And so, you know, there is a sort of broad, blunt baseline underneath the tariff policy, but there are a lot of strategic choices being made on top of it.

20:21The second thing I think is very important to keep in mind about these tariffs is that many of them very clearly were and have been used as negotiating tariffs, by which I mean the rates announced on Liberation Day were very clearly not intended to be permanent rates. They were intended to be a new backstop against which the administration wanting to negotiate these bilateral deals. And it's done so. And in those deals, it has gotten significant concessions on market access, on purchases, especially with East Asian countries on large amounts of foreign direct investment that were committed and are just now starting to move through the planning phase into reality.

21:05And so, again, when you look at that tariff chart and say, oh, well, wait a minute, you know, how do the tariffs today compare to what were announced and so forth, you have to also look at the flip side and recognize that this was much closer to the long run status quo that had been envisioned. And it's now coming with these potential very significant investments, not just on chips, on shipbuilding, on pharma, in a whole range of areas. And so I think that's what we should be looking at is, OK, are those things working? We're at the point where, you know, the very largest corporations and our trading partners have said, yes, this is working.

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