World Economy Yet to Feel Full Force of Trump Tariffs, OECD Says
The global economy is still on course for a substantial blow from Donald Trump’s trade measures despite showing greater resilience than expected in recent months, the OECD said.
In new forecasts published on Tuesday, the Paris-based organization raised its 2025 outlook for world growth and most individual economies, citing the impact of front-loading in anticipation of higher tariffs. The US also saw strong investment in artificial intelligence, while China benefited from fiscal support.
But the OECD made little change to its 2026 predictions, when it expects global growth to drop to 2.9% from 3.2% this year and expansion in the US to slow to 1.5% from 1.8% amid higher import duties and elevated uncertainty.
The full impact from an overall effective tariff rate imposed by the White House of 19.5% — the highest since 1933 — has yet to be felt, officials said. (…)
The OECD said inflation is expected to decline in most major economies with slower growth and weaker employment pressures. But it said central banks should remain “vigilant.” (…)
Overall, the organization said there are “significant risks” to its interim outlook, including the possibility of further trade levies or a resurgence of price increases.
Significant Amounts of Tariff Revenue Collected at the Moment
The US government currently collects about $350 billion in tariffs at an annualized rate, which corresponds to 18% of annual household income tax payments.
This is real dollars already paid by importers. Apollo is showing that a complete pass through would represent a 15% increase in household taxes. It would eat up 1.5% of Americans’ disposable income if fully absorbed by consumers, 8.0% of pretax corporate profits if all footed by companies.
It will fall somewhere in between, with greater repercussions from the consumers’ take.
BTW, speaking of repercussions:
USDA Considering A Bailout For Farmers
On Thursday, the Financial Times reported that the Trump administration is exploring the use of tariff revenue to fund an economic aid program for U.S. farmers. As the harvest begins, record-high yields, the lack of a U.S.-China trade deal, and rising input costs, partially due to tariffs, have set up farmers for projected losses.
A key source of concern for farmers has been that China continues to withhold new crop export orders for U.S. soybeans in response to elevated duty rates and to maintain leverage in ongoing U.S.-China trade negotiations. China has historically been the largest destination for U.S. soybeans, importing ~25% of total U.S. soybean production.
In response to President Trump’s tariffs, China imposed 20% retaliatory tariffs on U.S. soybean imports, bringing the total duty rate to 34%, making U.S. soybeans more expensive than South American product. Most U.S. soybeans are shipped to China during September to February, before the Brazil harvest comes to market, with ~15% of annual sales to China typically booked by now.
However, this year China has yet to place a single order, with the country importing record volumes of Brazilian soybeans over April–August in an effort to circumvent the need for American beans.
The situation looks eerily similar to the predicament faced by U.S. soybean farmers in the 2018-2020 trade war, when soybeans accounted for ~70% of agricultural export losses. With the soybean harvest underway, a solution is rapidly needed, whether it be in the form of a bailout or a deal with China.
Eurozone business activity continues to rise, but new orders stall
The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index, based on approximately 85% of usual survey responses and compiled by S&P Global, posted above the 50.0 no-change mark for the ninth consecutive month in September to signal a further expansion of activity across the euro area’s private sector. At 51.2, the index was up slightly from August’s reading of 51.0 and pointed to a modest monthly rise in output that was the most pronounced since May 2024.
The acceleration in the pace of growth in business activity was due to the service sector posting the fastest rate of increase in 2025 so far. Manufacturing production also rose, but the rate of expansion eased from the near three-and-a-half year high registered in August and was only slight.
Germany was a key driver of growth in September, recording a solid increase in output that was the joint-fastest since May 2023, equal with that seen in May 2024. On the other hand, France saw activity decrease for the thirteenth consecutive month, and at the sharpest pace since April. The rest of the Eurozone registered continued growth of output, but the rate of expansion moderated.
The overall increase in business activity was recorded in spite of a stable picture for new orders. New business was unchanged in September, following a first rise in 15 months during August. A slight rise in services new business was cancelled out by a renewed fall in manufacturing new orders, which decreased to the largest degree since February. Continuing the recent trend, total new order volumes were limited by difficulties securing new business from abroad. New export orders have decreased in each month since March 2022, and the latest modest decline was the most pronounced in six months. New business from abroad was down across both the manufacturing and services sectors.
