The Tariff Trade-Off

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1:44Stephanie Flanders:I'm Stephanie Flanders, Head of Government and Economics at Bloomberg. and this is Trumponomics, the podcast that looks at everything in the economic world of Donald Trump. This week, tariffs are back and they look like they're here to stay. We're recording this on Wednesday the 29th of July. Late last week, the White House imposed tariffs of around 10 % on imports from more than 80 countries, replacing emergency tariffs put in place after the Supreme Court ruled a lot of the previous ones he'd put in place unconstitutional. There have also been, in the last week, new tariffs on Canada and Brazil.

2:22Stephanie Flanders:And we have coming down the track so-called Section 301 investigations now hanging over multiple countries, all of which could result in more import taxes in the next few months. Well, heaven knows we've talked about tariffs before on this show. In fact, our most listened to episode ever was on that topic. But in a week when the president has reminded us just how much he likes them, I wanted to step back and think about the unintended consequences of those tariffs for the economy and the federal budget. In a nutshell, many of the positive consequences from tariffs that the President promised on the campaign trail have not really happened, or not in the way he suggested.

3:04Stephanie Flanders:But you'd have to also say that the biggest negatives that were talked about before they were imposed have not really happened either. So it raises the question, Is President Trump's signature economic policy turning out to be just a fancy way of extracting a few more tax revenues from US consumers? And if so, is anyone really going to want to let that money go? Well, we've brought back the pair of voices, actually, who featured, funnily enough, in that super popular Trumponomics episode. Sean Donnan, senior writer with Bloomberg, who reports on the US and global economy for us. Sean, thanks so much for joining us.

3:40It's always great to be here.

3:42Stephanie Flanders:And Trumponomics regular, also in Washington, Anna Wong, chief US economist at Bloomberg Economics, who's previously worked at the Federal Reserve and served in the Trump White House in 2019 and 2020 on secondment at the Council of Economic Advisers. Anna, always great to get you on. Happy to be here.

4:05Stephanie Flanders:Sean, there was a lot of talk ahead of these tariffs, and indeed President Trump used to talk a lot about it in his first term, that they were going to bring manufacturing back to the US. We were going to see reshoring and a revitalisation of US manufacturing. We were going to see the trade deficit fall and some extra revenue for the federal government, which was going to be paid for by all those foreign exporters. You had a great story this week focusing on tin cans, no less. And I thought that really painted a picture of how that manufacturing piece had sometimes panned out on the ground. So tell us a little bit about that.

4:47The reason I looked at tin cans was because it's a way of looking at Trump's original tariffs, which were the steel tariffs that he imposed back in March of 2018, a 25 percent tariff on all imports of steel. On the day after the announcement went out, as markets were having conniptions, Wilbur Ross went on television and held up a can. The Commerce Secretary, right? Who was then the Commerce Secretary, right? And he held up a can of Campbell's soup and said, essentially, the tariffs will not affect the cost of this one bit. He had calculated how much steel was in there. He also said that the payoff for these tariffs would be tens of thousands of jobs and hundreds of millions of dollars of investment.

5:39So I thought, let's take this tin can and look at it as a case study of how things have actually worked out. Well, the answer is the price of that tin can has gone up substantially since March of 2018 when these tariffs were put in place. The cost of canned fruits and vegetables that consumers pay are up almost 50 percent since that day. And the cost of the empty can itself coming off the production line is up 80 percent since March of 2018. So there's a significant impact on the cost side. One of the reasons for that is that, in fact, one of these promises of the tariffs, which was that there would be more investment in domestic production, domestic capacity, hasn't played out at all.

6:28On that day that Wilbur Ross went on TV, there were a dozen steel mills in the U.S. that turned out tin plate. Can makers imported about 50 percent of the steel that they used to make cans. And that was supposed to go down. Well, in fact, there are now only three steel mills in the United States that make tin plate. and can makers import 80 % of the steel that they need to make those tin cans. At the same time, we haven't seen the jobs story work out in the same way. There are now roughly 1 ,300 more people working in American steel mills than there were in March of 2018. So it hasn't been a huge jobs boom even for the broader steel industry, although we have seen investment in other parts.

7:17And part of the story here is also about how tariffs don't happen in isolation. They happen in an economy that has lots of different things going on. And the reality for the U.S. steel industry is that making tin plate is difficult. It's capital intensive. And it's a tiny part of the U.S. steel market. And therefore, the real question that you hear and that I heard from economists and people in the industry is, why are we putting tariffs on imports of something that the domestic industry does not want to make and does not want to invest in and allocate capital to? And so that, to me, is a case study for a lot of these tariffs.

8:00You can go down through the supply chain. And I talked to one of the people I talked to was a tomato farmer in Indiana who's planting fewer tomatoes this summer as a result of the higher cost of cans and as a result also of international competition because these tariffs don't apply to cans that are already filled with fruits and vegetables that are being imported. And so the domestic competitiveness has been hit by this as well. And so that's the unintended consequences. And then there's this kind of unfulfilled promises thing. And I think of that as really when we think of the kind of political economy of these tariffs as the big issue that Trump faces.

