Washington Weekly: Tariff Blitz

Tariff Blitz.

President Trump this week delivered his much-anticipated plans on reciprocal tariffs. Details were shifting in the time leading right up to the announcement. Underlying the reciprocal tariffs is a baseline 10% tariff that will apply to all countries and will go into effect at midnight tonight. A broad subset of countries (including China, EU countries, Switzerland, Japan, India, and Vietnam, among others) will be subject to higher tariffs (a list of these countries is linked hereWhite House list of countries subject to higher tariffs). The tariffs are country-specific and are set to go into effect next week. Though the math is opaque, the level of reciprocal tariffs is driven by the level of the US’s bilateral trade deficit with a given country (not the level of that country’s tariffs with respect to the US) and any non-tariff barriers or currency manipulation. We unpack below some of the complicated and uncertain dynamics on the pathway for tariffs.

• Emergency Authority. As he did with recent tariffs on Mexico, Canada, and China, President Trump is imposing the reciprocal tariffs through emergency powers under the International Emergency Economic Powers Act (IEEPA), a law that has been traditionally invoked for national security issues. Trump is the first president to use IEEPA to impose tariffs. The Senate this week passed a resolution to repeal Trump’s use of IEEPA for tariffs on Canadian imports. The resolution passed with four Senate Republicans joining all Senate Democrats, and is non-binding and will not go anywhere in the House.
• Reaction. These large tariff increases bring economic and political risks for the Trump administration. Markets reacted quickly and negatively to the size of the tariffs and its potential impact on prices and the economy. While Republicans currently are circling the wagons on the administration’s actions, there is unease from elected Republicans in Congress. They are aware that they and President Trump benefited in the last election cycle from voters’ concerns about higher prices. Before the make-over of the Republican party under Trump, free trade was also part of the party’s orthodoxy. Concerns likely will bubble up next when the US Trade Representative Jamieson Greer appears before Congress. In his first term, Trump often would change course in response to negative market reaction to even the threat of tariffs. In the second term, Trump has been more assertive in taking aggressive actions that come with economic and political risks and is surrounded by a different set of advisors. So, whether Trump heeds these concerns is questionable and may depend on the degree and persistence of the market and economic response.
• Next Steps. President Trump positions tariffs as serving multiple objectives (basis for negotiation, source of revenue and spur for domestic investment), though there are tensions between the objectives. In his second term, Trump has sometimes evinced an interest in prioritizing the last two objectives over the first. Nevertheless, in putting forward these reciprocal tariffs, Trump has the authority to ratchet up tariffs in response to retaliatory measures or ratchet down in response to potential agreements. While many countries are in the process of responding with retaliatory tariffs, the Trump administration thinks that many countries will come to the bargaining table and provide concessions in return for lower tariff levels. Some already are and the administration may provide delays to allow for these negotiations and to provide greater runway for actually implementing all of these tariffs. But a big question is how aggressively will the administration respond with their own retaliatory measures if many of the biggest trading partners dig in on retaliatory measures. The conventional wisdom continues to be that Trump is using tariffs as leverage in negotiations, but the risk of further escalation is not an idle concern.
• More Tariffs. The reciprocal tariffs don’t apply to steel/aluminum and autos, though the Trump administration has already applied 25% tariffs to these products under different authority. Other products that are excluded from the reciprocal tariffs include lumber, copper, pharmaceuticals and semiconductors. However, the administration already is or likely will conduct investigations into trade in these products that will form the predicate for heightened tariffs.

Budget Resolution Momentum.

Senate Republicans this week unveiled a compromise budget blueprint. The budget resolution is a necessary first step in advancing President Trump’s biggest legislative policy priorities. Passage of the budget resolution by the Senate, later today or tomorrow, and then passage by the House, possibly next week, tees up the reconciliation process for major tax-and-spending legislation to be passed with a majority vote in the Senate (instead of the 60-vote threshold for most legislation). The Senate’s revised budget resolution this week includes permanence of the 2017 tax cuts for individuals, a $1.5 trillion cost ceiling on new tax provisions, $250 billion in new defense spending and $175 billion for border security and immigration enforcement. It also includes a $5 trillion debt limit increase. Trump announced his support for the Senate’s budget resolution and called for its quick passage. While the Senate’s budget resolution differs from the version the House passed earlier this year, the House plans to pass the measure next week before heading into a two-week recess. Whether or not it’s that easy remains to be seen as several House Republicans have issues with the Senate’s more limited spending cuts.