Transcript: A case of Schrödinger’s tariffs

This is an audio transcript of the Behind the Money podcast episode: ‘A case of Schrödinger’s tariffs’

Saffeya Ahmed
Today is the day that US President Donald Trump’s tariff pause was supposed to end. As of Monday, though, that’s changed. Trump has now said that he’ll extend his pause until August 1st. Now in the three months since he announced this pause, Trump has worked out a deal with the UK.

News clip
Well, it looks like the Brits are over the line first, doesn’t it? Donald Trump has signed an executive order reducing tariffs on some UK exports into the United States . . . 

Saffeya Ahmed
He’s dropped taxes on Chinese goods from almost 150 per cent back down to 30.

News clip
This morning, a major trade breakthrough and possibly some relief for Americans. The US and China announcing that both countries will dramatically reduce tariffs.

Saffeya Ahmed
And he’s penned some more trade agreements in the last couple of weeks too.

News clip
To Wall Street now, as investors react to news of a trade deal between the US and Vietnam. Investors now weighing what the deal means for companies that manufacture in Vietnam, like Nike, Columbia Sportswear.

Saffeya Ahmed
But for the last three months, a 10 per cent baseline tariff has been in place for most all US imports, and it hasn’t had much of a visible impact on the American economy yet.

Claire Jones
What we saw after April the 2nd was a massive shock that really reverberated, first through markets and then the US public, and really kind of shook faith in the world’s largest economy. However, a few months on, you know, the sky hasn’t fallen in, it still seems like the US economy is doing sort of OK, and the inflation that we expected hasn’t landed yet.

Saffeya Ahmed
So what gives? Why hasn’t the American economy felt the heat from these tariffs yet?

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I’m Saffeya Ahmed from the Financial Times, in for Michela Tindera. Today on Behind the Money, we’re talking through what the last 90 days can teach us about Trump’s tariffs going forward, and, whatever may come next, should the US be bracing for a bigger fallout?

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I’m here with the FT’s US economics editor, Claire Jones, who has been following the ups and downs of Trump’s tariff rollercoaster. Claire, welcome to the show.

Claire Jones
It’s a pleasure to be here, thanks a lot for having me.

Saffeya Ahmed
Yeah, happy to have you. So I wanna go back to the chaos of those first few days after President Donald Trump’s “liberation day”. He announced tariffs on roughly 150 countries and territories around the world, even on an island that is only home to penguins. So what was the initial reaction in markets, Claire?

Claire Jones
I think it was one of shock and disbelief. I mean, these were the most aggressive American tariffs we’ve seen for more than a century. And not only that, they were worked out on the basis of a formula that no one really understood and that mainstream trade economists didn’t really agree with. And the immediate reaction for this was for trillions to be wiped off global stock indices in the days that followed.

Saffeya Ahmed
Yeah, and so what were economists saying at that point about how these tariffs could impact the US economy?

Claire Jones
I think most economists thought it’d spelled doom. I mean, we immediately saw people talking about the risk of a US recession. This was an economy that grew by 2.4 per cent in 2024. It was doing really, really well when Trump took office. And people just thought all of that growth or almost all of that growth would be completely wiped out. So midway through April we saw the IMF knock almost a percentage point off its estimate of US growth and people were saying that’s not nearly gloomy enough. What we also saw was people really starting to price in the risk of another bout of inflation in the US and the suspicion was that US people would be feeling the impact of a lot less growth and also seeing prices rise at a rate which would really hit them in the pocket.

Saffeya Ahmed
What happens next is just a week later, on April 9th, Trump decides to pause his tariffs, in large part because of chaos in the Treasury market. His pause calms markets a lot, but Claire says the real relief comes when the US and China back down from their one-on-one trade war.

Claire Jones
What I think changed it for economists was when Scott Bessent went to meet his Chinese counterparts in Geneva in May, and there was a sense in which relations between the US and China were improving. I think that gave economists some sense in which they thought, OK, we’re going to see a slowdown, we are going to see more inflation, but we might not see the recession that we feared.

Saffeya Ahmed
So it sounds like getting the situation with China cooled off was a bit of a reprieve here.

Claire Jones
I think there’s definitely the sense that economists think they need more time. There’s been a lot of optimism, even among economists who are kind of like, you know, that they’re known as the dismal science for a reason. I mean, they tend to be pretty bearish in a lot of ways, but I think the May consumer price index figure was supposed to offer us the first indicators of US consumers really seeing the impact of tariffs. The reading for inflation in May was a lot cooler than people expected and I think that boosted hopes among some people and I think among the public too that the impact of tariffs could be less drastic than they thought.

