To Tariff or Not to Tariff, That Is Not the Question

Starting with employment. The accompanying chart shows the employment levels of native and foreign-born workers from the BLS household survey. Native-born employment has risen and foreign-born has fallen since March.

These figures have been being greeted by the Trump Administration officials as a turnaround in employment by Trump’s economic policies. However, some analysts have questioned the veracity of the data as the unusual level of increase in native-born workers is virtually impossible. A more plausible explanation is foreign-born workers self-identified as native-born in the household survey in fear of deportation threats. The BLS doesn’t revise the household survey in the manner of the establishment survey. Instead, it adjusts its figures every January to align with the Census Bureau’s population estimates. Score this as an either a win or tie for the Trump Administration.
 

 

The interim report on inflation is less comforting. While there is an ongoing debate on whether tariff-induced price increases are one-time transitory events, the latest CPI report shows a disturbing trend in accelerating services CPI, which is not affected by tariffs.
 

 

An analysis of domestic and imported price increases by the Harvard Business School Pricing Lab shows that imported goods cost 5% more and domestic goods 3% more than pre-tariff predicted price trends, based on data that ended August 8.
 

 

The narrative of the foreign exporter will pay the tariff is not getting any traction. If exporters were absorbing the costs of tariffs, we should see a decline in the import price index, which excludes the effect of tariffs. Instead, they are modestly rising.
 

 

Even worse news, the tariff-related price effects are likely to worsen. Goldman Sachs estimates that importers are currently absorbing 64% of tariffs but by October this will drop to only 8%, with consumers absorbing 67%. It is therefore no surprise that the July FOMC minutes showed some Fed policy makers expressed concern over inflation expectations becoming unanchored: “Several participants emphasized that inflation had exceeded 2 percent for an extended period and that this experience increased the risk of longer-term inflation expectations becoming unanchored in the event of drawn-out effects of higher tariffs on inflation.”
 

 

As well, Trump’s TCJA tax bill and the subsequent OBBB Act are supposed to usher a capital investment boom because of the full expensing of depreciation. However, history does not indicate any surge in investment.
 

 

A review of forward-looking Capex Expectations also shows few signs of strength, either from a historical perspective or a current basis.
 

 

 

Elements of an Incomplete Grade

Here are some indicators where it’s too early to render judgment. The market has only seen two quarters of GDP growth under Trump. Arguably, much of the growth effects can be attributable to the policies of the previous Biden Administration. While headline GDP growth (left chart) in 2025 has been uneven, real final sales to private domestic purchasers (right chart) has been decelerating.

 

If the intent of Trump’s policies is to reshore manufacturing and boost wage growth for low-skilled workers left behind by globalization, we are also not seeing the fruits of those policies. The Atlanta Fed’s wage growth tracker shows that the wage growth of high school graduates, who should benefit from the reshoring of less skilled jobs, is lagging the wage growth of university graduates.
 

 

As well, it’s far too early to render a verdict on productivity, which is falling, but within the confines of a narrow range.
 

 

 

Locked-in Tariffs

Meanwhile, Trump has set the U.S. on a locked-in fiscal course of action with his tariffs. The Committee for a Responsible Federal Budget estimates that tariff revenue will steadily increase to slightly over 1.5% of GDP before declining as supply chains adjust. Future administrations will have difficulty unwinding the tariffs as they represent a significant source of revenue to the federal budget. A policy reversal would involve the political choices of significant tax increases in order to replace the lost levies.

The Economist featured an article that was a warning to America, based on the lessons from India’s “License Raj”. Soon after independence, India’s first prime minister, Jawaharlal Nehru, opted to implement a protectionist regime that restricted imports: “Firms that wanted to buy foreign kit or parts needed a permit. Consumer imports were in effect banned; they were unnecessary for development.” This “License Raj” led to widespread cronyism that hindered productivity growth.

In 1974 Anne Krueger, then of the University of Minnesota, coined the term “rent-seeking” to refer to the way companies in developing countries compete to secure licences that offer the chance to form monopolies or oligopolies selling pricey imports. Instead of devoting resources to production, firms use them, legally or illegally, to secure permits. “Some means of influencing the expected allocation—trips to the capital city, locating the firm in the capital, and so on are straightforward,” she wrote. “Others, including bribery, hiring relatives of officials or employing the officials themselves upon retirement, are less so.” India’s import-permit regime was the perfect example. She calculated the country’s rents were worth 7% of GDP in 1964—a time when the government was spending 1.5% of GDP on education. % of GDP before declining as supply chains adjust. Future Administrations will have difficulty unwinding the tariffs as they represent a significant source of revenue to the federal budget. A policy reversal would involve the politically choices of significant tax increases in order to replace the lost levies.

The article went on to compare the example of Apple, who secured an exemption from tariffs from Chinese imports after CEO Tim Cook’s phone call with Trump as an example of the creeping and insidious effects of the “License Raj”.