0:00 Hey everyone, it's Richard. You're
0:02 watching the plane bagel. It's been 7
0:04 months since Trump first started what
0:07 would end up being America's trade war
0:09 against most of the world with tariffs
0:11 being the market dominating topic of the
0:12 year and the slew of trade announcements
0:15 bringing America's effective tariff rate
0:18 to roughly 17% the highest it's been
0:21 since 1935. All under the premise that
0:22 the tariffs would benefit the US by
0:24 getting foreign countries to pay for
0:26 access to US consumers, bringing
0:29 manufacturing jobs back to America, and
0:30 ultimately spurring economic growth for
0:32 the country. Now, tariffs have long been
0:34 a tool used by countries to keep foreign
0:36 companies out of what are deemed to be
0:37 sensitive industries. But the idea that
0:39 they could spur economic growth or this
0:41 sort of prosperity is a fairly
0:43 controversial idea, not really supported
0:45 by economic theories or empirical
0:46 evidence. So, it's no surprise that we
0:48 saw these tariff announcements followed
0:51 by market sell-offs and predictions of
0:54 surging inflation and a recession by the
0:57 end of the year. And yet, that hasn't
0:59 happened. Prices so far haven't really
1:02 moved as high as was initially feared.
1:03 The stock market has returned to pushing
1:05 new record highs, and the economy has
1:07 actually been posting better than
1:09 expected results. All the while, the
1:10 White House is claiming to have brought
1:12 in trillions of dollars of foreign
1:14 investment to the country, supporting
1:15 the idea that seemingly against all
1:17 odds, the US has managed to hard ball
1:20 its way into prosperity, uh, using its
1:21 massive consumer base as a bargaining
1:25 chip to negotiate many concessions from
1:27 foreign countries and get them to pay
1:29 tribute to their economy. But depending
1:31 on where you look, the figures can paint
1:33 a very different picture. Labor, for
1:35 example, has continued to disappoint. In
1:38 August, we saw the massive 258,000
1:40 downward revision to the estimated May
1:42 and June hiring numbers with a more
1:44 recent estimate actually pointing to a
1:47 decrease in non-farm payrolls for the
1:49 month of June. So, are Trump's tariffs
1:51 actually working? Is Trump making like
1:55 Cynthia Aribo and defying gravity? Or is
1:57 the US economy actually sputtering here?
1:59 Well, with us now being 6 months into
2:00 this period of of high tariffs, we now
2:02 have some more data to help better
2:04 understand what's happened year to date.
2:05 And today we'll look into some key areas
2:07 and discuss how they've been impacted by
2:11 Trump's tariffs and importantly why they
2:12 might have been moving against
2:14 expectations. But before hopping into
2:15 that, it's worth understanding the
2:17 opposing view. Why many economists are
2:20 against Trump's tariff regime. You see,
2:21 like other forms of taxation, tariffs
2:23 are considered to be an inefficient
2:25 price distortion to the market.
2:27 Something that both lowers the quantity
2:30 traded and increases prices. And while
2:31 they can be important to utilize from a
2:33 national security standpoint, when it
2:35 comes to free trade, they generally
2:36 prevent countries from taking full
2:38 advantage of specialization. The idea
2:40 that if different countries focus on
2:42 different areas and get better at those
2:44 things, the group of trading partners as
2:46 a whole will mutually benefit from
2:48 higher quality goods or lower prices.
2:49 Now, a big part of Trump's tariff
2:51 campaign is America's large trade
2:53 deficit. The fact that the country
2:55 imports hundreds of billions of dollars
2:58 more than it exports to other countries.
