Update 879 – Trade Uncertainty Persists;
U.S. Firms, Consumers Slow to Respond
This week, the Trump administration pushed the Liberation Day 60-nation tariff “deadline” to August 1. President Trump took to social media to announce the new rates 21 nations will face by the new deadline. The very sectors and businesses that the President campaigned to protect are set to bear the brunt of trade uncertainty, and, ultimately, American consumers will pay the price if the thus-far uniformly double-digit tariff rates do go into effect in August.
As the nation awaits Trump’s new deadline, firms and consumers affected are holding their breath as well. As the back-and-forth, knee-jerk decision-making on trade policy continues from the White House, inflation remains cool, unemployment is still low, and many businesses hold off on major decisions in a wait-and-see approach. We dive into the week’s trade developments below.
Best,
Dana
Trump Delays Tariffs Again, Some New Rates Set
In what was slated to be another monumental week for global trade under the Trump administration’s “America First Trade Policy,” the President threw another curveball to many of our trading partners and allies, further delaying the “Liberation Day” tariff deadline to August 1.
Back on April 2, President Trump unveiled his signature “Liberation Day” tariff rates, which set off a new era of uncertainty in the modern global trading system where but one man makes policy unilaterally. A week later, these expansive tariffs on about 60 countries were delayed for 90 days to allow for trading partners to strike deals with the United States. Although his administration vowed to secure as many as 90 deals in 90 days, few deals and even frameworks for deals have come to fruition.
Source: CNBC
In the days leading up to the July 9 deadline, conflicting messages emanated from the White House. The President suggested the new August deadline was firm, while Commerce Secretary Howard Lutnick and Treasury Secretary Scott Bessent signaled more wiggle room in this timeline. Then, in an executive order signed Monday afternoon, the President officially delayed the July 9 Liberation Day tariff deadline to August 1.
A total of 21 nations were informed by “letters” with new tariff rates, many of which are only a few percentage points away from their original April 2 rate, which were posted on Truth Social and sent to trading partners. These letters, which were all almost identical, informed countries of the rates they will face in August unless they secure a deal in the next few weeks. These rates ranged from 20 to 40 percent and were mostly within 5 to 10 percent of each country’s Liberation Day rates. Included in these announcements were letters sent to key trading allies such as Japan and South Korea.
The President also placed copper tariffs and higher duties on Brazil and BRICS countries on the table this week.
- Sectoral Tariffs – Trump announced a 50 percent tariff on copper imports starting as soon as August 1. While the Section 232 investigation into copper has been ongoing since February, the announcement on Tuesday came as a surprise and caused copper prices to spike to all-time highs. The U.S. imports nearly 40 percent of the copper it consumes, mainly from Chile. We will likely continue to see a rush to get copper into the U.S. in the coming days to beat the duty. The President also mentioned an astronomical 200 percent duty on pharmaceutical products to be expected within the next year.
- BRICS – The President also warned countries in the BRICS group – Brazil, Russia, India, China, South Africa, and their 11 partner nations – will receive an additional 10 percent tariff, citing “anti-American” policies without elaboration, let alone justification. BRICS nations account for over 40 percent of the world’s population and around 37 percent of global GDP.
- Brazil – In an unexpected announcement this week, the President stated plans to place a 50 percent tariff on Brazil. He specifically pointed to what he considers a “witch hunt” against former President Jair Bolsonaro, who is currently on trial for an attempted coup. The United States actually runs a trade surplus with Brazil, so the President is making it no secret that this tariff is purely political. Brazil quickly vowed to retaliate.
American Consumers to Bear the Brunt
If the new tariff rates are implemented on August 1 along with all other tariffs in place, the U.S. effective tariff rate would be 18 percent, the highest since 1934, according to the Yale Budget Lab. For comparison, the effective tariff rate was less than 5 percent before Liberation Day. Economists have long agreed that tariffs are often passed on to the consumer. Although the President claims other countries pay the duty as they try to send their goods into the United States, it is the importer who pays the tariff to U.S. Customs and Border Protection as their product enters the country. American firms that import foreign products then have to decide if they will partially or entirely absorb the cost of the heightened tariffs and cut into their profits, or pass it along to their consumers.
The Yale Budget Lab also estimates that if these rates are implemented on August 1, price levels will rise by 1.8 percent, resulting in an average household loss of $2,400. Inflation is expected to rise over the coming months due to the Trump administration’s tariffs, threatening to upend years of progress in bringing inflation down from its peak during the pandemic. U.S. GDP would also shrink by 0.7 percent, according to the Budget Lab.
The stock market is showing some immunity to Trump’s chaos. The historic sell-off immediately following Liberation Day plunged markets for days before the President implemented the 90-day pause. After seeing the President back off a few times, investors are waiting to see where tariffs land and may be internalizing the recently-coined TACO theory – Trump Always Chickens Out.
Source: Reuters
Liberation Day and the Threats of Trump’s Tariffs
On Liberation Day, the President claimed he and his advisors calculated each tariff rate by considering both tariff and non-tariff trade barriers placed on the U.S. (some non-tariff trade barriers include export quotas, nonmonetary barriers, or Value-Added Taxes (VAT)). Instead, this quite simple calculation decided the tariff rates of around 60 countries: the U.S. trade deficit with a country divided by the U.S. imports from that country, and then halved to make the “discounted rate.” The President claimed to establish reciprocity with his Liberation Day tariffs, but instead fixated on the nuanced and complicated data points, which are trade deficits.
