Trump’s Giant New Car and Truck Tax He’s dead set on remaking the economy on his import substitution model.

The WSJ Editorial Board:

(…) He wants border taxes for their own sake, so get used to it.

“We’re going to charge countries for doing business in our country and taking our jobs, taking our wealth,” the President said in unveiling the tariffs. It’s pointless trying to persuade him that nobody is stealing Americans’ lunch and that trade can be good for both parties. But readers should know they are about to pay more for their cars and have less choice to boot. (…)

Imports give Americans more choices, and at lower prices, than they would otherwise have if all cars sold in the U.S. had to be made domestically. Americans as a result can afford more and better cars than they could a few decades ago. This is a security threat to whom exactly? (…)

Tariffs will raise car prices even more—as much as $10,000 per car according to Wedbush Securities. This will reduce sales and hurt domestic auto dealers and workers. U.S. manufacturers will suffer most because a relatively larger share of their sales are in the U.S. Thinner margins will dent auto-worker profit-sharing. (…)

Mr. Trump’s tariffs seem designed to blow up the USMCA and other trade agreements. His Administration says it plans to renegotiate USMCA, but why would Canada and Mexico go along if Mr. Trump can renege on its commitments willy-nilly? By the way, other U.S. businesses will be whacked like innocent bystanders when our trading partners inevitably retaliate.

Some Trump advisers and friends have peddled the line that he merely wants a level tariff playing field. But the average U.S. tariff rate (2.7%) on foreign goods is higher than the average rate in Canada (1.8%), Japan (2%) and Europe (2%), and roughly the same as in Mexico, according to the World Bank. While other countries impose non-tariff barriers, so does the U.S.

Andy Laperriere of Piper Sandler estimates that Mr. Trump’s auto tariffs, when combined with his levies on China, steel and aluminum, will raise the effective U.S. tariff rate to nearly 8%, the highest in 75 years. And this is before Mr. Trump unveils his long-touted “reciprocal” tariffs next week, which won’t be reciprocal at all. Mr. Trump said this week they’ll be whatever he decides, which could change at any moment based on presidential whim. (…)

Car makers have already invested countless billions in efficient supply chains to make cars that middle-class Americans can afford. They will now have to spend hundreds of billions more that could be invested in more productive ways. And all because Mr. Trump has an economic development model based on the fantasy of “import substitution.” That model kept India poor for decades. (…)

• Trump Warned U.S. Automakers Not to Raise Prices in Response to Tariffs Threat came in a call earlier this month, in which carmakers feared punishment if prices go up

(…) Detroit’s automakers and industry suppliers in particular have made clear there is little they can do but raise prices in the face of tariffs. Bringing more factories back to the U.S.—a tenet of Trump’s tariff strategy—can take years for car companies to make happen.

“Tariffs, at any level, cannot be offset or absorbed,” Ray Scott, chief executive of parts supplier Lear, wrote in an email Tuesday to employees that was viewed by The Wall Street Journal. “A holistic, industrywide approach will be necessary to mitigate the impact.”

For now, dealers have stockpiled a two- to three-month supply of new cars, meaning the impact of the tariffs might not start to be felt until May. At that point, vehicle prices could rise 11% to 12% to offset the tariffs, Morgan Stanley analysts said Thursday in a note. (…)

An executive at one of the automakers said they were baffled by the desire to both impose tariffs—but also tell car companies they couldn’t raise prices.

“The math would tell you, that’s going to cost us multibillions of dollars,” the executive said. “So who pays for that?” (…)

• Brian Kingston, the head of the Canadian Vehicle Manufacturers’ Association, said there has been more than $280 billion of investment in the North American auto industry since 2020, most of which was in the U.S. and all of which was done under the U.S.-Mexico-Canada Agreement that Trump signed in 2018.
• Cars Under $30,000 Risk Becoming a Casualty of Trump’s Tariffs

(…) The effects could be particularly pronounced at the low end of the market, with many of the least-expensive models from the likes of General Motors Co., Ford Motor Co., Kia Motors and Hyundai Motor Co. being built outside the US. (…)

The average price of a new car in the US now approaches $50,000, with high interest rates adding to the financial toll.