3:00 Uh but this isn't inherently a bad thing
3:03 for the United States. Yes, there can be
3:05 uh consequences to having a large trade
3:07 deficit, but it's quite normal for a
3:09 wealthy nation to be a net importer of
3:12 goods. And for the US specifically, this
3:13 deficit has actually helped the US
3:16 dollar and financial markets maintain
3:18 their global dominance. Since this
3:20 exporting of dollars contributes to it
3:21 being the most widely used currency
3:23 globally, not to mention that being able
3:25 to buy a foreign good for less than you
3:28 could domestically comes with its own
3:29 benefits. And while yes, tariffs may
3:31 allow certain domestic industries to
3:33 prosper with the protections put in
3:35 place uh thereby creating jobs in those
3:37 select areas, it's generally the view
3:39 that the higher costs passed on to the
3:42 consumers and the general job loss from
3:44 the distortion isn't generally worth the
3:46 protection. In fact, while Trump's
3:48 tariffs on steel during his first term
3:50 did create thousands of new jobs in that
3:53 industry, this benefit was offset by the
3:54 impact to manufacturing where higher
3:57 input costs led to a relative decline in
3:59 employment. And with seeing many
4:00 examples historically of countries
4:02 hurting their economic output by
4:04 imposing tariffs, you can see why many
4:06 economists generally advocate for free
4:07 trade. But it brings us to the first
4:09 main question that's puzzled a lot of
4:11 people by now. If tariffs are so bad for
4:15 inflation and the like, why aren't
4:17 prices rising? After all, tariffs should
4:19 directly increase the cost of a good
4:21 because they are literally increasing
4:23 the cost of buying that thing. So, you
4:25 should see prices increase as a result.
4:26 Yet, Trump has highlighted that
4:30 inflation is virtually non-existent
4:32 except for windmills, I guess, stating
4:33 that it's foreign countries who are
4:35 paying the higher price of these
4:37 tariffs, not Americans. Now, both of
4:38 those statements are technically
4:40 incorrect given that tariffs are paid
4:42 for at the importer level and we are
4:44 still obviously having inflation. It is
4:46 true that the latest inflation figures
4:48 have been below expectations with CPI
4:52 price levels increasing just 2.9% as of
4:54 the most recent release, above the
4:56 central bank's target, but still fairly
4:58 below the higher rates feared by
5:01 economists. Meanwhile, the PPI, which
5:03 measures prices charged by producers,
5:05 was recently reported to have increased
5:07 2.6%. 6% with the level actually dropping.1%
5:09 dropping.1%
5:11 month overmonth in August. Something
5:13 that among other things has prompted
5:16 many to argue that tariffs are actually
5:19 deflationary not inflationary. And it is
5:20 true that foreign companies are
5:21 absorbing some of the cost of the
5:23 tariffs here because while they don't
5:25 pay the cost directly they have been
5:27 lowering their prices to compensate for
5:29 the higher fee. In fact, Goldman Sachs
5:30 estimates that consumers so far have
5:33 only borne about 1/5if of the entire
5:35 cost of Trump's tariffs with Teimu, for
5:37 example, recently reducing the price of
5:39 its popular products by an average of
5:41 18%. Supporting the idea that Trump has
5:43 seemingly pulled off the impossible of
5:46 raising record levels of tariff revenue
5:48 without pushing up prices meaningfully.
5:50 The problem, however, is that it's not
5:52 foreign companies absorbing the lion's
5:54 share of these levies. According to
5:56 Goldman Sachs, foreign exporters have
5:58 actually paid less than US consumers,
6:00 covering just 14% of these new fees,
6:02 while US businesses have covered the
6:05 remaining 64%. Meaning effectively that
6:09 domestic parties have paid roughly 86%
6:11 of the record-breaking tariff revenue
6:12 that's been brought in. Now, the reason
6:14 US companies have willingly taken the
6:16 brunt of these levies is because in
6:19 2025, we've seen consumer confidence
6:21 drop to its lowest point since the
6:22 pandemic. Many companies are concerned
6:24 that consumers would rather forego
6:26 spending than pay higher prices. And
6:28 with the trade situation being so
6:29 volatile with new trade deals being
6:31 announced and changes made, it appears
6:33 companies are trying to avoid alienating
6:36 their consumer base and waiting to see
6:38 how things ultimately shake out. So that
6:39 helps to explain why we haven't seen the
6:41 surge of inflation that many expected by
6:43 now. Uh but another component here to
6:46 consider is the inventory stockpiling.
6:47 Uh on the announcement of tariffs, we
6:49 actually saw the US increase its trade
6:52 deficit to a record high as companies
6:54 increased imports trying to get ahead of
6:56 the new levy. Something that temporarily
6:57 has allowed companies to put off their
6:59 price hikes as they haven't yet paid
7:01 more for their own inputs. The problem,
7:03 however, is that neither of these
7:05 mitigation methods are sustainable. Uh
7:07 Goldman Sachs estimates that by the
7:10 fall, consumers will be covering 67% of
7:12 the cost of tariffs as companies
7:14 increasingly pass along their price
7:15 increases. Now, it's a common
7:17 misconception that if you have a tariff
7:19 rate of say 50% on steel imports, that
7:21 that will increase the price of most
7:24 goods directly by 50%, assuming they
7:25 have imported uh components. However,
7:27 the cost of final products has many
7:29 other factors baked into it in addition
7:31 to imports, including uh labor involved
7:33 with final assembly domestically as well
7:35 as retail staff who sell that product.