Saffeya Ahmed
The data that Claire’s talking about, it shows that inflation has actually fallen over the last few months, the exact opposite of what economists expected. We’ve actually gotten closer to the Federal Reserve’s target of 2 per cent inflation, which makes a cut in interest rates more likely. Markets have been hitting record highs. Pretty much by all indicators, the US economy is in decent shape.

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So Claire, the burning question here, why haven’t we felt the impacts of the tariffs that Trump didn’t pause?

Claire Jones
I think one of the reasons is Trump has taken an approach that’s been a little bit more conciliatory than people might have expected at the start of April. And in fact, we ended up seeing this idea that there was a Taco trade, a kind of Trump-always-chickens-out idea kind of start to percolate.

Another big factor has been the build-up of inventories before the tariffs were introduced. We saw US imports soar to levels we’d never seen before in March, so there is a sense in which US companies knew that some form of tariff was coming, even though the aggressiveness of the tariffs might surprise them, and they were in a position to get ahead of that a little bit and stock up.

Saffeya Ahmed
This means that a lot of the foreign goods US consumers are buying now made it into the country before any tariffs went into effect back in April. So that’s one reason why consumers haven’t really felt the pain yet. But there is another. The world has a lot of stuff right now, thanks to China.

Claire Jones
We know that domestic demand in China has been quite weak and that’s led Beijing to focus on building up manufacturing capacity and export capacity and what that’s led to is in some industries a lot of relatively cheap products flooding global markets.

Saffeya Ahmed
But is the consensus right now, is it still that we are waiting to see more impact from the original tariffs, the ones that weren’t paused?

Claire Jones
I think most of the effects are still to come. Look, we’re at a point where there’s still a lot of uncertainty out there. Firms don’t know how much they’re going to need to pass on to their customers, how much the companies they import goods from are going to stomach themselves. So even though the data at the moment suggests we’re still doing OK, you know, not only is inflation not as bad as we feared, the labour market remains pretty strong, it’s all looking OK, but that doesn’t mean that we’re not in for a few shaky months as the summer goes on.

Saffeya Ahmed
So with these tariffs, it’s kind of a case of Schrödinger’s tariffs, if we might call it that, right? They’re there, but we don’t feel them.

Claire Jones
I love that. Schrödinger’s tariffs. That’s great.

Saffeya Ahmed
But companies are having to pay more to import goods. In May of this year, the US collected a record $24bn in customs duties. So I’d assume that one way for companies to offset that cost would be by raising prices for consumers. So why haven’t we seen that happen yet?

Claire Jones
I mean, we are for some products, but it’s a very limited amount of products. I mean, I think a big factor here is definitely the stockpiling that took place. Firms in general are a little bit reluctant to pass on price increases in an environment where their rivals might not be doing the same. So they might be waiting to see what their rivals are doing before they decide to really raise prices for fear of really losing market share. I think another aspect of it is because most of our income, we don’t necessarily spend on foreign-produced goods. You know, the US is what economists call quite a closed economy, which means a lot is produced domestically and especially services, so a lot of, you know, what we’re doing day-to-day is just not really impacted by tariffs because it is domestically produced.

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Saffeya Ahmed
So Claire, we’re recording this on Monday, a couple of days before the pause was officially meant to be lifted. Where do things stand right now? What has been going on recently?

Claire Jones
So we’ve seen there’s few things, some quite positive. It seems as though the administration has come to a deal with Vietnam. So it’ll be interesting to see what comes of that. And then later on today, the White House has said it will send out a number of letters to a number of countries outlining what they propose the tariff will be once the extended pause, not of July the 9th but now August the 1st, kicks in.

Saffeya Ahmed
OK, so I want to now discuss what could happen going forward. So scenario number one, we’re at this point of Schrödinger’s tariffs, as we’re calling them. They’re there, but we don’t really feel them yet. Let’s say things don’t change a tonne once this tariff pause is over. Trump sticks to his 10 per cent blanket tariffs, his China tariff. In this scenario, to what extent are we still waiting for the other shoe to drop?

Claire Jones
I think the question highlights how bizarre the situation is that we find ourselves in. On the campaign trail when Trump was talking about a 10 per cent tariff, people were pretty shocked by that because it was the sort of level that we hadn’t seen for many generations in the US. We’ve seen trade barriers collapse more or less constantly since the end of world war II. But now we’re in a world where I think if you outline that scenario to most economists and most people in financial markets, they’d kind of think, hmm, growth will be a bit weaker, prices might be a bit higher, but you know, we could live with that.

Saffeya Ahmed
Now, what about the possibility that businesses run out of their stockpiled goods and then end up having to pass on some of the costs of the tariffs to consumers? Would that look like a 10 per cent price increase because it’s a 10 per cent tariff?