8:40if you go back to 2016, you go back to when he was first running for president, and he was first talking about cracking down on trade and first talking about tariffs, in all of those campaigns is that he is promising more factory jobs in the United States. And today, there are 75 ,000 fewer people working in American factories than there were when Trump returned to office in January of 2025.

9:04Stephanie Flanders:And it's interesting, Sean, I think it makes sense to be focusing on some of the sectors that were affected by the first Trump tariffs, because obviously you could make the argument, and it's been made on this programme before, that it's quite soon if you want to have the kind of shift that Donald Trump is talking about. But I guess what's interesting from the way you've talked to, particularly with the question of whether or not you could have more US producers of tin plate to replace those imported tin plate for the tin cans, it seemed from the people you talked to that this wasn't just a matter of time and the tariffs being in long enough.

9:41Stephanie Flanders:They already had quite a lot of protection. They were looking to have even more, and it just didn't seem like it was going to work. I think in the Trump presidency, it is such a short news cycle that we deal with on every day. There's a lot of noise on every day. But we are now a decade into this experiment, and at least eight years into tariffs actually being in place. We can actually look at what has happened in some of these cases. This is no longer a promise about what's coming in the future. There is a record now. So, Anna, one of the reasons I wanted to have you on is I know you have a slightly different view of this.

10:18Stephanie Flanders:Just on this piece of whether or not U.S. domestic manufacturing has been affected in the way that Donald Trump talked about manufacturing jobs coming back to the U.S., a support for domestic production, a reduction in the trade deficit. What's happened with those? What kind of evidence are you looking at? Yeah, you know, Stephanie, as I was listening to Sean as he was talking about how Trump promises loads of manufacturing jobs, it made me recall the time when I was seconded to the Council of Economic Advisors and I was writing talking points for these senior leaders. And it is indeed true that politicians are very much indexed to the number of jobs when they go out to give speeches.

11:07They want to talk about how many jobs is created. But as an economist who's evaluating the overall impact of a certain policy, we care about all these other variables, including profits, investment. And because jobs comes way later, only after profits, investment, productivity happen would you have jobs. So when we evaluate the success or failure of a policy, you want to look at everything. to play the devil's advocate, what I'm seeing in the manufacturing sector is put aside for a second what is causing this. But the facts are that I think manufacturing has improved over the last years. And the improvement, while it did not result in a surge in jobs, it has basically concentrated a significant increase in output as well as productivity.

12:02So when you have output increase, but no hiring increase, that means higher labor productivity. So from an economist point of view, not a politician's point of view, increased productivity is a good thing. And so for whatever reason, the manufacturing sector has improved in the last year. Now, is this due to tariffs? As Sean's tin can example showed, and also just looking at what sectors are most exposed to tariffs, we see that it is in these China-exposed sectors like apparels, textiles, consumer electronics, and stuff like that. No, the increase in manufacturing output are not in these sectors.

12:48The increase in manufacturing productivity and output are concentrated in durable manufacturing sectors, such as computers, electronics, not the consumer type, but hardware, High value added stuff, aerospace, mining also. Would I say that this resurgence in manufacturing is due to tariff? No, I do not see direct evidence of that. However, there is an improvement in the manufacturing sector for whatever reason it is happening.

13:21Stephanie Flanders:And I seem to recall, Anna, some interesting conversations that we have had where you were speculating that the tariffs, you know, for many companies would have just been presented, would have felt like a cost increase of one form or another. And maybe something they had to decide whether or not to pass on to consumers and had been a spur to get more out of workers and to maybe had that kind of indirect impact on productivity that you've just described. Yeah. So when you look at the output, manufacturing output, you see that the increase is driven by more hours out of existing workers. So part of that is that my team also looked at earning transcripts in the last couple of quarters and the way that firms are describing how they handle the increased input costs from tariffs.

14:13First of all, it's absolutely true that tariffs are raising the input costs of firms. The question is, how are firms dealing with that? And so in Sean's tin can case, Campbell's Soup decided to surgically raise the price of these soup tin cans, right? But they're also cutting prices in some of the other stuff, because what happened is when they raised the price on these products, which is catered to lower income people who are very budget conscious, the sales volume declined. And they had to make up for that revenue with something else, but cutting prices is something else. And so that's generally one way of dealing with how do you handle higher input costs.

14:59Second is that they are simply hiring less people and extract more out of existing workers. And third, they are rejiggering the supply chain. And we see in the earning calls, a lot of firms talk about how they have already put in place a different setup on supply chains. In fact, I would say many more than half of that rejiggering has already happened. Those are all ways to how to increase operational efficiency to deal with input costs. Anna makes a very good point about productivity, increased efficiency, and the kind of as an unintended byproduct of tariffs. One of the really fascinating things I discovered when I visited Robert Gatz and the Can Corporation of America is that one of the ways they responded to the original steel tariffs was by making thinner cans.