7:37 Uh neither of which would be impacted
7:39 directly by a tariff rate. Nonetheless,
7:40 many forecasts have pointed to a broad
7:43 general price increase of 2 percentage
7:44 points above what we're currently
7:45 seeing, meaning that we could see
7:48 inflation of 4 to 5% across the board
7:50 once businesses passed on more of the
7:52 tariff costs. So, while the current
7:54 inflation situation has been used by
7:56 some as evidence that economists have
7:58 been wrong, and to be clear, uh they are
8:00 wrong a lot, uh you can see that it's
8:02 not so much that tariffs aren't
8:04 impacting price levels, but more so that
8:06 companies are trying to compensate for
8:08 it and to hold off hiking their own
8:11 prices as long as possible in the face
8:14 of a weak consumer base. Now, as for why
8:15 some have posited that tariffs are
8:18 actually deflationary, that stems from
8:20 some monetary schools of economic
8:21 thought that argue that all forms of
8:23 taxation are deflationary in nature,
8:25 given that they pull money out of the
8:27 economy and thereby reduce money supply
8:29 and liquidity, which is a real factor in
8:32 consideration. Taxation does have a
8:34 depressing impact on money supply. And
8:37 if we experience a recession, it could
8:39 very well lead at some point to a
8:42 decrease in price levels as economic
8:44 contractions tend to be deflationary.
8:46 But this real deflationary pressure of
8:48 tariffs is often offset by the direct
8:51 impact tariffs have on prices, the
8:52 disruption it causes to supply chains,
8:54 which brings other costs as companies
8:56 have to set up new infrastructure and
8:58 the economy deals with the dead weight
9:00 brought on by taxes. And in this case,
9:01 the fact that the US government is
9:04 directly offsetting any deflationary
9:06 influence from tariffs with the big
9:08 beautiful bill, which cuts taxes,
9:10 increases government spending, and is
9:12 forecasted to increase the government
9:15 deficit by $1 trillion over the next
9:18 decade, even after accounting for tariff
9:20 revenue brought in. And thankfully, we
9:21 don't have to theorize about the
9:23 relationship between tariffs and
9:25 inflation because again, we have
9:27 empirical evidence to demonstrate that
9:28 while the impact is not always
9:31 clear-cut. Historically, tariffs tend to
9:33 lead to higher price levels for the
9:35 imposing country. The circumstances
9:38 where you often see prices fall is when
9:41 again the tariffs occur during or cause
9:43 a recession. During periods of economic
9:45 expansion, inflation is actually
9:48 exacerbated by tariffs. And as a side
9:50 note, regarding the PPI measure that
9:52 many use as evidence of deflation, it
9:54 was actually services that saw a
9:56 decrease in price and ultimately pulled
9:58 the measure down. Goods where tariffs
10:00 are actually applying still saw their
10:02 prices increase. But then what about the
10:04 other angle, the manufacturing jobs? Uh
10:05 Trump has long argued that the US has
10:07 hollowed out its manufacturing
10:08 capabilities by relying on foreign
10:10 countries and that tariffs would help
10:12 bring these jobs back on shore. Is that
10:16 in fact what we're seeing? Well,
10:18 no. While we did in fact see the trade
10:21 deficit for the United States fall 25%
10:22 year-over-year in July, that also
10:24 followed a period of record high
10:26 imports. So it is somewhat to be
10:27 expected. And domestic manufacturing
10:30 hasn't really shown meaningful signs of
10:32 reigniting. One gauge of manufacturing
10:33 activity, the S&P global US
10:36 manufacturing PMI did in fact see a
10:38 strong rebound in August. Another gauge,
10:39 the Institute of Supply Management's
10:41 manufacturing index, instead showed that
10:43 the US had had its sixth month of
10:45 manufacturing activity contraction with
10:47 Susan Spence, the chair of the survey
10:49 committee, indicating that 69% of
10:52 manufacturing GDP was estimated to be in
10:54 contraction. We've also seen sluggish
10:55 performance from other indicators such
10:57 as the real final sales to private
10:59 domestic purchasers, which measures
11:00 domestic purchases of domestic
11:02 production. And while the figure was
11:03 better than expected with its recent
11:05 release, it's still lower than it was a
11:07 year ago despite the current trade
11:09 barriers. And as we alluded to, when it
11:11 comes to jobs, things haven't looked so
11:13 promising with the latest update
11:15 pointing to a continued decline at the
11:16 aggregate level with unemployment
11:18 ticking to its highest point in four
11:20 years as the US saw more job seekers
11:22 than job openings for the first time
11:25 since April 2021. And for manufacturing
11:27 jobs specifically, the area that the
11:29 tariffs are seemingly targeting, well,
11:31 jobs have actually fallen for the fourth
11:33 month in a row. Now, of course, it is to
11:34 be expected that jobs wouldn't surge
11:36 immediately on the announcement of
11:38 tariffs. It takes time for companies to
11:39 build out their domestic manufacturing
11:41 infrastructure and capacity, and so it
11:42 could take years before we see a
11:45 meaningful impact on manufacturing jobs.