Trade was an early priority for the Trump administration. Within hours of being sworn in, Donald Trump released the “America First Trade Policy” memo. The reviews and studies directed by this memo are meant to inform the President’s trade policy decisions. Among his many motivations for his tariff hikes, he has cited:
- ballooning trade deficits (both cumulative and bilateral),
- mass reshoring of manufacturing jobs in the U.S.,
- raising revenue,
- and even domestic policy and national security issues, such as immigration and fentanyl supply chains.
Trump views tariffs – and the threat of them – as the best tool to “rebalance” the global economy after what he claims has been decades of trading partners “taking advantage” of the U.S. with massive trade deficits, unfair trade deals, offshoring, and domestic subsidies.
In the months since Liberation Day, the entire world has been forced to grapple with this new unfolding reality. Economists, world leaders, investors, business owners, and consumers have tried to make some sense of Trump’s on-and-off tariffs. Two of his central motivations include a renaissance in American manufacturing and business creation. Let’s examine how his policies will actually hurt American manufacturing and disproportionately disadvantage small businesses.
Manufacturing
More than half of all goods that are imported into the U.S. are manufacturing inputs. As such, U.S. manufacturers are more reliant on trade than most other industries, making it ironic that Trump’s plan to boost U.S. manufacturing involves implementing tariffs that will hamper trade and increase their input costs.
Source: CAP
Of the most recent batch of tariffs, those that will hit hardest are the ones on Japan, South Korea, Thailand, and Malaysia, which make up a total of 12 percent of all U.S. imports. Some of the most notable manufacturing inputs the U.S. imports from these countries include:
- Vehicles and vehicle parts
- Machinery and mechanical appliances
- Mineral fuels and distillation products
- Pharmaceutical products
- Electrical/electronic equipment and computer parts
- Rubbers
- Plastics
- Textiles
In the short term, that means U.S. manufacturers — the same firms and sectors Trump says he wants to protect — would be among the most harmed by the tariffs, as they would have to face higher prices for their manufacturing inputs. In the long term, while Trump says the America First policy will force companies to reshore their manufacturing – bringing tens of thousands of jobs back to the U.S. if it succeeded – the process of changing supply lines takes years, requires paying for the expensive move back to the U.S., and can only be implemented if there is stability in a country’s trading policy. On that last point, few U.S. companies are going to reshore their factories if they expect tariff rates to change every couple of weeks, as has been the case this year.
In the longer term, even conservative think tanks such as the American Enterprise Institute seriously doubt that Trump’s tariffs will succeed in boosting U.S. manufacturing. One major reason is that Trump’s policies do not target the most viable manufacturing in the U.S., such as advanced manufacturing, for protection. Instead, Trump opted for across-the-board tariffs that help some manufacturers (such as steel and aluminum producers, which Trump heavily favors) while hurting others. Advanced manufacturing, such as that needed for high-end technology, would shrink overall from Trump’s tariffs, in large part because of how heavily reliant they are on parts from overseas.
Small Businesses
Stories of small businesses that have closed their doors, raised prices, or had to cut back on hiring or even reduce their staff have been highlighted by the media in recent months. The Chamber of Commerce sent a letter in April to the administration proposing various exclusions for small businesses who, they explain, “are increasingly endangered by higher costs and interrupted supply chains that will cause irreparable harm.”
In an April report published by the U.S. Census Bureau and Department of Commerce, 97 percent of importers are small to medium-sized businesses (SME) as can be seen below:
Source: U.S. Census Bureau
The effects of disrupting supply chains are thus wildly disproportionate to small businesses, which do not have the resources to withstand price hikes or supply chain disruptions due to trade shocks. According to a working paper out of the Harvard Business School in collaboration with Alignable, most small firms expect to raise their prices in the coming year, while one in five expect to cut jobs. Roughly half of Americans are employed by a small business in the United States.
State of Play for “Deals”
So, what has the administration gotten done in the past 90 days? On the trade front, surely not as much as it was hoping. The United Kingdom and Vietnam have secured what can better be described as trade frameworks. Although touted as deals out of the White House, the outcomes have been relatively limited to specific industries or require further negotiations. Trade deals typically take years to negotiate, so Trump’s “90 Deals in 90 Days” was always a long shot.
- Vietnam – Last week, Vietnam secured a 20 percent tariff on all goods entering the U.S. Any goods “transshipped” through Vietnam – namely from China in an attempt to avoid higher tariff rates – would face a 40 percent duty. Vietnam also assured the U.S. “total access to their markets.” However, it seems this deal is little more than a handshake agreement, as neither government has released any official text.
- United Kingdom – Signed in June, the “deal” lowered U.S. tariffs on British cars from 27.5 percent to 10 percent for up to 100,000 vehicles. Certain aerospace products will now face no tariffs when entering the United States.
- China – Also signed in June, the U.S. set tariff rates on Chinese goods to 55 percent, while China will charge 10 percent on American imports. China also agreed to allow U.S. firms to access rare earth minerals and magnets more easily.
This week, the E.U. and the U.S. are closing in on a trade deal of their own, with representatives signaling it could be finalized in the coming days.
What Lies Ahead?
Looking ahead, the President first signaled that the August 1 deadline was flexible and then quickly clarified that there would be no extensions. We have heard this story before, as uncertainty continues to be the only throughline in Trump’s trade agenda. Consumers, importers, and trading partners return to a state of suspended animation after this week’s developments.
A Trump-induced cloud hovers over the economy. The Federal Reserve has made clear that the path forward on monetary policy is unclear in the face of tariff uncertainty. Still, the on-and-off tariff rates and unclear negotiating priorities, along with the resulting price hikes, hurt American businesses, consumers, and our closest allies. Meanwhile, the administration continues to contradict its central campaign promise of lowering prices for Americans.