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I'm Stephanie Flanders, head of Government and Economics at Bloomberg, and this is Trumppernomics, 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?

This 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 second, when he announced he was liberating the US economy by slapping hefty trade levees 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 added to inflation, especially in all those big arguments about affordability and the cost of living before and after the recent US off year elections.

The 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.

So 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 CFL page is called Follow the Money.

We worked together approximately half a million years ago, and unlike me, he then went back to the US Treasury to be Deputy Assistant Secretary for International Economics under President Obama.

Brad, great to have you finally on Trumponomics.

N's pleasure, and it wasn't that one.

We obviously both still look very youthful, but it makes me feel old.

The illusion.

Also joining us as so often Anna Wong, chief US Economists for Bloomberg Economics, and before this she worked at the Federal Reserve, US Treasury and on so common at the White House Council of Economic Advisors during Donald Trump's first term.

Anna Hi Hi, I actually also worked for a Brad Setser under Obama intration when he was Deputy Assistant Secretary.

He's my old past.

And 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.

You know, 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 fourteen point five percent, just roughly.

Administration just announced some exemptions for food imports last Friday, so that should knock off another point two percentage point from that.

So you can say roughly around fourteen ish percent.

Memory, I think it was about two or three coming into this administration, so 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 four percent of the price cost born by foreigners, seventy percent absorbed by any kind of intermediate firms in the US, and twenty six percent absorbed by US consumers through higher prices.

When you say it's that certain chunk of it has been absorbed by consumers, that thirty percent we're seeing that in prices.

Yes, So we estimate that CPI and core PCEE inflation is a roughly zero point three 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 equipments.

Those type of things.

And in fact, that point three percentage point addition on core CPI and core pc 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 one point one percentage one roughly there.

According to the FED model, if there's one hundred percent pass through, So if there's point three or roughly thirty percent of the pass through, then that corresponds to roughly point three percentage point edition on CPI.

And that's indeed what we have seen in the year over year increase of core good CPI.

We have seen that went from naked zero point one percent that's year over year core good CPI to now one point five percent year over year.

Now that's a one point six percentage point swing.

And Brad just as we'll get into some of the details, but just sort of sort of on the broad scope of what Anna just said, that thirty percent is absorbed by consumers, and then it looks like about sixty sixty five percent by those kind of intermediate firms who have to pay the tariff at the border.

Is 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, Bloomberg, we are often listening in on earning schools when companies are announcing their results.

We'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 earning season, I seem to remember my colleagues talking about most companies actually beating their expectations on profits.

Maybe you first bad, 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 US economy that generate the superprofits, you know, the tech sector, the pharmaceutical sector, they've been entirely exempted from the tariffs.

Why wouldn't Nvidia be talking.

About it because there isn't yet a terraff chips.

Why is it not impact Advisor'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 firmlike 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, So 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.

And what's your sense of where that?

I mean, if you're saying sixty percent is being felt somewhere by corporate America.

Is this the little guy who's finding the getting squeezed rather than these big companies we hear on the earning schools.

Yeah, so the stock market is not the economy.

It's very important to know that the S and P five hundred only has about five hundred firms, but the total US economy has about seven million firms.

You have that on your Twitter handle, date you more or less you know common brackets.

You know the stock market is not the economy, and of.

Which ninety percent of those seven million firms have only less than twenty employees.

And most US firms don't export at all either.

And another very specific feature about the stock listed companies is that in total, they generate thirty percent of revenues from outside of the US.

So offsetting shocks include, for example, the dollar depreciation this year, and that ten percent dollar depreciation had boosted the revenues form revenues for those SMP five hundred firms.

So their profits abroad and 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 sixty five billion to just seven billion.

In the revised estimate, sixty five turned into seven.

I know it is in that particular bit of the national accounts does sometimes jump around a lot, but is that a big revision?

That is a big revision.

When you look at this the change of corporate profits from the second quarter of twenty twenty five compared to the end of twenty twenty four, 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 that the profits having gone down for sixty five and a half to just down the seven billion in the second quarter, And as you pointed out, and 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?

Is 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 are.

