Note: I am travelling until mid-May. Postings will be irregular.
The Great Trump Tariff Rollback The President started a trade war with Adam Smith. He lost.
The WSJ Editorial Board:
Rarely has an economic policy been repudiated as soundly, and as quickly, as President Trump’s Liberation Day tariffs—and by Mr. Trump’s own hand. Witness the agreement Monday morning to scale back his punitive tariffs on China—his second major retreat in less than a week. This is a win for economic reality, and for American prosperity.
Make that a partial win for reality. The Administration agreed to scrap most of the 145% tariff Mr. Trump imposed on Chinese goods on April 2 and later. What remains is his new 10% global base-line tariff, plus the separate 20% levy putatively tied to China’s role in the fentanyl trade, for a total rate of 30%. In exchange, Beijing will reduce its retaliatory tariff to 10% from 125%. The deal is good for 90 days to start, as negotiations continue.
Investors are cheering at this border-tax reprieve, since this is a step back from mutual assured trade destruction. (…)
The 30% tariff is still exceptionally high for a major trading partner, but the 90-day rollback spares both sides from what looked like an impending economic crackup. U.S. consumers were facing widespread shortages, while China feared growing unemployment.
As with last week’s modest British agreement, the China deal is more surrender than Trump victory. Apart from the tariff rollback, neither side announced any broader concessions on the substantive trade issues that weigh on the U.S.-China relationship. Those include China’s barriers to American firms, especially in services such as digital and financial, and its chronic intellectual-property theft.
Many of these bad Chinese practices have become worse under President Xi Jinping’s strong-arm economic management. One tragedy of Mr. Trump’s shoot-America-in-the-foot-first approach is that he’s hurt his chances of rallying a united front of countries against Beijing’s mercantilism. By targeting allies with tariffs, Mr. Trump has eroded trust in America’s economic and political reliability.
Beijing now also has the benefit of concrete experience to reassure the Communist Party that Washington would struggle to impose economic sanctions in a crisis such as a Chinese blockade or invasion of Taiwan. If there’s a silver lining to the tariff fiasco, it’s the timely reminder to Congress to get serious about true military deterrence again.
Taking a step back, where are we now after nearly four months of Mr. Trump’s protectionism? The President’s concessions since his initial tariff announcements include: exemptions for goods from Canada and Mexico produced under the terms of the USMCA; a 90-day pause on his reciprocal tariffs against everyone except China; exemptions on China tariffs for iPhones and electronics; the mini-deal with the United Kingdom; and now the 90-day rollback on China tariffs.
The landing spot coming into view is a 10% global tariff, and higher (but not 145%) for China. The negotiations allegedly underway with dozens of countries while the reciprocal tariffs are paused may make some marginal headway opening markets for American firms. But so far there’s scant sign of the substantial trade deals that Mr. Trump promises.
So after weeks of market turmoil, the economy is left with higher trade costs and greater uncertainty for business, but at least a step back from Smoot-Hawley 2.0. Investors, businesses and households probably would welcome this outcome, which is considerably better than Mr. Trump’s initial plan.
But a 10% across-the-board tariff is still four times the average U.S. tariff rate before Mr. Trump took office. It keeps the door open to the economically and politically destructive special pleading for tariff breaks for well-connected industries and companies at the expense of everyone else. U.S. companies protected by high tariffs will gradually lose their competitiveness against the rest of the world.
If there’s a silver lining to this turmoil, it is that markets have forced Mr. Trump to back down from his fever dream that high tariff walls will usher in a new “golden age.” The age didn’t last two months, and it was more leaden than golden. White House aide Peter Navarro, the main architect with Mr. Trump of the Liberation Day fiasco, has been repudiated.
Mr. Trump will not want to admit it, but he started a trade war with Adam Smith and lost. He’s not the first President to learn that lesson.
(…) The port’s executive director, Gene Seroka, said he expects imports at the port to end May down 25% year-over-year. He said a move to temporarily lower the base tariff rate on Chinese imports to 30% from 145%, announced Monday, is unlikely to lead to a sudden surge in cargo volume.
“Even at a 30% tariff with a 90-day reprieve, it’s not going to dramatically change what we’re seeing right now,” Seroka said in an interview Monday with The Wall Street Journal.
Seroka said companies that supply critical goods like healthcare products and sellers of holiday merchandise like toys might use this moment to restock. “But your refrigerator, outdoor patio set, regular stuff is not just going to come and flood the marketplace because we’ve gone from 145% to 30%,” he said.
