Hello there,
U.S. President Donald Trump’s tariffs take effect today: a fresh test of his strategy for shrinking U.S. trade deficits without higher inflation or stiff retaliation from trading partners.
On the surface, it looks like he’s winning. The trade deficit is indeed narrowing, contributing heavily to the rebound in U.S. gross domestic product during the second quarter. The United States is also raking in tens of billions of dollars a month in much-needed cash for federal coffers.
But there are major hurdles too. Trump’s trade war is inflicting harm on Americans, particularly lower-income households. They are cutting back on eating out, travel and pantry staples like diapers, soda and beer. They may have to hunt harder for bargains in future. Recent data is showing that prices for imported goods like household furniture and recreation products are rising, supporting views that inflation will pick up in the second half of the year.
U.S. businesses, meanwhile, are saying the swarm of new import taxes is driving up costs and making business planning more difficult. Experts expect profit margins at consumer goods companies to shrink as companies find they can no longer rely on price hikes to boost revenue.
When it comes to the risk of retaliation, Trump is, so far, doing OK. The leaders of Brazil and India have vowed not to be cowed by Trump’s hardline bargaining position but they don’t have the same leverage as China with its dominance in rare earth minerals.
Japan’s Prime Minister Shigeru Ishiba is under fire for not getting written confirmation of his trade deal with the United States. Under the agreement clinched last month, the two agreed that U.S. duties on most Japanese goods will be cut to 15% from 25% effective Thursday but the lack of written confirmation has led to confusion over whether the new 15% tariffs will be stacked on top of existing levies. Japan’s Toyota, meanwhile, is warning of a near $10 billion tariff hit, the highest such estimate yet by any company.
Trump’s threat of a 100% tariff on imports of semiconductors sets the stage for a survival of the fittest competition among chipmakers. The exemption offered for companies that manufacture in the United States is a boon for major, cash-rich companies like TSMC that can afford to do so. Smaller players based in countries like the Philippines and Malaysia look set to lose out.
Sticking with chipmakers, Trump is calling for the immediate resignation of Intel's new CEO, Lip-Bu Tan, saying he was "highly conflicted" after questions arose about his ties to Chinese firms. The move comes a day after Reuters reported Republican Senator Tom Cotton sent a letter to Intel's board chair with questions about Tan's ties to Chinese firms and a recent criminal case involving his former firm Cadence Design.
Speaking of personnel moves, Trump’s firing of the head of the Bureau of Labor Statistics has shaken trust in the foundations of economics - statistics. We dive into how this is raising concerns about U.S. data - and the implications for the global economy - on this week’s Reuters Econ World podcast. Listen here.
I am leaning into my European roots and heading off on vacation for the rest of August. But do not worry, this newsletter will still be winging its way to your inboxes thanks to some guest authors. Enjoy and I will “see you” in September.
As always, I'd love to hear from you by hitting reply on this email or finding me on LinkedIn.
Carmel