11:46 And Trump has argued that with the trade
11:48 negotiations and record amounts of
11:50 investment coming into the country, jobs
11:52 are sure to follow. Apple, Project
11:54 Stargate, Nvidia, and a number of other
11:56 companies have made their own sizable
11:58 domestic investment promises in the
12:00 hundreds of billions, while countries
12:02 like the United Arab Emirates, Japan,
12:04 and the Collective European Union have
12:06 seemingly agreed to invest trillions of
12:08 dollars into the United States as part
12:10 of their trade negotiations. And if we
12:11 saw these manufacturers and countries
12:12 follow through on those investment
12:15 promises, that could very well lead to a
12:17 meaningful boost to economic activity in
12:18 the United States. After all, America's
12:21 total foreign direct investment in 2024
12:24 was around $330 billion. So investments
12:26 in the trillions of dollars, even if
12:28 spread out over Trump's term, would move
12:30 the needle quite a bit. The problem is
12:31 that it's questionable how much
12:33 follow-through we'll actually see with
12:35 these deals. While Japan has moved the
12:36 closest to cementing its investment
12:38 promise with a recently signed
12:40 memorandum of understanding outlining
12:42 the terms of the arrangement, the Gulf
12:43 State investment promises so far
12:45 represent verbal commitments that would
12:47 be challenging for the economies to
12:48 meet. Not to mention, some of these
12:50 actually stem from prior agreements
12:52 before Trump's term. The European Union
12:54 doesn't actually have grounds to enforce
12:56 a $600 billion investment from its
12:57 member states with it admitting that
12:59 this is just what's expected to come
13:01 from private companies. And for South
13:03 Korea, who promised a $350 billion
13:04 investment, we're already seeing
13:06 disagreements over the terms of that
13:08 investment package. Now, yes, we've seen
13:10 domestic companies promising to invest
13:12 more in the US. Apple being one of the
13:14 key examples of a situation where Trump
13:16 has seemingly been successful in
13:17 convincing a company to bring
13:19 manufacturing into the United States.
13:20 But for many of these investment
13:22 promises, the largest of which are for
13:24 tech or pharmaceutical companies, it's
13:25 unclear whether these announcements are
13:28 based on tariffs or just the surging
13:30 demand for AI infrastructure and drug
13:32 development in the United States. The
13:34 Taiwanese semiconductor company TSMC,
13:36 for example, which made one of the
13:38 largest commitments from a foreign
13:41 company at $100 billion, actually made
13:43 this announcement in March before any
13:45 tariffs had been announced on Taiwan or
13:47 semiconductors, with in fact a Reuters
13:48 review finding that a good chunk of
13:50 investments claimed by the Trump
13:52 administration were either previously
13:54 secured under Biden or just part of
13:56 routine spending. And while a lot of
13:58 these investment promises do span
13:59 multiple years, so far the
14:02 infrastructure buildout needed to bring
14:04 manufacturing jobs back to the US just
14:06 hasn't really kicked off yet. There's
14:07 this great chart that was shared with me
14:10 that shows that US factory construction
14:12 is actually down 7% from last year.