The lack of growth in new orders meant that companies often used the clearance of outstanding business to support output growth in September. Backlogs of work fell modestly, and at the fastest pace in three months. Work-in-hand has now been depleted on a monthly basis throughout the past two-and-a-half years.
With new orders unchanged, employment was also kept stable in September, thereby ending a six-month sequence of job creation. Staffing levels in the services sector continued to rise, but the pace of job creation was only marginal and the weakest in seven months. Meanwhile, manufacturing employment continued to fall, extending the sequence of job cuts which began in June 2023.
France saw workforce numbers rise for the second month running, albeit only marginally. Meanwhile, Germany posted a solid reduction in employment that was the most pronounced in 2025 so far. The rest of the euro area saw modest job creation.
After having risen to a five-month high in August, the pace of input cost inflation softened in September and was below the series average. Manufacturing input costs decreased for the first time in three months, while services posted a sharp but softer pace of inflation.
A similar picture was seen with regards to selling prices, with a fall in manufacturing coinciding with a slower rise in services charges. Overall, output prices increased modestly, and at the slowest pace since May. Germany posted a solid rise in charges, with the pace of inflation hitting a five-month high. Output prices decreased in France for the first time in four months. Meanwhile, the rest of the Eurozone registered a solid increase in selling prices, but one that was the slowest since last November.
Purchasing activity in the euro area manufacturing sector decreased again in September, extending the current sequence of decline to 39 months. Moreover, the latest fall was solid and the fastest since March. In turn, stocks of purchases also decreased, as did stocks of finished goods. In both cases, however, rates of inventory depletion eased from those seen in August. Latest data pointed to a fourth successive monthly lengthening of suppliers’ delivery times. Moreover, the rate of deterioration in vendor performance was the most pronounced since November 2022.
Although companies in the euro area remained optimistic that output will rise over the coming year, business sentiment dipped to a four-month low in September and was below the series average. The waning in confidence was centred on the manufacturing sector, where optimism was the weakest in the year-to-date. Services sentiment was broadly unchanged from August. Confidence weakened in Germany and France, but improved across the rest of the single-currency bloc.
Commenting on the flash PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said:
“The eurozone is still on a growth path. Manufacturing output has increased for the seventh month in a row, and business activity in the services sector has been expanding almost continuously since February 2024. That said, we’re still a long way from seeing any real momentum. Just consider that the Composite PMI, which combines activity in both manufacturing and services, hit a modest 51.2 points and reached with this a 16-month high.
(…) hopes for an acceleration in growth are not justified as new orders have dropped significantly in both Germany and France. In the medium term, higher defence spending could drive up demand for industrial goods. A more immediate impact might come from Germany’s so-called investment booster and the infrastructure package.
Still, according to the survey, confidence in rising output has actually dipped in both Germany and the eurozone overall.
Hiring, which was already pretty sluggish this year, has now come to a halt. That’s due to slower hiring in services and faster job cuts in manufacturing. Germany, in particular, has been a drag here. It is possible that the eurozone’s official unemployment rate, which fell to a seasonally adjusted 6.2% in July, has now bottomed out.
Cost inflation in the services sector, which the European Central Bank watches closely, has eased slightly but remains unusually high given the fragile economic backdrop. Selling prices have cooled more noticeably, which might just prompt the ECB to consider whether a rate cut before year’s end could be back on the table.”
China Floods the World With Cheap Exports After Trump’s Tariffs Shipments have soared outside the US this year
With access to the US curtailed, Chinese manufacturers have shown they aren’t backing down: Indian purchases hit an all-time high in August, shipments to Africa are on track for an annual record and sales to Southeast Asia have exceeded their pandemic-era peak.
That across-the-board surge is causing alarm abroad, as governments weigh the potential damage to their domestic industries against the risk of antagonizing Beijing — the top trading partner for over half the planet.
While so far only Mexico has hit back publicly this year — floating tariffs as high as 50% on Chinese products including cars, auto parts and steel — other countries are coming under increasing pressure to act. Indian authorities have received 50 applications in recent weeks for investigations into goods dumping from nations including China and Vietnam, according to a person familiar with the matter who asked not to be identified as the information isn’t public. Indonesia’s trade minister pledged to monitor a deluge of goods, after viral videos of Chinese vendors touting plans to export jeans and shirts for as little as 80 US cents to major cities caused an outcry.