The National Retail Federation said some retailers might find short-term relief in the lowered levies as they stock up for the peak back-to-school and holiday seasons. Some shippers might now rush inventory sitting in China that they had waited to ship to the U.S. under the 30% duty rate, Seroka said.
However, “I don’t see all of the normal cargo coming back to the levels that we had witnessed in recent weeks and months,” he said. “Reason being, you’re not going to be frontloading at 30%.”
Shipping rates have stayed relatively flat amid the trade turmoil. The average daily spot rate to ship a 40-foot container from Asia to the U.S. West Coast was $2,321 for the week ended May 7, roughly in line with the previous week, according to the Freightos Baltic Index.
Judah Levine, head of research at Freightos, said rates will likely rise but not skyrocket under the 30% base tariff. “The volume rebound will probably signal the start of an early peak season that will keep rates elevated,” he said.
Seroka said he expects spot rates might tick up as carriers shift capacity back to China-to-U.S. shipping lanes.
(…) Because the process of bringing goods to the US starts months in advance of their appearance on store shelves, a whole host of disruptions has already been baked into the rest of 2025, even if the average person can’t see them yet. In particular, it could be slim pickings for many seasonal goods commonly imported from China—prom and wedding dresses, fireworks for the Fourth of July, new TVs for football season, laptops for kids going off to college, and toys and gadgets and beauty product gift sets for Christmas—just as Americans head to stores looking for them.
An extended period of shortages and financial strain on regular people might lead us into a very tariffed holiday season. (…)
Even if the tariffs disappeared tomorrow—a best-case scenario—“you probably have another six months to wrestle through it before you can get somewhat back to normalcy,” says Rob Holston, the global and Americas consumer products sector leader at EY. “The spike has been put into the system, and it’s not like you can just pull it back.” In an interview on Bloomberg Surveillance, Gene Seroka, the executive director at the Port of Los Angeles—the country’s busiest container port and the one that handles the bulk of Chinese imports—estimated that most US retailers have only about a five- to seven-week stockpile of pre-tariffed goods left on hand. (…)
It’s not just a lack of finished goods that could become a barrier to stocking gifts on shelves. China churns out almost a third of the world’s plastic and is the world’s largest supplier of paper packaging products, which means that a major component of many everyday goods has suddenly become more expensive, and demand for those components from countries with smaller export operations has spiked. Too many buyers for too little packaging can create short-term shortages just as effectively as a lack of the product itself. (…)
The FT:
- China-based exporters greeted the announcement on Monday of the tariff rollback with relief. Shipments to the US are expected to “significantly increase” in the coming few weeks, according to Wang Xin, head of the Shenzhen Cross-Border E-Commerce Association, which represents more than 2,000 Chinese merchants.
- Exporters also noted that the reduced tariffs were significantly higher than before Trump took office in January.
- A Shenzhen-based freight agent who asked not to be named said that she expected many clients would stock up in advance of Thanksgiving and Christmas. “Currently, shipping companies have not raised prices, but the trend should be upward,” she added. Ken Huo, a supervisor at the Foshan Foreign Trade Association, said some exporters were shipping goods as fast as possible to ensure they arrived within the 90-day timeframe.
- But “tariffs are still a big challenge”, he added. “There is a little bit [of relief]. But the situation is still very severe.”
State of U.S. Tariffs: May 12, 2025
(my emphasis)
The Budget Lab (TBL) estimated the effects all US tariffs and foreign retaliation implemented in 2025 through May 12, including the effects of the lower rates with China, the deal with the UK, and the recent announced auto tariff rebate. TBL analyzed the May 12 tariff rates as if they stayed in effect in perpetuity.
Judged by effects on the price level and GDP, the May 12 changes to the China rate alone reduce the negative economic impact of all 2025 tariffs to date by 40%; the US-UK trade deal and auto tariff rebate have only minor impacts.
Current Tariff Rate: Consumers face an overall average effective tariff rate of 17.8%, the highest since 1934. The reduction since the April 15 report is almost entirely due to the lower rates on Chinese imports—the US-UK trade deal has minimal effects on average tariff rates. Even after consumption shifts, the average tariff rate will be 16.4%, the highest since 1937.
Overall Price Level & Distributional Effects: The price level from all 2025 tariffs rises by 1.7% in the short-run, the equivalent of an average per household consumer loss of $2,800 in 2024$. Annual pre-substitution losses for households at the bottom of the income distribution are $1,300. The post-substitution price increase settles at 1.4%, a $2,300 loss per household.