So going back to this FED model that internally the Divisional of International Finance has on the impact of tariff.

In twenty eighteen, the FED staff ran assimilation on what a fifteen percentage point tariff shock would do the 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.

So according to the lookthrough strategy, the unemployment rate should be going up by about zero point three two point five 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 four point one at the end of twenty twenty five, and now we're looking at four point five.

So in fact, these macro models are performing okay, Brad.

If you're looking at the kind of overall impact of these tarerts, they've obviously been very uncertain, unpredictable, and if we were designing a trade policy, we'd probably want the very least.

We probably want something that was a bit more stable and followed a slightly more predictable path.

But if you just were told that the effective tariff rate had gone up from three percent to around fourteen percent 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 paired back spending on other goods.

Of course, part of it is also that other things are happening.

But for the tariffs, the big increase in spending on data centers and all the investment in AI might have been propelling the US 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 reincreased teriffs by a percentage point with no offsetting policy changes, and at the end of that six months consumer prices are only up thirty 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.

But 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 twenty 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.

But the President has raised these taxes and he's made a bunch of revenues.

And then he's arguably paid a bit of a political price for it.

I mean, hence the fall in the price of coffee, or the tariffy on coffee, hence the decisions to exempt consumer goods that aren't made in the US.

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.

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

Let'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 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 guarantee 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.

But 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 US trade deficit and encourage American producers to make more in the US, encourage US consumers to buy more American products.

I mean, we 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 to the United States.

We'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 finyal 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 thirty to twenty.

Now there's legacy tariffs on some goods from the Trump one trade case, and in some cases those are twenty five.

In some cases those are seven and a half, some cases those are zero.

But for most of the goods it's the new tariffs are either going to be twenty seven and a half, which is high, or twenty which is also high.

But twenty is not that different from the nineteen or twenty 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 terra structure than has actually emerged.

What has emerged, if this sticks, is a terra 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 on Trump's first term, and it's still too small, particularly with the exchange rate moves, to get much production coming back to the US.

That's really interesting.

I mean, I think a lot of fair amounted 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 US off a particular right liiance 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 geoeconomists analysts we're making the same point.

It 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 US 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 TERRORFF related quotes from the earnings transcripts so far, and what I have seen is at 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.

However, 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 twenty twenty six their effective tariff rate would be lower.

I mean, regardless of what the statutory tarif 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 US China deal that lower the Chinese tariff and to below the Southeast Asian because many of these mitigation strategy involved moving to Southeast Asia or to the USMCA region.

As of now, this positive pigure partly hinges on these mitigation strategies.

That's interesting.

They thought that was the one sure thing, was that there 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.

You know, they may all go away in a week's time.

And 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 would have helped increase the efficiency of US business.

Right probably, But if the tariff were to suddenly go away, for example with the Supreme Court ruling, it would be super polish 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 of these big auto makers are talking about how they're finally getting to margins of eight to ten percent, and the auto sector is so resilient.

In fact, for.

Them, the tariff is creating domestic protectionalism, I mean, which is benefiting them from their perspective, even though it does create a more than one billion tariff costs for some of these auto firms.

But the original intent of tariff is domestic protectionalism, 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 we have the tariffs reduced the number of imports coming into the country.

I'll start with a dodge in the come back and actually answer the question.

The dodges of course we lack trade data for the past two months because the government.

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 surgeon gold imports in the first quarter because everybody was afraid that gold was going to get tariffed.

Well, guess what, Gold didn't get hit by any tariffs, and now some of that gold's flying out of the US 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 ie produced in Ireland to avoid payan US corporate income tax.

So you have gigantic quantities, not big quantities physically, but valueized, crazy numbers of pharmaceuticals coming into the US in the first quarter and so forth.

That turned out not.

To be necessary because pharmaceutical companies are doing deals.

Who knows quite what's going to happen with those deals.

Maybe they'll be more fill and finish, but the net effect was you had these giant swings and distortions with no actual tariff being imposed.

When you look through that, imports are not really down.