14:14 Ironically, thanks in part to companies
14:17 finishing up their projects under Biden
14:19 era incentive programs like chips or the
14:21 inflation reduction act. Now, of course,
14:23 this or really any of the other factors
14:25 we've talked about might change in the
14:27 future. I think hopefully this video has
14:29 demonstrated that in the short term, you
14:31 do have these distortions that make it
14:33 hard to figure out what's actually going
14:35 on. Some of the gauges we referenced,
14:36 for example, like the opposing
14:39 manufacturing indices, rely on executive
14:41 surveys and may not be perfectly
14:42 accurate. Well, even labor data, as
14:44 we've seen, is prone to meaningful
14:46 revisions, which was recently
14:48 exemplified by the massive nearly 1
14:50 million jobs that were cut out of past
14:52 estimates for the 12-month period ending
14:54 this past March. But the point is to
14:55 highlight that while we've heard of
14:57 these lofty promises from different
14:59 countries, companies, and the like. We
15:01 just haven't yet seen followrough with
15:03 it. And there hasn't been much evidence
15:05 to date that on the net, America's
15:07 economy has benefited from tariffs. But
15:09 then why is the economy growing so much?
15:10 After all, we saw in the second quarter
15:14 that US GDP actually grew 3.3%
15:16 year-over-year, faster than expected and
15:18 higher than its long-term average. Well,
15:19 part of this is again the distorting
15:21 impact of tariffs. Imports, for example,
15:24 contributed to a lower first quarter GDP
15:26 print and a higher second quarter print.
15:27 But one aspect to consider is that the
15:29 US economy does have other strong
15:32 factors moving in its favor. For one,
15:34 there's the big beautiful bill. Yes. Uh
15:35 while a controversial piece of
15:37 legislation given that it does increase
15:39 the US government's debt load uh which
15:41 has caused some turmoil in the US bond
15:43 market, it did also come with tax cuts
15:45 and other things that could stimulate
15:46 the economy. There's also of course the
15:48 AI gold rush with UBS estimating that
15:52 tech companies will spend $375 billion
15:55 on AI infrastructure in 2025 and $500
15:57 billion next year. All of which in the
15:59 short term translates into more activity
16:01 for the US economy regardless of how
16:03 these investments ultimately pan out.
16:04 But the point is that the economy has
16:06 seemingly been performing in spite of
16:08 tariffs, not really because of them.
16:10 Again, most empirical research points to
16:12 a net negative impact on economic
16:15 activity and a rise in unemployment when
16:17 tariffs are imposed. And most forecasts
16:19 are calling for a 1 percentage point
16:23 impact to US GDP as a result of Trump's
16:25 current tariffs. And yes, the US may be
16:27 able to use tariffs to negotiate better
16:29 trade deals and that could ultimately
16:31 still benefit the US economy. And that's
16:32 where the discussion does get a bit more
16:34 complicated because you would then have
16:35 to factor in what's ultimately agreed
16:37 upon. But over the long term, when you
16:39 ignore the negotiation aspect of this
16:41 and if you look past the distortions in
16:43 the short term, it's very likely that
16:45 tariffs will dampen overall economic
16:47 activity. And while it may benefit some
16:49 and the US may still avoid a recession
16:50 in spite of these tariffs, it doesn't
16:52 mean that the tariffs are a contributor
16:54 to economic growth. Now, with all that
16:55 being said, hopefully it does go to show
16:57 that we don't face a clear picture here.
16:59 Uh, despite all the factors we're
17:01 looking at, we can't really know for
17:02 certain whether things will move one
17:04 direction or the other. Whether tariffs
17:06 will allow the US to negotiate better
17:08 trade deals that ultimately benefit the
17:10 economy, if it then leads to say
17:12 dropping the tariffs, or if the tariffs
17:13 stay in place and hurt the economy
17:15 overall. But hopefully it emphasizes the
17:17 importance of going beyond just
17:18 individual data points to try and
17:20 understand what's actually happening
17:22 behind the scenes rather than taking
17:26 individual uh charts or what have you at
17:28 face value. It's important that when you
17:30 look at figures like inflation, you dig
17:32 a little bit deeper. Thank you guys for
17:33 joining me today. If you like this
17:34 video, please do make sure to like,
17:36 subscribe, all that good stuff. It does
17:37 help the channel tremendously. Let me
17:38 know your thoughts on the topic as well
17:40 as any other topics you'd like me to
17:41 cover on the channel. I've been trying
17:43 to branch out from just tariff related
17:44 stuff, but I wanted to give a quick
17:47 update on what we've seen to date. And
17:48 of course, if we see a a major update,
17:50 I'll cover that as well, but hopefully
17:51 we'll be diversifying a little bit.
17:53 Anyway, thanks again for joining me and
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