Tariff Uncertainty Is Stalling the Economy
Businesses are reporting fewer orders, lower inventories, less employment, and weaker expectations. The only thing going up: prices.
Last Tuesday, the day before President Donald Trump's "Liberation Day" tariffs were set to be imposed, White House press secretary Karoline Leavitt was asked by a reporter about the possibility of last-minute changes to those import taxes.
"The president was asked and answered this yesterday," Leavitt responded. "He is not considering an extension or a delay."
Less than 24 hours later, the White House announced that many of those tariffs would, in fact, be delayed. "This was [Trump's] strategy all along," Treasury Secretary Scott Bessent told reporters shortly after the change was announced.
That same cycle of events has played out several times in the past three months. Trump announced new tariffs on imports from Canada and Mexico in early February. Days after they were set to take effect, Trump postponed them. On April 11, the White House announced a sweeping set of tariff exemptions for televisions, phones, computer chips, and other electronics imported from China. By April 13, Commerce Secretary Howard Lutnick said those tariff exemptions were temporary. Later the same day, Trump denied that any exemptions had been made at all. The president is now reportedly considering another delay, this one on the 25 percent tariff that he slapped on all imported cars and car parts.
What tariffs will America charge tomorrow, and what imports will be subject to them? It seems to depend on the whims of one man.
And that's not great for lots of other people who are trying to run businesses in the current environment.
Victor Owen Schwartz, the owner of VOS Selections, a New York–based importer and distributor of wines and spirits, says the new tariffs have made it "impossible" to plan ahead.
"Could you imagine if I had a supplier and every time I talk to them, they gave me a different price? This is the equivalent of that," Schwartz told Reason this week. (He is also a plaintiff in a new lawsuit challenging Trump's authority to impose these tariffs without congressional approval.)
That sentiment seems to be widespread—even in the industries that Trump's trade policies are supposed to be helping.
"The threats and uncertainty have made it hard to make business decisions," Traci Tapani, co-president of Wyoming Machine, a Minnesota-based sheet metal fabricator that relies on aluminum imports from Canada, tells Reason. Tapani, who also serves as vice chair for the U.S. Chamber of Commerce's small business council, says that she's already seen "immediate, detrimental" impacts from Trump's trade war, which "will make it extremely difficult for small businesses like mine to grow."
The New York Federal Reserve Bank's monthly survey of manufacturers, published earlier this week, reported sharp drops in what it calls "forward-looking indicators"—that is, what businesses expect the next six months to look like. The manufacturers in the survey expect to see fewer orders, longer delivery times, declining inventories, and lower levels of employment. About the only lines in the survey that are pointed upward are the expectations about prices.
Even global businesses don't seem to be immune. On Tuesday, the CEO of the Dutch firm ASML, the world's leading producer of the equipment needed to make semiconductors and other advanced computer chips, attributed lower-than-expected sales to America's new tariff regime, which he said is "creating a new uncertainty."
"The outlook for global trade has deteriorated sharply due to a surge in tariffs and trade policy uncertainty," the World Trade Organization said in the latest edition of its Global Trade Outlook report, released this week.
The biggest cost created by new tariffs is, of course, the actual cost of paying the tariffs—which are nothing more than a tax on imports. Still, the costs created by economic uncertainty are a major factor too, and those have become a bigger part of the current trade dynamic due to Trump's mercurial nature and his willingness to exercise unilateral control over tariffs.
During Trump's first term in office, the uncertainty created by his trade policies reduced aggregate U.S. investment by as much as $47 billion in 2018, according to a 2020 study in the Journal of Monetary Economics. The authors of that paper wrote that "all measures suggest that uncertainty about trade policy has recently shot up to levels not seen since the 1970s." They concluded that "both higher expected tariffs and increased uncertainty about future tariffs deters investment."
Those costs are almost certain to be higher this time because the size and scope of Trump's new trade war have greatly expanded, as has the uncertainty it created.
It is obviously difficult to objectively measure something as frothy and fleeting as uncertainty, but economists Scott Baker, Nick Bloom, and Steven Davis are the best at doing it. Their Economic Policy Uncertainty Index is based on newspaper reports, Congressional Budget Office reports, and surveys of economic forecasters by the Federal Reserve. Right now, the global index is at the highest level it has ever been—surpassing the previous peak set during the COVID-19 pandemic and far higher than it was during Trump's 2018 tariff phase.
The exact consequences of all that uncertainty remain to be seen, but the costs could show up in a variety of ways.
"Much research shows that increasing uncertainty can affect decision-making and thus economic activity through a number of economic channels," writes Kevin Kliesen, a business economist and research officer at the Federal Reserve Bank of St. Louis. "For example, firms may delay investment and hiring during periods of high uncertainty. Households may exercise precautionary reductions in spending by increasing their saving rates in anticipation of possible changes in incomes or wealth."
And the most immediate impact may be a loss of economic dynamism, which means slower supply chains and reduced risk-taking, as businesses wait to see what the next pronouncement from the White House (or the president's Truth Social account) will mean for their bottom lines.
"Our quotes are down. Our orders are down. Our purchase orders are down," Brian Bendig, president of Canada-based Cavalier Tool and Manufacturing, told the Windsor Star in February, as Trump targeted imports from Canada with higher tariffs. "People are scrambling and pivoting. The reality is almost nothing is moving."
