As “liberation day” nears, American businesses suffer
AMERICA’S ECONOMY is looking peaky. Inflation expectations are creeping up; consumer confidence is weakening. But Donald Trump, the country’s president, says relief is at hand. “Liberation day” for the economy will arrive on April 2nd, he proclaims, when he intends to slap new tariffs on imports from all over the world.
Since tariffs are in essence a tax on consumers, this is the sort of liberation most businesses would happily do without. As a consolation prize, they may be hoping that April 2nd will bring certainty. But that hope looks increasingly forlorn. The past few days have provided a reminder of Mr Trump’s seemingly boundless appetite for tariffs. On March 26th he said that 25% levies on imports of cars would come into effect on April 3rd, with charges on car parts to follow. These could cause havoc for car companies, some of whose parts cross the American border several times. As for the other tariffs, Mr Trump initially said they would be “reciprocal”, matching those levied by other countries on American goods. More recently, though, he has said he will be “very lenient”—while promising yet more charges to come.
All this confusion is paralysing parts of the American economy. On March 19th Jerome Powell, the chair of the Federal Reserve, talked of “remarkably high” levels of economic uncertainty. “I don’t know anyone who has a lot of confidence in their forecast,” he said. Companies that serve as bellwethers for broader economic performance have started to suffer. When FedEx, a logistics company, lowered its full-year profit forecasts on March 20th, it cited “uncertainty in the US industrial economy”. On March 10th Delta Airlines said “macro uncertainty” was reducing consumer and corporate confidence.
Broader surveys back up such anecdotes. FactSet, a financial-data firm, found that over half of the companies in America’s S&P 500 index cited tariffs in their earnings calls over the past few months—more than in any other quarter over the past decade. “Our clients are essentially frozen, because they have no ability to figure out the future course of government action,” says Michael Smart of Rock Creek Global Advisors, a consultancy.
Indices that measure uncertainty about trade policy have shot up since Mr Trump took office. One such index, devised by economists at the Federal Reserve, suggests trade-policy uncertainty is at its highest in over half a century (see chart 1). The indices are based on newspaper coverage, which may sound imprecise. But spikes tend to foreshadow slower growth. Deutsche Bank reckons that the uncertainty currently detected in the Fed index could shave about three-quarters of a percentage point from America’s GDP over the next year or so. If the tariff uncertainty ends up being more prolonged—persisting until June, say—then the blow to growth could be twice as large.
Canada, its two largest trading partners. To mitigate the disruption, America has created an exemption for goods that comply with the USMCA, a trade pact which Mr Trump negotiated during his firm term in office. But the exemption is not as generous as it might seem. Compliance for Canadian oil exporters, for instance, requires that they trace their crude all the way back to the wellhead, something they had rarely done before. For makers of complicated products with many parts, such as medical devices, rules of origin are complex to master—and therefore hardly worth doing if the rules are going to change again on April 2nd. “This isn’t just uncertainty. This is a holy mess,” says John Murphy of the Chamber of Commerce, a lobby group.
Clear as mud
The chill extends beyond the manufacturing industry, too. David French of the National Retail Federation notes that his members would like to nail down their sourcing arrangements. Can they rely on production networks that run through Mexico? Or are factories in South-East Asia a safer bet? Purchasing managers do not want to make any rash moves until the dust settles on the new tariff landscape, whenever that might be. The uncertainty is delaying other investment decisions, too. “Tariffs on building materials and consumer goods add uncertainty to opening new stores,” says Mr French.
Mr Trump, meanwhile, has been keen to highlight evidence that his tariffs have upsides. A series of companies have announced big investments in America in the past few weeks. These range from Apple, an American tech giant, to TSMC, the world’s largest chipmaker. The latest was Hyundai, a South Korean carmaker, which said on March 24th that it would invest $21bn in its American operations, and create 14,000 jobs, by 2028. “Money is pouring in and we want to keep it that way,” Mr Trump said at a White House event alongside Hyundai executives.
But companies know how to flatter the president. Many of their announcements concern spending plans that were already in train before he took office. Moreover, for every announced deal, others are languishing. Recent surveys from the Federal Reserve’s branches in New York and Philadelphia register sharp declines in manufacturers’ outlook for the economy over the next six months (see chart 2).
So, will April 2nd at last bring clarity? It seems unwise to bet on it. Press reports in the past few days have suggested that the new levies will turn out to be relatively limited. Rather than sweeping global tariffs, which Mr Trump had talked about repeatedly on the campaign trail, he seems inclined to target 15 or so trading partners, including the European Union, India and Vietnam, that run persistent surpluses in their trade with America.
But early reports have been wrong before. And whatever policy Mr Trump ends up choosing, matters may not rest there. Countries could retaliate, as Canada did earlier in March with a tariff package of its own. That, in turn, may invite escalation from Mr Trump. The president has also said that eventually he wants to add sectoral tariffs on pharmaceutical products, microchips and more.
Then there are the legal questions. Mr Trump’s tariffs have so far largely relied on emergency-powers laws. These allow for the immediate imposition of tariffs so long as there is a threat to national security—hence the emphasis on illegal immigration and drug-trafficking, however spurious, in his actions against Canada and Mexico. If the administration were to base its tariffs on complaints about unfair trade practices, it would have to rely on other laws that require more detailed investigations and longer notice periods. In the case of the new auto tariffs, Mr Trump has tried to get around this by basing them on an investigation completed in 2019.
Mr Trump has not helped his case by regularly veering off-script, carping about economic imbalances rather than drugs and immigration. Moreover, the deadline for taking action after the investigation in 2019 passed long ago. Elizabeth Baltzan, a trade official who served under Joe Biden, Mr Trump’s predecessor, says Mr Trump’s tariffs are thus more vulnerable to court challenges. The possibility that the new rules may ultimately be struck down is one more reason for companies to defer making any big decisions.
One way to grapple with all the uncertainty is simply to brace for worse. Consider the recession probabilities calculated by S&P Global Ratings. Were the credit-rating agency to base its assessment solely on its econometric model, it would conclude that the chance of a recession starting in the next 12 months is no higher than 10%. But factoring in subjective judgments about Mr Trump’s policies, it instead puts the risk of a downturn at 25%—close to its highest level in over a decade. That does not mean that a recession is imminent. It nevertheless reflects the rising price of Mr Trump’s endless threats on trade.