Claire Jones
I think we’ve seen it’s very hard to tell how companies would react. And that’s what we saw with the 2018 tariffs as well. There’s a really nice research paper by two University of Chicago economists and one guy at the Fed who note that if we go back to Trump’s first term when in 2018 he imposed a tariff on foreign-made washing machines, the tariffs on foreign-manufactured washing machines increased the price for US consumers. But not only that, they also increased the price of dryers, which weren’t exposed to any tariffs during Trump’s first term, by more or less the same amount. And for domestically manufactured washing machines, their prices also went up too. I think people might have heard that there was going to be a 10 per cent tariff and thought the prices on all goods would rise by 10 per cent as a result. Whereas in fact, it’s very hard to tell what will or won’t end up being affected by the tariffs.

Saffeya Ahmed
OK, so now Claire, I want to discuss the second scenario, which is that things do change quite drastically. First of all, at this point, what is your sense of what we may see happen on July 9th?

Claire Jones
Well, the fact that these letters are going to go out Monday to say higher tariffs will kick in August the 1st has in effect moved a lot of the pressure back from July the 9th to the following month. However, there’s still this sense in which we’re probably not going to back to a world that was quite as bad as it was on April the 2nd, but it looks as though from later on in the summer onwards, we are gonna see higher tariffs on some countries compared with the 10 per cent we’ve got now. We already see that, you know, Trump’s made a deal with Vietnam, not at 10 per cent but at 20 per cent. And that kind of gives a sense that we’ll end up somewhere in between where we’ve been over the past few months and where we were in early April.

Saffeya Ahmed
And so in that situation, if we end up somewhere in the middle, what does that look like in terms of markets and the economy?

Claire Jones
So there’s two elements of that. One is that just extending the pause still leaves you with this issue of uncertainty where businesses and foreign governments don’t really know what’s going on. Do we feel like we’ve got something in the middle that’s set in stone or do we feel like this is just a placeholder and there’s more to come, but we don’t quite know what? I think that’s a big factor in that. In terms of where we end up in the middle, I just think it’s a matter of where that point is. You know, the larger the average effective tariff rate, the more severe the risk to US inflation and growth in US jobs, and the greater the chance that this isn’t just a one-off price shock and that it’s something that endures and really seeps into the public mindset. And we also know that for Biden, US inflation cost him very dearly. And I think even though Trump can potentially blame something else for US inflation, other than its tariffs, people really, really don’t like it when prices go up. And it’s a political risk too.

Saffeya Ahmed
Claire says that economists project that for every 10 per cent hike in tariffs globally, there could be a half to a full per cent price increase across the board. And the higher tariffs go, the more likely it is that things could spiral.

Claire Jones
There’s always a risk with inflation that it becomes self-fulfilling. So what does that mean? What it means is that if people see prices go up, they start thinking, oh, well, I need to be paid more, so they up their expectations of wages in negotiations. And you know, what does that lead to as well? Maybe other companies think, oh I’ve got to pay my staff more so I’m going to raise my costs. Or I’m seeing a firm down the road do the same, so I’m gonna raise my costs too. And you get to that point where inflation becomes like it was in the late ’70s or early ’80s, or even what we saw post-Covid for a little bit, where it becomes a vicious cycle, where it gets embedded into the economy, and you get high prices, perpetuating high prices and it just . . . then it becomes very, very difficult to control.

Saffeya Ahmed
So Claire, what would you say is the biggest worry for whenever new tariffs go into effect and like the potential aftermath from those? What is kind of the worst-case scenario at this point?

Claire Jones
The worst-case scenario, I think, is that we end up with a series of never-ending deadlines that the uncertainty that we’ve had just doesn’t really go away where, OK, we see a few trade deals signed here and there, but really that it remains a very, very uncertain landscape. That’s something that US shoppers, businesses in America, and also foreign governments just really won’t know quite how to respond to. And when you’re stuck with a scenario like that, it just, it gradually drags on economic growth.

Saffeya Ahmed
Right, so kind of just that the rollercoaster doesn’t end, there’s no resolution.

Claire Jones
Yeah, I think that’s it, right? It’s the never-ending rollercoaster. At some point, you just want to say stop it and get off.

Saffeya Ahmed
All right. Well, Claire, thank you for coming on the show.

Claire Jones
No problem at all. Real pleasure. Thank you.

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Saffeya Ahmed
Today’s episode was hosted by me, Saffeya Ahmed. It was also produced by me, Katya Kumkova and Michela Tindera. Sound design and mixing was done by Sam Giovinco and original music is by Hannis Brown. Topher Forhecz is the FT’s acting co-head of audio. Thanks for listening.