15:51they now make more cans using roughly the same amount of steel as they did eight years ago because they have figured out a way to make those cans thinner now you know they insist they're not flimsier but you know it doesn't result in us opening our cupboards in a few years time and

16:10Stephanie Flanders:discovering oh yes those are the post 2025 cans but there's no evidence of that uh so far i listen to you, Sean, and I do worry a bit that your family are now also very well informed about tin cans. You have invested an impressive amount of time in actually what turns out to be a rather interesting industry. Yeah, my children are regularly bored by me at the dark table.

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19:07Stephanie Flanders:But we haven't mentioned the big other positive that the administration did talk about going into this, particularly the Treasury Secretary, that it would bring great increase in revenues for the federal government. And there was even talk of a tariff dividend for voters courtesy of Donald Trump. Anna, what's happened there? Yeah, so here are some numbers. So last year, the tariff revenues was roughly around$200 billion, depending on whether you look at calendar year or fiscal year. But I would say around the$200 billion mark. Before the Liberation Day, it was around$80 billion. And now after the AIIPA ruling, so far the administration had to refund$80 billion of those roughly$200 billion collected.

19:58Stephanie Flanders:That's interesting. They have done the refund. Yeah, they definitely have done the refund. We have a lot of evidence around that. So$80 billion is the ones that's already refunded. The total possible amount that's needed to be refunded is around$166 billion. because out of the collected,$166 billion was due to IEPA. I think what that shows is that the tariff last year indeed was quite an important source of fiscal revenues. When you look at the 10-year budget period for CBO, that is supposed to be the tariff revenues based on IEPA and all the other tariff policies was supposed to generate roughly$3.3 trillion in revenues over 10 years.

20:46And that's roughly how much the one big, beautiful bill cost. So now that we have the AIPA ruling and even taking into account the interim policies to fill the gap, such as using the 122 and last week, the 301 and 338. I think what we are looking at is a reduced fiscal revenue estimate of roughly more like around$2 trillion as opposed to$3 trillion over 10 years. And the yearly this year, as opposed to$300 billion, it's looking more likely to be$200 billion. So when we enter this year, CBO has estimated that fiscal deficit would be around 5.8 % of GDP this year. It's 1.9 trillion fiscal deficit.

21:39Now it's looking more likely to be 6 % of GDP for all these reasons. There are other reasons, including higher treasury rates. You know, CBO expected average 10-year treasury yields to be 4.1 this year. Well, it's averaged 4.5%. And I think part of that is I think Wall Street do look at these tariff revenues numbers, I mean fixed income traders. And if it's looking like there's more uncertainty around the collection of these revenues, I think people will get more bearish in the treasury rates market. Can I just make two quick points on the income, the kind of fiscal effect side of things? One is the refunds they're not done with.

22:28In fact, in June, there was a net outflow from the Treasury when it came to customs duties. The number listed on the monthly Treasury report was minus$25.5 billion. And we're likely to see several more months like that this year because, as Anna says, they've refunded about$80 billion. There's another$80 billion that they need to refund because the courts are really holding their feet to the fire on this. There's that short-term fiscal piece is a lot of that$200 billion that they raised last year, they're sending back to people this year. The second point is the kind of durability of tariffs. And I think that's something we need to think more.

23:11The Yale Budget Lab estimates it's$1.9 trillion over the next 10 years based on the current state of tariffs that you would get in revenues. But they make the point also that that does not account for slower growth that you get as a result of tariffs. The other point is that there are more legal challenges coming. The tariffs that were announced last week were very quickly challenged by another group of small businesses. There's a guy called Alan Wolf, who's one of the kind of eminence gris of the trade bar here in Washington, actually helped write the 1974 trade law, who says that the use of that law in Section 301 of that law that the Trump administration rolled out last week is completely against the spirit of the law.

23:56and likely open to legal challenge. There are going to be more legal challenges coming up. So the question is, okay, are these going to withstand further court challenges? And I've heard this from Scott Besson himself making the point that, well, if the tariffs really work, we should see diminishing revenues from them over time. Because if you are reshoring manufacturing, then you're going to get less tariff revenue and you're going to get more business tax revenues is the hope. So the idea of tariffs as this kind of fiscal wonder tool going into the future, I think there's a lot of caveats on it.

24:40Stephanie Flanders:You know, we focused a lot on whether or not the good stuff that was promised has happened and we had a debate around the manufacturing. It seems very unclear that the tariffs have really engineered a revival by themselves of domestic manufacturing. Maybe that's an unreasonable expectation. There was a big surprise in that other countries didn't retaliate to the tariffs, the US imposed tariffs. And that has fundamentally changed certainly the impact on the global economy. And we haven't seen tariffs meaningfully increase US inflation, even though a lot of consumers sort of link their tariffs to the high costs in their minds.

25:19Stephanie Flanders:So I guess it's fair to say, Anna, although we haven't seen all the positive consequences, some of the things that the critics focused most on before President Trump's Liberation Day have not really panned out either. One thing that I guess was predictable, but is very evident, is these are super unpopular, these tariffs. And people do associate the tariffs with higher costs, Anna, even if the numbers don't quite back it up. Yeah, Stephanie, but everything is unpopular. Cutting back fiscal deficit is also unpopular. Doge was unpopular. The question is, I mean, once the government starts spending or people start spending, it's hard to cut back.