There are 20 models on the market priced below $30,000, according to Cox, and at least half of them will be hit severely by the new tariffs. Among the vehicles assembled in Canada or Mexico, costs would rise by $5,855 on average, it estimated in a recent research report. (…)

GM sold more than 200,000 of the Trax [$20,000+] in the US last year and did so profitably thanks to Korea’s cheaper supply base. The vehicle will soon face a 25% tariff, which will force GM to make tough decisions on how to handle the extra cost. (…)

US auto prices broadly could rise 11.4% on average if tariffs are fully passed on to consumers, JPMorgan Ryan Brinkman said in a research note.

(…) “there’s a reason they’re made outside the US, because that’s what keeps them affordable.”

BTW, used car prices will also go up as a result.

FYI:

Lumber Prices Up 15% YoY The recent increase might be due to tariffs.  This is the highest price since the pandemic related shortages.

Ferrari Plans to Raise US Prices Up to 10% After Tariffs Hit (Buy Now, Pay Later…)

Here we go!

EU looks to hit US services in tariff retaliation Scale of Trump administration’s trade war requires bloc to consider more powerful measures, officials say

(…) “The Americans think that they are the ones with escalation dominance [in the trade war], but we also have the ability to do that,” said one EU diplomat, adding that the aim was ultimately to de-escalate with a comprehensive trade deal. (…) “Services is where the US is vulnerable,” a second diplomat said. Washington ran a €109bn trade surplus with the EU in services in 2023, compared with a €157bn deficit in goods. (…)

CONSUMER WATCH

Lululemon says US consumers are cutting back on spending “

Traffic to US stores had been declining in the company’s first quarter, which began in early February, executives said.

Chief Executive Officer Calvin McDonald said that US shoppers are keeping their wallets tight and visiting stores less often amid geopolitical strife and high inflation.

“a material slowdown from recent quarters”.

• Nike, the shoe and athletic apparel company that is a competitor of Lululemon, last week forecast an unexpected drop in quarterly revenue.

Recent surveys show the U.S. bipolarity by political views. John Authers shows us what Independents think:

The independents are getting much more negative. Perhaps most alarmingly, their expectations for longer-term inflation are now higher than they were at any time during the inflationary implosion under Biden:

• UK Households Save More as Caution Over Outlook Intensifies

Tax cuts to the rescue?

Goldman thinks not:

While we continue to think that personal and corporate tax changes that Congress is likely to pass will modestly boost growth, fiscal policy is unlikely to offset the hit from tariffs this year, for three reasons.

• First, the fiscal package looks likely to take several more months to pass and even longer to take effect. At this point, we think the legislation could pass by late July or early August, but it could slip to September and there is a small risk that tax cuts are not extended until closer to year’s end. Whatever boost fiscal policy provides is likely to come after tariffs have been implemented.

• Second, the upcoming fiscal package is likely to consist mainly of an extension of existing tax cuts with limited new tax cuts. While the expectation of greater tariff revenue might make some congressional Republicans more willing to vote for legislation that expands the deficit, so far there is little sign that rising expectations for tariff revenue is leading to larger tax cuts.

• Third, while tariffs are the main source of uncertainty at the moment, fiscal policy also poses some risks. Congress might have a harder time avoiding the next shutdown (Sep. 30 deadline) than it did the last, the Treasury is likely to exhaust borrowing room by September if not before, and DOGE-related cuts look likely to weigh on growth and employment.

Why this trade expert says the U.S. economy will stall next quarter

Brad Setser, a senior fellow at the Council on Foreign Relations, is a former adviser to the Office of the U.S. Trade Representative and a former Treasury Department official. He shared his big-picture views on tariffs in an interview on Jack Farley’s YouTube channel, Monetary Matters Network.

Setser said he isn’t exactly sure what’s coming. All announced tariffs — excluding the auto ones announced Wednesday night — equal about 1% of GDP. Reciprocal tariffs could double that, he said. He added that calculation excludes the impact of likely retaliation.

