Turns out that temporarily reducing tariffs on China from 125 percent to 30 percent (and Chinese tariffs on the US from 145 percent to 10 percent) still won’t stop businesses from passing the costs down to the consumer. Who could have ever thought that would happen except anyone who ever stumbled into an econ 101 class and half-listened for five minutes! Trump was undoubtedly spooked by the litany of businesses telling him that what his Treasury Secretary called “an embargo” on Chinese trade was going to crush the economy, which led to him blinking to the biggest degree yet this week. Prior to Trump blinking, Ryan Petersen, CEO of the shipping company Flexport, told the Wall Street Journal that “if they don’t change the tariffs, it’s going to be an extinction-level, asteroid-wiping-out-the-dinosaurs kind of event.”
Whether a 40 percent effective tariff rate on Chinese goods is an extinction-level event for small businesses remains to be seen, but it certainly won’t change Walmart’s stance. CEO Doug McMillon said on their earnings call today that “the higher tariffs will result in higher prices.” Walmart Chief Financial Officer John David Rainey said on CNBC today that the tariffs are “still too high” and that “the magnitude of these increases is more than any retailer can absorb. It’s more than any supplier can absorb.” Rainey said that he is “concerned that the consumer is going to start seeing higher prices. You’ll begin to see that, likely towards the tail end of this month, and then certainly much more in June.”
This is already happening as the Federal Reserve noted last week, finding that so far, the tariffs have led to a 0.3 percent increase in prices this year. ING pushed back on that notion, and cited last week’s low CPI report showing a “benign” 0.2 percent month over month rise in inflation, and alleged that “there is little evidence, so far, that tariffs are inflationary and instead profit margins are being squeezed.”
But as Walmart noted in their conference call today and ING cited as well, that will not last and come the end of next month, companies will stop taking hits to their profits to try to keep costs low for their customers. It doesn’t matter if the tariff is 125 percent or 12.5 percent, eventually, that cost will get passed down to the consumer, as the nation’s largest retailer promised. Walmart beat first-quarter earnings estimates but just missed sales expectations, and they, like many other companies, are not issuing standard financial guidance on earnings per share or operating income growth for the rest of the year due to the uncertainty around tariffs.
If Walmart is saying they cannot contain this “unprecedented” tariff level within their profit margins, you can bet your bottom dollar that small businesses are in the same or worse shape. Petersen’s “extinction-level event” quote to WSJ was specifically about small businesses, who operate on smaller margins where many simply cannot stay alive with an additional 40 percent surcharge to their cost of doing business. Their survival is the main fear in the “not even Walmart can deal with this stupid bullshit” headlines across the financial world today.
While ING notes that the CPI data does not suggest the tariffs are inflationary yet, the Federal Reserve’s primary concern right now is that they will be. That’s why they didn’t cut interest rates this month, but they’re not the only ones with this fear that Trump’s policies are designed to bring stagflation back to America. Treasury rates have shot back up since the end of April, with long-term bond yields sitting at previous “oh-oh” levels that made Trump blink in the past. The 20 year Bond snuck its head over five percent yesterday, and while there is a less obvious explanation for this move relative to the ones directly resulting from Trump’s previous actions, it’s hard to see how all movements in financial markets right now aren’t driven by the trade war, with investors deleveraging out of US assets as they assign a new risk premium to a country that has proven it cannot be trusted to the degree it once was.
Trump could come to an agreement with China tomorrow, but that wouldn’t change the fate of the economy for the next month or so, as supply chains take time to ramp back up and it’s not a short voyage across the ocean. The Trump supply shock is real and it’s already here at America’s emptying ports. The first quarter of this year saw negative GDP growth driven entirely by the largest negative net exports figure in recorded history, as businesses and consumers stocked up on inventory ahead of Trump’s tariffs ensuring that businesses will not fill our ports with new orders this quarter. The question all of them will be asking is how long they can sustain their business on their pre-tariff inventory, or on their post-tariff inventory without passing the cost to consumers, and for the largest retailer in America, the answer to that question is about another month. Then everything gets more expensive. Welcome to Donald Trump’s America.
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