The economy was supposed to crumble. The trade war was expected to escalate out of control. Markets were forecast to plunge.
None of that happened – at least, not yet.
President Donald Trump has pulled off what few outside the White House predicted: A trade war victory of sorts that sets America’s taxes on imported goods higher than the infamous Smoot-Hawley era, without any of the damaging fallout so far. Customs revenue has increased sharply while inflation remains reasonably low. And America’s trading partners, for the most part, have been willing to accept the higher tariffs without significant retaliation.
Multiple framework agreements between the United States and other trading partners have jacked up tariffs on foreign goods imported to America while setting levies on US exports at or near zero. Overseas trading partners have agreed to open previously closed markets to some US goods, pledged increased investments in the United States and dropped some of what the Trump administration has lambasted as non-trade barriers, like taxes on digital services.
But Trump’s early trade victory may be short-lived. In fact, it is already showing signs that it may not last.
The European Union, fresh off its 11th-hour compromise to get a trade agreement done before Trump’s self-imposed August 1 deadline, is already in revolt.
French Prime Minister François Bayrou called Sunday a “dark day.” Hungarian Prime Minister and Trump ally Viktor Orban said Trump steamrolled the EU. Belgium’s Prime Minister Bart De Wever lambasted the Trump administration’s “delusion of protectionism.” And Bernd Lange, chair of the European Parliament’s trade committee, said the deal is “not satisfactory.”
The 27-member bloc has to hammer out key aspects of its framework, and the fragile trade truce between two of the world’s largest economies could quickly break apart if sentiment turns against the arrangement.
The Trump administration’s trade talks with its northern neighbor and one of its largest trading partners have been effectively shut down. Despite Canada relenting on its digital services tax that the president has lambasted, Trump continued to threaten higher tariffs on some Canadian goods, including lumber.
Although many goods imported from Canada continue to be tariff-free because of the US-Mexico-Canada free trade agreement, the USMCA only covers just about half of Canadian goods. So higher tariffs on Canada could raise some costs for American consumers down the road.
And the fact that America is even embroiled in a trade spat with Canada in the first place is a sign that the recent cooling off in the trade war may not last: Trump negotiated and signed the United States’ current trade agreement with Canada during his first term. At any time, even after an agreement is inked, Trump could turn around and decide to raise tariffs again.
A third round of talks between China and the United States’ trade negotiators is expected to result in a continued pause of their historically high tariffs on one another. But it’s unclear what else might come from the discussions, and the Trump administration has grown frustrated by what it has described as China’s slow-walking of its previous agreements.
Both sides have aimed to reduce more regulatory barriers on shipments of key technologies. China has sought more access to critical semiconductors, and the United States wants the flow of rare earth magnets to increase further.
But the Trump administration has tried repeatedly to speed up China’s slow progress, claiming the country has failed to live up to its agreement to approve the critical materials for crucial electronics. Trump has also said he wants China to open up its market to more US goods – a desire that Chinese Premier Xi Jinping is unlikely to give in to significantly.
Trump’s rhetoric against China has cooled in recent months, but the truce appears to be on a knife’s edge.
A crucial appeals court hearing Thursday could determine whether most of Trump’s tariffs are legal at all.
For most of his tariffs, Trump has cited powers listed in the International Emergency Economic Powers Act. But a federal court in May ruled that Trump overstepped his authority to levy tariffs on that basis.
An appeals court paused that ruling from taking effect and will hear oral arguments Thursday. It’s not clear when the court will rule, and the White House would likely appeal to the Supreme Court if it loses.
If Trump ultimately loses his ability to levy tariffs using emergency powers, he has plenty of other options – but legal experts have said those alternatives could limit his ability to set tariffs without Congress. For example, Trump may be able to impose some tariffs as high as just 15% but only for 150 days, potentially taking some of the bite out of his tariff regime.
Although the US economy remains strong, with rebounding retail sales, a still-robust labor market and rising consumer confidence, there is some evidence that inflation in key areas is starting to creep higher – slowly – because of tariffs. That’s a potential warning sign as the tariffs take full effect.
The Bureau of Labor Statistics’ Consumer Price Index earlier this month showed that some tariff-affected goods have started to gain in price. Clothing, appliances, computers, sporting goods, toys, video equipment, hardware and tools prices have been on the rise. And it’s starting to become a trend – in many of those categories, the rise has been happening for a few months.
Many major retailers, including Walmart, have said they will raise prices because of tariffs. And GM, Volkswagen and Stellantis all reported tariff charges of $1 billion or more over the past quarter.
Economists widely expect inflation to pick up in the late summer and throughout the rest of the year as retailers work through the inventories of goods they had stockpiled before tariffs went into effect. No one expects anything close to the inflation crisis of a few years ago. But with consumers still dealing with price-hike PTSD, that won’t be a welcome change from the return to healthy inflation levels over the past year.