There is also the inflationary impact of other suppliers raising their costs due to a lack of competition. “In general, estimates of the inflationary impact are close to estimates of the just-pay-at-cost,” he said. “That’s partially because some of the tariff may be absorbed and not passed on to consumer prices. But it’s also a reflection of the fact that if the price of imported autos goes up, some firms may increase the price of domestically made autos.”

Setser said the pain would be felt right away, and potentially offsetting tax breaks would not occur until later. “Right now, if tariffs go forward on April 2, they will go forward ahead of any adjustments in tax. So they are a direct hit to the economy in the second quarter. And a hit that is big enough that you could imagine the U.S. economy coming close to a stall in the second quarter when you add in the uncertainty effects,” he said. (…)

Setser concluded that there will likely be a recession that doesn’t lead to meaningful upside down the road. “If you do the tariffs and you pull away the CHIPS Act, I actually don’t think you get a manufacturing renaissance in the U.S.,” he said.

FED WATCH

Don’t say the `t’ word

Bond and stock markets rallied recently on hopes that the so-called Federal Reserve “put” was alive and well.

Fueling the perception was Fed Chair Jerome Powell, who last week even resurrected the word “transitory” in reference to tariff-related inflation. He gave the sense to some investors that he’d be more responsive to slowing economic growth than any short-term price increases on the heels of levies from President Donald Trump.

But any perceived clarity was muddied this week by the comments of individual Fed members, who sounded like they were on a different page from Powell. Take Atlanta Fed President Raphael Bostic, who was asked about his take on the “t”  word on Monday with Bloomberg’s Michael McKee. His response? “I’m not going to say that word. Nope.”

St. Louis Fed President Alberto Musalem was similarly skeptical, saying Wednesday that he’d be “wary of assuming that the impact of tariff increases on inflation will be entirely temporary.” Federal Reserve Bank of Boston President Susan Collins said it looks “inevitable” that tariffs will boost inflation, and Minneapolis Fed President Neel Kashkari also emphasized the pace of price growth, saying it’s “above our 2% target so we have more work to do.”

The result in markets has been a battle between how quickly growth will slow and how sticky inflation will remain.

A stagflation-like recipe has led to the continued breakdown of bonds’ traditional role as a haven in times of turmoil. Even on down days for the S&P 500 and Nasdaq, US Treasuries of all maturities failed to rally in a meaningful way. This year’s bottom for the 10-year Treasury yield was on March 3, when it reached 4.16%. Since then, 10-year rates have risen by 22 basis points, even as the S&P fell 2.5%. (…)

One test for the Fed and therefore investors comes today and two more follow next week. Today sees the release of the personal consumption expenditures price index excluding food and energy — the Fed’s preferred measure of underlying inflation. It probably advanced at an annual pace of 2.7% in February, according to the median forecast in a Bloomberg survey of economists.

Then next week, Trump is set to continue imposing tariffs on trade partners on April 2, although the degree he does so is still up in the air. That’s followed a week from today by the US payrolls report for March. And finally, Powell speaks the same day on the economic outlook. (Bloomberg)

• With tariffs not going away, the observed weakness in the soft data should be expected to spill over to weakness in the hard data over the coming months. The next important data point is the March employment report, which will be released on Friday, April 4. The survey week for the employment report was the week of March 12, when tariff uncertainty was very elevated. (Torsten Slok)

AI CORNER

Quite a mood change!

CoreWeave Raises $1.5 Billion in Downsized IPO Below Price Target

CoreWeave Inc. raised $1.5 billion in its initial public offering, a downsized deal that reflects how stock market volatility is hurting demand for even highly anticipated listings.

The cloud-computing provider sold 37.5 million shares at $40 apiece, it said in a statement, confirming an earlier Bloomberg News report. That’s down from an initial plan of 49 million shares at $47 to $55 each that could have raised as much as $2.7 billion. (…)

Livingston, New Jersey-based CoreWeave was at one time looking to raise about $4 billion from its listing and target a valuation greater than $35 billion. That was before the broader stock market slumped and volatility dented optimism. At the revised range, CoreWeave would have a value of about $23 billion on a fully diluted basis.

