The New Tariffs in Town Are Still Old News

The Trump administration’s blanket 10% tariff under Section 122 of the Trade Act of 1974 officially expired overnight, but now there is a new sheriff … err, tariff in town. To effectively replace the departed levies, the White House enacted new charges Friday. That follows a new tariff on Canada earlier this week, and more new tariffs likely loom to replace the “reciprocal” tariffs from Liberation Day the Supreme Court ruled unconstitutional earlier this year. Yet markets are decidedly calm about all of this, taking the news in stride without a big pullback. Tariffs’ power over stocks looks officially spent.

This week’s tariff news is the kind of thing that would have rattled markets hard last spring. One day after beaming alongside Canadian Prime Minister Mark Carney and Mexican President Claudia Sheinbaum to hand out medals after Sunday’s FIFA World Cup final, US President Donald Trump slapped a 50% tariff on select Canadian goods. This new levy, which came on the heels of Trump’s decision to punt on a US-Mexico-Canada Agreement extension (instead subjecting the pact to annual reviews), is retaliation for Canada’s retaliatory measures against the original Liberation Day tariffs. It hits about $20 billion worth of Canadian exports, including booze, paper products, hockey sticks, a lot of dairy, men’s suits and, ummm, wigs and false beards, among other things. It is all kind of small beans, affecting only about 5% of annual US imports from Canada, but markets weren’t into scaling last year.^[i] They were into freaking out, and we reckon this escalating tit-for-tat is the kind of thing stocks would have freaked out about.

Friday’s new tariffs fall under that header, too. On paper, they target countries the Trump administration says import goods made with forced labor. That obviously isn’t something the government can actually track in detail, given how shadowy supply chains are, so the tariffs take a more blunt approach. Countries that lack laws banning imports produced with forced labor will face a 12.5% rate, while countries that have laws but whose enforcement the administration deems too lax get a 10% rate. The US Trade Representative’s office says these will hit 80 countries and cover 99% of US imports, making them a blanket tariff.

Far be it from us to cast aspersions on anyone’s motives, especially with an issue as critical as forced labor. But it seems clear the basis is pretextual and this is an attempt to enact a more legally durable blanket US tariff. After the Supremes killed the original one, Trump used a provision of 1974’s Trade Act allowing the president to levy tariffs for 150 days to address balance-of-payments deficits. The new levies use Section 301 of that same law, which lets the president adopt indefinite tariffs against countries whose trade practices discriminate against the US. The White House argues allowing goods made with forced labor amounts to discrimination against US goods made with more highly paid employees (and expensive robots). We will leave it to the legal eagles to determine whether this is indeed more durable.

For markets, this all just extends the status quo—something stocks seem to get, even if headlines don’t. Much of today’s coverage was preoccupied with the potential risk for tariffs to induce hot inflation, as if this is somehow an untested theory. Yet we had tariffs all last year, blanket and reciprocal. The US Consumer Price Index rose just 2.7% y/y, continuing its comedown from 2022’s hot inflation.^[ii] Businesses didn’t have pricing power and swallowed a lot of the cost.

The same likely holds now, as we have already seen with matching claims about businesses passing higher energy costs to consumers earlier this year. It didn’t happen, as we covered. Excluding energy, goods prices were tame as can be. If core goods inflation ran a measly 1.1% y/y in May and 0.8% y/y in June—despite tariffs being part of the calculus as well as energy—then it beggars belief that replacing these same tariffs would suddenly be some massive inflation driver. Not when money supply continues growing at rates that didn’t ignite hot inflation in the 1990s.

The good news is markets know all this, even if headlines don’t. Stocks are efficient, pre-pricing all widely known information and digesting economic developments over the next 3 – 30 months. Over the last year, US and global GDP grew and inflation stayed tame (outside energy this spring) despite tariffs. We still think tariffs are negative, but the global economy had enough positives to offset them and preserve growth. This is all in the data, all well known and all in share prices already, and world stocks are now up 32.6% since market close on Liberation Day.^[iii] US stocks are up 32.7%.^[iv]

All the while, tariff news has lost its power. Last year, new threats against China were still making stocks sweat. But this year, we aren’t seeing that. The Supreme Court ruling against tariffs didn’t cause a boom. Nor did tariff refunds. Both barely registered. Same for the first replacement tariffs, and same for this week’s. Stocks have had a little volatility, but between the semiconductor tantrum, nerves over $100 oil and other items, it is pointless to try to disentangle tariffs as a proximate cause. Sometimes noise is just noise.

So take your cues from stocks and move on. Tariffs aren’t good, and it remains true that US businesses and consumers pay them. That stinks. But the economy and stocks have already overcome them.