For all the pain, the chances of more meaningful action are limited. Countries already embroiled in tariff negotiations with the Trump administration appear reluctant to take on a separate trade war with the world’s second-largest economy. That’s giving Beijing breathing room from US levies at heights economists previously predicted would halve the nation’s annual growth rate. (…)
Officials shielding their economies from Beijing are treading carefully. South Africa’s trade minister has advised against punitive tariffs on Chinese car exports — which nearly doubled this year — and is instead seeking more investment. Chile and Ecuador are quietly imposing targeted fees on low-cost imports, after Chinese e-commerce giant Temu’s monthly active users in Latin America soared 143% since January. While Brazil has threatened more aggressive retaliation, this summer it gave China’s biggest electric car maker, BYD Co Ltd, a tariff-free window to ramp up local production. (…)
Demand for China’s world-beating, high-tech innovations helped drive much of the recent traffic. Rising sales to wealthy markets in Europe and Australia also indicate Beijing simply found new buyers for many products.
India shows how Trump’s redrawing of the global trade map is benefiting Beijing in new ways. Exports to China’s neighbor hit a record $12.5 billion last month, driven largely by Apple Inc.’s suppliers rapidly shifting output of iPhones to India from its Asian neighbor. Those companies, however, still depend on parts and tooling made mostly in China.
In July, Chinese firms shipped almost $1 billion worth of computer chips to India and billions of dollars more worth of phones and parts, according to data released by Beijing. That puts exports on track to exceed last year’s record, with the value of shipments so far this year almost as large as the whole of 2021. (…)
- Trump Trade War Is Helping Jumia Access Chinese Goods, CEO Says The “Amazon of Africa”
US President Donald Trump’s tit-for-tat tariffs with China have caused the world’s second largest economy to divert goods to other markets including Africa.
“Our pipeline of goods from China is getting healthier and healthier and we have a lot more interest from Chinese suppliers and vendors,” Dufay said in a Bloomberg TV interview. “It’s really making our lives much easier.”
(…) as tariffs throttled Chinese shipments to the US, exports to Africa have soared by 25% year on year. (…)
H-1B Visas Are Crucial to American Productivity
(…) US doctoral programs in STEM fields are often dominated by foreigners. But it would be wrong to say they are stealing spots from Americans; US universities have their pick of global talent, and non-Americans just have much stronger math and science backgrounds. And I now appreciate that competing against my classmates helped me in ways I still benefit from.
Most of them stayed in America, got H-1B visas for their first jobs and eventually became citizens. Almost all have been very successful. Their experience is not unique. Research shows the foreigners who come to the US as students or on H-1B visas tend to be much more productive than native-born workers. They increase employment, get patents, start businesses and raise US productivity. Firms that win the H1-B lottery (the number of visas is capped, and there is more demand than supply) are better funded.
In short, H-1B visa holders are among the most valuable of all migrant categories, and American universities offer some of the best advanced STEM training in the world. (…)
The executive order that President Donald Trump issued last week essentially ends the program by imposing a $100,000 fee on each new application.
H-1Bs are intended for migrants who have skills natives lack. Critics of the program argue that it enables firms to pay foreigners less: Since their visa status is tied to their job, they must accept the lower salary and can’t change jobs. (…)
As much as it might be nice to believe that the $100,000 fee will benefit native workers by effectively shrinking the number of skilled early-career foreign workers, it won’t. Despite being a leader in STEM research and graduate training, the US education system does not produce enough high-quality native STEM graduates. American students are falling behind because they don’t get adequate training. (…)
In the current environment, the only way for US industry to stay competitive in STEM fields is to import talent from abroad.
Nearly two-thirds of H-1B visas go to people working in “computer-related occupations,” according to a recent government report to Congress.
Federal data from fiscal 2024 shows that people born in India accounted for 71% of approved H-1B petitions that year, while people from China accounted for almost 12%.
The U.S. caps new H-1B visas at 85,000 a year, just a sliver of the nation’s 171 million-strong civilian labor force, though employees of universities and other nonprofits are generally exempt. But the government issued nearly 400,000 H-1Bs in its 2024 fiscal year. Most of these were for people who were already in the U.S., to cover situations like workers who sought extensions or switched jobs.
These visas usually last up to three years and are for people with specialized skills. Recipients need a Bachelor’s degree at a minimum and nearly half of them have a Master’s degree.