TECHNICALS WATCH

A few important (to me) technical trends, courtesy of Steve Blumenthal and NDR:

• The 50dma is about to cross the 200dma:

• The S&P index is below its 200dma which has been flattening lately. A declining 200dma is not desirable.

• The 13/34 exponential m.a. is threatening a sell signal:

• Here’s a closer look:

US Government Fiscal Mess: Debt, Deficit, Interest Payments, and Tax Receipts: Q4 2024 Update on an Ugly Situation

 

“The only way to have a friend is to be one.”

Carney says Canada cannot rely on U.S. any longer, must achieve ‘economic autonomy’

• Mark Carney says old Canada-US relationship is ‘over’

Nikola’s Trevor Milton says he has been pardoned by Donald Trump

Trevor Milton, the founder of electric-truck maker Nikola who was found guilty in 2022 of lying to investors and sent to prison, has said he has been pardoned by US President Donald Trump. Milton wrote on X: “I was issued a full and unconditional pardon by @realDonaldTrump himself. He called me personally to tell me.” (…)

Since becoming president, Trump has also pardoned Ross Ulbricht, who was sentenced to life in prison in 2015 for masterminding an online marketplace for illegal drugs and online hacking.

It probably was not fentanyl…otherwise El Salvador

Trump Auto Tariffs, Threats on Allies Intensify Global Trade War

President Donald Trump signed a proclamation to implement a 25% tariff on auto imports and pledged harsher punishment on the EU and Canada if they join forces against the US, expanding a trade war and triggering threats of retaliation.

“What we’re going to be doing is a 25% tariff on all cars that are not made in the United States,” Trump said at the White House on Wednesday as he pushed ahead with a program seeking to bring more manufacturing jobs to the US.

Hours later, Trump suggested further tariffs would be imposed on the European Union and Canada if they worked together “to do economic harm” to the US. (…)

The auto tariffs will come into effect at 12:01 a.m. Washington time on April 3, initially targeting fully assembled vehicles. By May 3, the scope will expand to include major automobile parts like engines, transmissions, powertrain components, and electrical systems, with the potential to broaden further as necessary, according to the proclamation. (…)

Trump cast the tariffs as “permanent” and said he was not interested in negotiating any exceptions. The tariffs will be on top of levies already in place, White House Staff Secretary Will Scharf said, and the administration projects that the tariffs would result in $100 billion of new annual revenue to the US. (…)

In a fact sheet about the auto tariffs, the White House said importers whose vehicles were covered by USMCA, the trade agreement negotiated in Trump’s first term with Canada and Mexico, would be given the opportunity to certify their US and that the 25% levy will only apply to the value of their non-US content.

A White House official, discussing the tariffs on the condition of anonymity, said the administration would develop a plan to deal with parts that cross the border multiple times. (…)

Autos Drive America, which lobbies for carmakers based outside the US including Toyota and BMW AG, warned the new levies will do the opposite of what Trump wants.

“The tariffs imposed today will make it more expensive to produce and sell cars in the United States, ultimately leading to higher prices, fewer options for consumers and fewer manufacturing jobs in the US,” Jennifer Safavian, the group’s president, said in a statement. (…)

Tariffs will likely raise prices of foreign-made cars, but even US-made vehicles would see price increases if supplies and parts are hit by levies or if supply chains are cut off from manufacturing in lower-cost countries.

