Trump’s unpredictable tariffs are changing the economy

We should have known it was too good to last. After markets enjoyed a month of relative peace in Donald Trump’s trade war with the world—a stretch of time during which Trump paused his so-called “reciprocal” tariffs on most countries and then rolled back his massive 145% tariffs on China—the president reignited the conflict Friday morning with a couple of posts on TruthSocial.

First, he directly threatened Apple with a company-specific 25% tariff on all iPhones if it shifts production to India from China, rather than to the U.S. Then, he attacked the European Union for being “very difficult to deal with,” and said he wanted to impose a 50% tariff on all U.S. imports from the EU on June 1.

The threats—which he may not have the legal authority to follow through on—rattled markets severely at first, with S&P futures dropping more than 2%. Stocks recovered somewhat after Treasury Secretary Scott Bessent tried to cool investor anxieties in an appearance on Fox, and European officials said they were continuing to negotiate.

But the turmoil engendered by Trump’s posts was a reminder of the fact that U.S. trade policy is now being made, in effect, by presidential whim, making the future profits of many American companies dependent on how Trump happens to feel on any given day.

When the president first unveiled his plan to impose high tariffs on imports from most of the world’s countries—which he called “Liberation Day“—he claimed that the goal of his scheme was to bring about an “ECONOMIC REVOLUTION.”

But that implied a level of planning and strategy that has been sorely lacking in the way Trump has handled tariffs since April 2. He jacked up tariffs (relying on an absurd formula), only to roll them back when markets cratered. He promised that trade deals galore were in the offing, only to then say he would raise tariffs unilaterally because the deals were taking too long to do. And he promised a 90-day pause on all the reciprocal tariffs, only to now say he’s going to tariff the EU less than 60 days into the pause.

The most obvious consequence of Trump’s chaotic trade policy is that he has massively increased the amount of uncertainty American businesses (and, by extension, American consumers) will face going forward. It’s next to impossible for businesses that import goods (either for sale or as part of their supply chain) to make reasonable plans for the future, since there’s no way for them to know what Trump will require them to pay for imports down the road. Nor is there any guarantee that the tariff rates Trump comes up with will stay the same over time.

As a result, companies don’t know whether they now should be massively stocking up on imports in anticipation of higher tariffs (a move that would increase their inventory costs)—or if they should be buying like normal in anticipation that deals will get made. They have to decide, but that decision can’t be built on much more than guesswork. 

The only thing companies do know, in fact, is that regardless of whatever else Trump decides, they’re going to have to pay a 10% universal tariff on everything they import (along with permanently higher tariffs on imports from certain countries, like China). This universal 10% tariff—which Trump imposed on Liberation Day and kept in place even as he rolled his other tariffs back—is not a bargaining tool or a threat: It’s here to stay for as long as Trump remains president. So companies are facing permanently higher import costs on top of major uncertainty.

The fact that, for all his changes of mind, Trump has stayed committed to the 10% universal tariff isn’t surprising. In the first place, it was one of his oft-repeated campaign promises—he said it would be a “ring” around the U.S. economy. And it fits well with Trump’s basic view of trade, which is that when we buy stuff made abroad, we’re “losing money,” so the government should charge what he thinks of as effectively a cover charge to sell to U.S. customers. (That cover charge, of course, is paid by the U.S. businesses that are importing the goods, but Trump prefers to ignore that fact.)

Trump may talk about the importance of opening foreign markets (as he did in his post about the EU Friday morning), but he’s always been more interested in imposing tariffs on imports than he has been in encouraging exports.

The 10% tariff is not as dramatic as the China tariffs or the threats against the EU and Apple, which helps explain why investors have, for the most part, shrugged off its potential impact. But American businesses and consumers won’t be so lucky.

That’s why Walmart said on an earnings call last week that it would be hiking prices as soon as the end of the month because of tariff costs. As the company’s CFO explained in an interview with CNBC: “We’re wired for everyday low prices, but the magnitude of these increases is more than any retailer can absorb. And so I’m concerned that consumer is going to start seeing higher prices.”

This of course infuriated Trump, who wrote on TruthSocial that Walmart should “eat the tariffs.” But the company was simply acknowledging economic reality: Its net profit margin last year was around 2.6%, and it imports almost $50 billion a year in goods from China alone, plus tens of billions of dollars of goods from other countries. It does not have the leeway to absorb a sizable increase in the price of those goods without passing at least some of the cost along.

And the same is true of many other retailers—indeed, it’s even more true of small- to medium-size retailers.

In response to Trump’s criticism, Walmart said: “We’ll keep prices as low as we can for as long as we can, given the reality of small retail margins.” But the message was ultimately the same: Prices will have to rise. 

Those price increases are not likely to be massive. But that doesn’t mean they won’t matter. What Trump’s policy means is that we are now looking at a global economy in which tariffs are going to be higher across the board, and in which he is imposing, at a minimum, a new 10% tax on trade. When you tax something, you get less of it—meaning that in addition to higher retail prices, we’re likely to have less trade and lower retail sales.

This will be even more true if Trump follows through on his latest threats. But even if he backs down from them, the Yale Budget Lab estimates that a universal 10% tariff, along with 60% tariffs on Chinese imports (which would be a little higher than they are now), would cost consumers, on average, a minimum of $1,900 a year in higher prices, and could shrink U.S. GDP by somewhere between 0.5% and 1.4%.

We may yet dodge the disaster that the U.S. is headed for if Trump ends up returning to his original Liberation Day tariffs, and if we have a real trade war with the EU and China. But even if we do, the tariffs we’ll still be stuck with are going to be a permanent, steady drag on the economy—a drag that may not be big enough to make headlines but that nonetheless will be impossible to avoid.