The biggest category of H-1B visa holders includes skilled jobs in fields like computer and management consulting services, engineering and scientific research.
AI CORNER
An $800 Billion Revenue Shortfall Threatens AI Future, Bain Says
Artificial intelligence companies like OpenAI have been quick to unveil plans for spending hundreds of billions of dollars on data centers, but they have been slower to show how they will pull in revenue to cover all those expenses. Now, the consulting firm Bain & Co. is estimating the shortfall could be far larger than previously understood.
By 2030, AI companies will need $2 trillion in combined annual revenue to fund the computing power needed to meet projected demand, Bain said in its annual Global Technology Report released Tuesday. Yet their revenue is likely to fall $800 billion short of that mark as efforts to monetize services like ChatGPT trail the spending requirements for data centers and related infrastructure, Bain predicted. (…)
The increasing popularity of services such as OpenAI’s ChatGPT and Google’s Gemini, as well as AI efforts by companies across the planet, means demand for computing capacity and energy is rising at a rapid clip. But the savings provided by AI and companies’ ability to generate additional revenue from AI is lagging behind that pace.
“If the current scaling laws hold, AI will increasingly strain supply chains globally,” said David Crawford, chairman of Bain’s global technology practice.
OpenAI is losing billions of dollars a year and prioritizing growth over profit, but it does expect to be cash-flow positive by 2029, Bloomberg has reported. (…)
The biggest tech firms including Microsoft Corp., Amazon.com Inc. and Meta Platforms Inc. will ramp up their combined annual spending on AI to more than $500 billion by early next decade, according to Bloomberg Intelligence. (…)
Global incremental AI computing requirements could soar to 200 gigawatts by 2030, with the US accounting for half that, Bain said. While breakthroughs in technology and algorithms could ease the burden, supply chain constraints or insufficient power supply could thwart the progress, Bain said.
Besides spending on computing capacity, leading AI companies are investing massive amounts in product development. Autonomous AI agents, which can perform multi-step tasks like humans, with limited guidance, are one area of focus. Over the next three to five years, companies are set to allocate as much as 10% of tech spending to building core AI capabilities including agent platforms, Bain estimates.
Beyond AI services, Bain said in its annual tech report that it anticipates growth in areas such as quantum computing. The emerging technology could unlock $250 billion in market value across industries from finance, pharmaceuticals, logistics, and materials science, it said.
While some expect a single quantum breakthrough, Bain sees a gradual curve with early adoption in narrow domains within the next 10 years and broader adoption over time.
Humanoid robots are attracting capital and becoming more prevalent, yet deployments are at an early stage and heavily rely on human supervision, Bain said. Commercial success will depend on ecosystem readiness, and companies that pilot robots early are set to lead the industry, the consultancy said.
The complete Bain report is here.
Miran Is Contradicting Himself on the Case for Big Rate Cuts
In a speech at the Economic Club of New York, he claimed that the US economy’s “neutral rate” has dropped significantly and that, therefore, current interest rates are unduly restrictive, risking higher unemployment. Does Miran really believe that? Or is he providing a rationalization for the president’s long-desired rate cuts? (…)
Miran’s basic argument is that a confluence of immigration, tax and trade policy shocks are producing an inflation-adjusted neutral rate — or r-star, in economics jargon — that is 1 to 1.2 percentage points lower than it had been, meaning it’s close to zero. Taking that assumption as given, Miran concludes that the appropriate level of the fed funds rate could be around 2%-2.5% and, thus, “monetary policy is well into restrictive territory.”
But this line of reasoning is inconsistent with what Miran himself argued prior to taking his job in government.
Consider a Barron’s essay that Miran co-wrote in March 2024 in which he argued the exact opposite of what he said on Monday. Specifically, Miran and co-author Sander Gerber made the case that neutral rates had “crept higher,” citing estimates by the Bank for International Settlements that put the rate at as much as 1.5 percentage points in real terms, meaning that interest rates were actually easier than policies makers realized.
The Miran-2024 argument hinged in part on the end of an era of hyper-globalization. The essay posited that the proceeds from Chinese exports had been recycled into US markets, creating a “global savings glut” and driving down rates.
But, globalization was going into reverse and a new era of conflict was emerging in its place. “Wars and the proliferation of sanctions and tariffs incentivize firms to invest in supply-chain resilience over efficiency, which requires capital expenditures and boosts neutral,” Gerber and Miran wrote.