US car and light truck imports were valued last year at more than $240 billion. (…)

 

• Asked if there was anything carmakers could do to have the tariffs removed, Trump replied: “This is permanent, 100 per cent.”
• Almost half of vehicles sold in the US are imported and cars assembled in the US contain nearly 60 per cent foreign-sourced parts, according to Bernstein analyst Daniel Roeska.
• European manufacturers export up to 60 per cent of the vehicles they make in the US, according to Acea.
• The levies threaten to upend the European auto industry’s reliance on exports to the lucrative US market. German carmakers are most at risk as they send more vehicles to the US than to any other country, including many of their higher-margin combustion-engine models like Porsche’s 911 sports car and Mercedes’ S-Class sedan. Most German automakers operate factories in the US where they produce cars both for local buyers and export.
• The tariffs could be a devastating blow to Mexico’s economy, where 1mn people are directly employed in a sector that accounts for about 4 per cent of GDP.
• Japan sent $40bn worth of cars to the US in 2024, representing 28.3 per cent of its overall exports to the US.
• “The revenues we’re going to use to give the largest tax cut in American history,” a US official said. “Tariffs equal tax cuts.”
• The president reiterated a campaign pledge to juice auto demand, saying that he was working with House Speaker Mike Johnson to pass a policy that would allow consumers to deduct car interest payments from their income taxes for American-made cars.
• Used cars? Higher new car prices are likely to lead to higher used car prices.

Drill, Baby, Drill

From the Dallas Fed Energy survey:

• What WTI oil price does your firm need to profitably drill a new well?

For the entire sample, firms need $65 per barrel on average to profitably drill, higher than the $64-per-barrel price when this question was asked in last year’s first-quarter survey. Across regions, average breakeven prices to profitably drill range from $61 to $70 per barrel. Breakeven prices in the Permian Basin average $65 per barrel, unchanged from last year.

Large firms (with crude oil production of 10,000 barrels per day or more as of fourth quarter 2024) require a $61-per-barrel price to profitably drill, based on the average of company responses. That compared with $66 for small firms (fewer than 10,000 barrels per day).

• I have never felt more uncertainty about our business in my entire 40-plus-year career.
• Oil prices have decreased while operating costs have continued to increase. To stimulate new activity, oil prices need to be in the $75-$80 per barrel range. Natural gas take-away in the Permian Basin has not improved for any of my properties, and I am still getting paid slightly negative to barely positive prices for natural gas. Last month I was paid 29 cents per million cubic feet. I feel very negative about the short-term outlook for the oil and gas business.
• In a strange twist to the administration’s hope for more domestic oil and gas production, higher steel tariffs may result in fewer wells completed due to higher completion costs, and, in particular, the cost of oil country tubular goods. The margins are thin enough for many wells, and this will likely result in downward pressure on total wells brought online.
• The key word to describe 2025 so far is “uncertainty” and as a public company, our investors hate uncertainty. This has led to a marked increase in the implied cost of capital of our business, with public energy stocks down significantly more than oil prices over the last two months. This uncertainty is being caused by the conflicting messages coming from the new administration. There cannot be “U.S. energy dominance” and $50 per barrel oil; those two statements are contradictory. At $50-per-barrel oil, we will see U.S. oil production start to decline immediately and likely significantly (1 million barrels per day plus within a couple quarters). This is not “energy dominance.” The U.S. oil cost curve is in a different place than it was five years ago; $70 per barrel is the new $50 per barrel.
• The administration’s chaos is a disaster for the commodity markets. “Drill, baby, drill” is nothing short of a myth and populist rallying cry. Tariff policy is impossible for us to predict and doesn’t have a clear goal. We want more stability.
• The 2025 steel is already purchased; tariffs are most likely to impact 2026 investment decisions.
• The administration’s tariffs immediately increased the cost of our casing and tubing by 25 percent even though inventory costs our pipe brokers less. U.S. tubular manufacturers immediately raised their prices to reflect the anticipated tariffs on steel. The threat of $50 oil prices by the administration has caused our firm to reduce its 2025 and 2026 capital expenditures. “Drill, baby, drill” does not work with $50 per barrel oil. Rigs will get dropped, employment in the oil industry will decrease, and U.S. oil production will decline as it did during COVID-19.
• Drilling projects are increasing from outside sources. Natural gas is very positive.
• The rate of accomplishment of the administration’s policy agenda will impact prices for natural gas in a favorable way. Killing the climate change policies and instigating LNG exports, along with the increase in manufacturing and artificial intelligence demands, will increase natural gas consumption. Weather-related demand was higher this year, and that increased the draw down in natural gas storage.