And when you look further through that, I think you'll see that imports in some sectors that have been heavily tariffed, like autos, are a little down, and then imports in sectors that are tied to capital expenditure in data centers and so forth, and which have not been heavily tariffed are up and up a lot.

So the aggregate will mask a lot of different stories.

But we're not currently trending towards a smaller deficit.

I think there's a lot of reasons for that, one of which is that a big boom in capital expenditures normally pulls and imports, and we still rely on imported chips.

The build out of TSMC and Arizona's taken time, and so you know, you really are seeing big increases in imports in those categories, and I fully expect that to be the dominant theme of the second half and the trade data once we get the data, just on this reallocation.

For a firm like Apple, the fentanyl tariff which used to be twenty percent and now ten that was hitting them because the fentanyl tariff didn't have any exclusions.

For the reciprocal tariff, which was the tariff on everybody else, you had an electronics and semiconductor's exclusion.

Now that electronics and semiconductctor exclusion did not include game stations.

We are kind of weird and arbitrary and where you draw the limit.

And that's true across the board.

So Apple's mitigation strategy would just be get out of China.

For some others, your mitigation strategy was initially to go to Southeast Asia because it was much lower ten than on China.

That mitigation strategy may not work as well going forward, and your next mitigation strategies final assembly in Mexico or Central America where you have very strong exclusions, presuming that the USMCA renegotiation doesn't change things.

To me, one of the surprises though, is that in the macro data, you would think all this policy uncertainty would have had a bigger impact and you really just don't see the policy uncertainty impact yet.

But it really has made life difficult for a lot of firms.

And I mean it's made life difficult for a lot of analysts.

I always put a star next to the estimates of the effective teriff rate because some tack, some tariffs don't stack, there are exclusions, there are rebates.

It has become insanely complex.

Anna, I guess all these things always have to come back to the FED.

You said yourself their model for thinking about things and the effect of tariffs was sort of broadly holding up the fact that consumers are taking about a third of this on the chin and then you're seeing the rest in various ways in the corporate America, but it's not really as obvious because there's so much stuff going on.

Does that affect how they might be thinking about inflation coming down the track?

I mean, one thing I heard you say was maybe there isn't this isn't a lagged effect.

We may have seen most of what we're going to see, Is that right?

Yeah?

I think what we are seeing right now reflect well one of the model's forecasts.

It's not the same result as what the Fed's research has been saying earlier this year, but it matches the result of one particular model from twenty eighteen, which is most of it would be absorbed by firms and hence there will be the hit would be on the labor market.

So at the end of the day, the US economy is mostly a service driven economy.

You look at the CPI.

Index, about three quarters are services sectors, only a quarters goods sector.

Also, if you look at it from the income perspective, two thirds of the US is labor share, the rest is capital share.

So what will happen to inflation in the next twelve months, importantly will be driven by the labor market.

And there are so many things that's heading the labor market.

Aside from tariff there's also the issue of is AI reducing hiring, which is another almost as big as an issue as a driver as tariffs.

And my answer to that is, I think both tariffs and AI point toward the direction of a drag, a major drag to the labor market.

If I were the FED, I would be more worried about downside risks to the labor market.

Right.

So my takeaway from this is just because we did promise we would sort of answer those riddles that I posed at the start questions households.

We see and hear people talking about affordability and high cost of things.

They are clearly feeling the pain, and some of that is about tariffs, but there's an awful lot of other things that are affecting their costs and their outlook.

Corporate America paying about two thirds of the tariffs.

It's not being paid by foreign exporters.

But there's so much other good news in corporate America now with AI and other things that the bad news associated with tariffs is literally getting lost in the mix.

So I guess that might take aways that they tarifs are a lot easier to talk about than to find in the real life economy.

Anna Wong, Brad Setter, thank you so much, thank you, thank you, thanks for listening to Trumpnomics from Bloomberg.

It was hosted by me Stephanie Flanders, and I was joined by Brad Setter, Senior fellow at the Council of Foreign Relations, what Chief US economist for Bloomberg Economics.

Trumponomics was produced by Samasadi and Moses and with help from Amy Keen.

Sound design was by Blake Maples.

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