Today, that’s more true than ever, thanks to Trump’s sweeping global levies and new kinetic conflicts around the world. Rising security concerns have led governments to ramp up defense spending, including the proposed Golden Dome defense system in the US.
The 2024 essay also relied on a series of other factors that are as true today as they were 18 months ago, including a boom in capital-intensive hardware spending to power the artificial intelligence revolution, and the fact that many US households enjoyed fixed-rate mortgages locked in around 4% or below.
The authors worried that large fiscal deficits (then running at around 5.8% of GDP) were working at cross-purposes with Fed efforts to cool the economy. Deficits are a very comparable 6.2% of GDP now, with Trump’s signature tax legislation all but guaranteeing budget shortfalls as far as the eye can see.
In his Monday speech, Miran makes the case that tariff revenue constitutes a boost to our fiscal fortunes, but that’s controversial to say the least.
For starters, the Supreme Court needs to uphold the legality of most of the existing tariffs. Second, many economists project that the duties, if sustained, would make the economy less productive, potentially weighing on total tax revenue. Lower productivity growth may, of course, put downward pressure on neutral rates — so there are a lot of countervailing forces here. Lastly, tariffs are demonstrably pushing up reported inflation, a reality that Miran conveniently denies.
So what has legitimately changed? Miran correctly notes that net migration has swung from substantially positive under President Joe Biden to something much lower than that. Arithmetically, that seems to account for around a third of the drop in r-star under Miran’s model. Among other things, he highlights the possibility that fewer immigrants could dampen rents and ultimately weigh down inflation — a conclusion that is based on a 2003 paper about a very specific episode that unfolded in Miami in 1980, the Mariel boatlift.
Meanwhile, Miran gives short shrift to the many inflationary cross-currents from the Trump immigration shock. Among other things, economists still don’t know whether the scramble for labor will, at least temporarily, push up wages and, therefore, prices, including in areas such as housing!
While Miran’s speech falls flat on his own terms, there is another even broader issue at the heart of his argument: It’s rarely wise to make policy on the basis of judgments about r-star. While economists have developed fancy models to estimate “neutral,” most monetary policy practitioners acknowledge that it’s almost impossible to observe in real time with a high degree of accuracy — a theme that Fed Chair Jerome Powell has repeatedly highlighted dating back to his first major policy speech in 2018. In that context, Powell has emphasized the need to stay humble and watch the evolving data. (…)
Judging by the Fed’s most recent survey, Miran may not be alone in his belief that the neutral rate is substantially lower than where policy rates are today. He is, however, alone in demanding that rates move toward neutrality very, very quickly. If that’s not an effort to justify Trump’s stated desire for lower interest rates, then it’s something almost as bad: a sign of extraordinary hubris from a brand new Fed governor speaking a week after confirmation.
Trump’s playbook metastasizes:
Taiwan Curbs Chip Exports to South Africa in Rare Power Move
Taiwan has imposed restrictions on the export of chips to South Africa over national security concerns, taking the unusual step of using its dominance of chip markets to pressure a country that’s closely allied itself with China.
Taiwan now requires pre-approval for the bulk of chips sold to the African nation, its trade regulator said in a statement. The decision emerged after Pretoria tried to downgrade Taipei’s representative office and force its move to Johannesburg from the capital, Taiwan’s foreign ministry has said.
The move reflects both the island’s economic clout and a growing frustration with getting sidelined by Beijing in the diplomatic community. Taiwan Semiconductor Manufacturing Co. makes the majority of the world’s most sophisticated chips, essential to cars, AI and industrial production. (…)
“The South African government’s actions have undermined our national and public security,” Taiwan’s International Trade Administration said in a statement. “We are adopting measures to restrict trade to maintain our sovereignty.”
There’s a plan:
Trump Cancels Trail, Bike-Lane Grants Deemed ‘Hostile’ to Cars
The Trump administration canceled grants for street safety measures, pedestrian trails and bike lanes in communities around the country this month, each time offering a simple rationale for yanking back federal aid: the projects aren’t designed for cars. (…)
Transportation Secretary Sean Duffy has regularly heaped scorn on major transit systems, including New York’s Metropolitan Transportation Authority, and signaled that the department would prioritize projects that are designed around automobiles. (…)