Good for inflation, not so good for oilmen:

Trump Says He Could Cut China Tariffs to Secure TikTok Deal

President Donald Trump said he would consider lowering tariff rates imposed on China to secure Beijing’s support for a sale of the US operations of ByteDance Ltd.’s social video platform TikTok to an American company.

“Every point in tariffs is worth more than TikTok,” Trump told reporters Wednesday in the Oval Office. He suggested that “in order to get China” to agree to a sale, “maybe I’d give them a reduction in tariffs.” (…)

Trump, who once sought to ban TikTok himself, has become a cheerleader for the popular video-sharing app, which he credits with helping his 2024 presidential campaign bolster outreach to younger voters.

CONSUMER WATCH

• Bloomberg’s in-house consumer spending metric, compiled from data tracking upwards of 20 million shoppers, in turn suffered “a sharp pullback” during that period [February]. (ADG)
• Penny pinching is in. Consumers are slumming it en masse these days, as Dollar General CEO Todd J. Vasos relayed on Thursday’s earnings call that “trade-down” among both middle- and upper-income consumers “appears to be accelerating.” (ADG)

Cushion or Pushin’ Considerations for the Pass-through of Tariffs into Consumer Price Inflation

(…) Our models point to a 0.6 percentage point increase in the year-over-year rate of consumer price inflation based on the tariffs implemented thus far, but we think this is an upper bound. Aside from explicit absorption mechanisms, the staggered implementation of tariffs and the varied timing of firms’ responses means the effects of tariffs are likely to ripple through pricing over the next year or two rather than come all at once. Ultimately, we see core PCE inflation remaining near 2.8% this year—0.4 percentage points above our pre-tariff baseline—and subsiding only gradually through 2026 to remain above the Fed’s target. (…)

Upside Surprise in Durables Looks More Rebound than Recovery

(…) Despite the Bloomberg consensus of 59 forecasters looking for a 1% drop in orders, total orders rose 0.9% with some modest upward revisions to the previous month of data as well. This better-than-expected report can be mostly traced to aircraft orders specifically. Orders for defense aircraft popped 9.3%, and nondefense aircraft orders were down ‘only’ 5%. Separately released Boeing data suggested more downside risk from aircraft and point to strike effects still working their way through the data.

While some of the gain may signal a front-running of tariffs by businesses, we expect the strength more so reflects normal volatility and a rebound after some weak data. Consider orders for autos for instance, which bounced 4% in February after four consecutive monthly declines. The 2% gain in electrical equipment and 0.9% gain in fabricated metals orders also followed declines in January. Further, core capital goods orders (excluding defense & aircraft) fell 0.3% last month, signaling a bit of a weaker trend in underlying capital investment demand than implied by the headline growth rate. (…)

On a three-month annualized basis, core capital goods shipments are up 2.9%, which marks the fastest growth rate since 2020. (…)

Was this front loading in Nov-Jan, slumping starting in Feb?

Data: Census Bureau; Chart: Axios Visuals

From S&P Global’s flash March PMI:

Manufacturing output meanwhile fell into decline, contrasting sharply with the gains seen in the first two months of the year (February’s rise in output was the largest recorded since May 2022). Factories reported fewer instances of output having been buoyed by the front-running of tariffs, and new orders growth came close to stalling in the goods-producing sector.

AMERICAN EXCEPTIONALISM

A rather interesting chart from Bridgewater, showing that U.S. GDP growth has underperformed global GDP while U.S. profits outperformed. Bridgewater explains:

US companies need global cooperation. American corporations dominate global profits relative to the US economy’s share of global GDP, and they need the rules in the rest of the world to allow them to do that.

US companies’ global profit share is discounted to grow from here, which will be increasingly difficult in a less-globalized world, particularly given the risk that countries facing tariffs could focus their retaliation toward multinational US companies operating in their economies.

U.S. tariffs are likely to increase relative input costs for American corporations, at least for a year or two. The popularity of American brands across the world seems to be going the same way that the Trump administration is cultivating alliances and friendship.