Commodity Prices: The 2025 tariffs disproportionately affect clothing and textiles, with consumers facing 15% higher shoe prices and 14% higher apparel prices in the short-run. Shoes and apparel prices stay 19% and 16% higher in the long-run respectively.
Real GDP Effects: US real GDP growth is -0.7pp lower from all 2025 tariffs. In the long-run, the US economy is persistently -0.4% smaller respectively, the equivalent of $110 billion annually in 2024$.
Labor Market Effects: The unemployment rate rises 0.4 percentage point by the end of 2025, and payroll employment is 456,000 lower.
Long-Run Sectoral GDP & Employment Effects: In the long-run, tariffs present a trade-off. US manufacturing output expands by 1.5% but more than crowds out other sectors: construction output contracts by 3.1% and agriculture declines by 1.1%.
Fiscal Effects: All tariffs to date in 2025 raise $2.7 trillion over 2026-35, with $394 billion in negative dynamic revenue effects. This is $300 billion more than under the higher 145% China tariffs, showing how far from revenue-optimal levels those rates were.
Without the lower China tariffs—but with the US-UK trade deal and auto rebates—the average effective tariff rate would have been 27.6% pre-substitution, the highest since 1903, GDP growth would have been 1.1pp lower over 2025, and PCE prices would have been 2.9% higher in the short-run, the equivalent of a $4,800 per household consumer loss in 2024$.
The distinction between pre-substitution metrics (before consumers and businesses shift purchases in response to the tariffs) and post-substitution (after they shift) is a crucial one. One metric where the difference is meaningful is the average effective tariff rate.
Measured pre-substitution—assuming there are no shifts in the import shares of different countries—the 2025 tariffs to date are the equivalent of a 15.4 percentage point increase in the US average effective tariff rate. That calculation assumes that, for example, the share of imports from China remains at 14%, where it was in 2024. This is the right way to think about the tariffs from the perspective of consumer welfare, since it reflects the full cost faced by consumers before they start making difficult spending choices. This increase would bring the overall US average effective tariff rate to 17.8%, the highest since 1934.
Post-substitution—after imports shift in response to the tariffs—the 2025 tariffs are a 14.0 percentage point increase in the US average effective tariff rate, due to the substantial fall in China’s share of US imports as American consumers and businesses find alternatives for Chinese imports. China’s import share goes from 14% to 6% as a result of the tariffs, which, compositionally, means that fewer Americans are paying the China tariffs and means therefore it has less “weight” in the post-substitution average effective tariff rate calculation. The 14.0pp increase brings the overall US effective tariff rate to 16.4%, the highest since 1937.
The timing of the transition from “pre” to “post” substitution is highly uncertain. Some shifts are likely to happen quickly—within days or weeks—while others may take longer.
Goldman Sachs:
In light of yesterday’s US-China trade agreement, our economists now expect a 13pp increase in the US effective tariff rate for 2025 on the whole, versus +15pp previously.
Incorporating that change, as well as the easing in financial conditions over the past month, they have raised their 2025 growth forecast by 0.5pp to 1.0% (on a Q4/Q4 basis), lowered their odds of a recession in the next 12 months by 10pp to 35%, and pushed back their call for Fed cuts, now looking for cuts in December/March/June, to an unchanged terminal rate of 3.5% – 3.75%.
John Authers:
It’s a good sign when inflation data no longer seem to matter that much. The latest readout of the US consumer price index, with a headline rise of 2.3%, was indeed comfortingly dull. In April, when import tariffs briefly hit their highest rates in more than a century, steady disinflation continued as though nothing had happened. This was the third month in succession that inflation declined and came in below expectations.
It’s possible that companies did a good enough job of boosting their inventories before the tariffs to save them from dilemmas over whether to pass on price rises to customers; it could still be too early to see a tariff inflation. Meanwhile, services continue to be the greatest obstacle to lowering overall inflation to the Federal Reserve’s targets, even though it’s coming down only very slowly. Falling fuel prices improved the picture. (…)
The “supercore” measure of services excluding shelter prices, emphasized by Fed Chair Jerome Powell, is down to 2.7%, its lowest since 2021, while prices that tend to be sticky (meaning they’re hard to reduce) are falling. The same is true of the trimmed mean, which excludes the greatest outliers in either direction, and takes the average of the rest:
(…) All of this would normally boost hopes for Fed rate cuts, as lower inflation allows the central bank to offer easier money. The problem is that the CPI data is balanced by growing optimism that a recession can be avoided, which means less urgency to ease. (…)
FYI: Sony Sees $700 Million Tariff Hit on Underwhelming Outlook