Donald Trump’s Road to Tariffs Takes Another U-Turn
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From the opinion pages of The Wall Street Journal, this is Potomac Watch. Tariffs or no tariffs, that is the question. And it's not a good one for financial markets or businesses that are trying to figure out what Donald Trump is really up to in his implementation of his signature tariff policy. That's our...

subject for today, and could that uncertainty tip the United States, along with some other things, into an economic recession? Welcome to Potomac Watch, our daily podcast for the Wall Street Journal opinion pages. I'm Paul Gigo, and I'm here with my two colleagues, Kyle Peterson and Alicia Finley. Welcome to you both. Nice to have you here with me in the

The studio. So this week, Trump imposed a 25% tariff on all goods from Mexico and Canada on Tuesday. Then Wednesday, he said, well, not on autos imported from those countries for another month. And then a day later, Thursday, he has now apparently given a reprieve

at least as we discuss this here now, for another month from all goods from Mexico and Canada that abide by the USMCA trade agreement that Trump signed in his first term. The similar exemption for another month might happen on Canadian goods later today. Let's listen to Howard Lutnick, the Commerce Secretary, who signaled this earlier Thursday.

The president is going to decide this today, but he's talking about it. But I think it's likely that it will cover all USMCA compliant businesses.

goods and services. So that which is part of President Trump's deal with Canada and Mexico are likely to get an exemption from these tariffs now. This comes from that Canada has done an enormous amount. They've offered us an enormous amount of work on fentanyl, and so is Mexico. As a matter of fact, the president and I are speaking to our Mexican counterparties today

later today, this morning. So we think this is likely, the likely outcome will be sort of in the middle. So USMCA compliant goods and services will be excluded and everything else. So if you think about it this way,

If you lived under Donald Trump's U.S., Mexico, and Canada agreement, you will get a reprieve from the tariffs now. And if you chose to go outside of that, you did so at your own risk. And today is when...

All right. So Howard Ludnick, I mean, they roll him out to try to somehow suggest that a magical change in Canadian policy and Mexican policy on fentanyl in 48 hours somehow changed the need to impose those tariffs, Kyle.

Are you buying that? I am not buying it. And the real question here is whether this is just another reprieve or whether when the big one comes in April, whether these tariffs are going to go back on, as Trump is now saying. I mean, again, the White House, the administration casting this as part of its

strategic negotiations. The Truth Social post from Donald Trump about a half an hour ago says this, after speaking with President Claudia Scheinbaum of Mexico, I have agreed that Mexico will not be required to pay tariffs on anything that falls under the USMCA, saying that he did this out of respect for President Scheinbaum. But if you are in a business that involves importing goods and services across these borders,

Maybe they're intermediate parts. Maybe you're re-exporting them like automakers often do. Or even if you're just a consumer of

of Mexican produce, tomatoes, avocados, and so forth. I think the real question is whether Trump is gonna pull the trigger then coming in April. - I mean, the fentanyl thing, Alicia, is an excuse, I think. It's just the, oh, well, this justifies the switch. But I think the real reason is the Trump administration's concerned about the market reaction. We've had significant moves in equity markets down every time he comes up with one of these big announcements.

And then they look around and go, oh, geez, maybe that's not such a good idea. And then also in this case with the automakers, Trump had a phone call from them. President, of course, has said this traffic is going to be great for the North American auto industry. The automakers, Ford, Stellantis, and GM-

don't think so. Right. So I think he got a little spooked by the markets. They rebounded a little bit on Wednesday after selling off on Tuesday when they hit. But then they took another tumble on Thursday morning, as I think it's kind of sank in that, well, the auto reprieve really only covered less than 10 percent of all the imports from Canada and Mexico.

And automakers, you're right, they are not happy about this. And they supposedly get a one month reprieve, but that's not going to help them rejigger their supply chains in order to avoid the tariffs. And for that matter, they will become much less globally competitive if they were to try to even

move much of their production that is now in Canada and Mexico back to the U.S.? And one other issue is, could they even find the workers to produce all those cars and plants? Probably not. They certainly can't move them back in 30 days. It's kind of ludicrous. Carolyn Leavitt, the White House press secretary, suggested that, well, now this month reprieve gives them that time to adjust their supply chains and move their production back into the States. It's absurd. The thing is, the president said...

acknowledged in his speech to Congress that, well, there's going to be a little disturbance from the tariffs. By the way, that phrase, I think, is going to be one for the memory books. We're going to remember that as the administration goes ahead. He said, you know, there can be some adjustment, but don't worry. Bear with us. It's going to be short-lived and we're all going to be entering the golden age before too long. That's not the way the firms are seeing it, Kyle.

And already what we're seeing is not just the one month reprieve, but we're seeing businesses start to line up for exemptions.

which happened in his first term. But already we're seeing people say, not us, please, Mr. President. Yeah, this is one of the ways that these tariff decisions end up deepening the swamp. In Trump's first term, they set up an official exemption process for companies who had some component that they could not source in the United States or it wasn't cost effective to ask to go hat in hand to Washington begging for an exemption.

You could go into the Freedom of Information Act requests and find examples of Republican members of Congress, including Mark Meadows, the future White House chief of staff, writing letters on behalf of companies, furniture companies, for example, in their districts saying, please, you know, this is so vital to my district that this furniture company get an exemption for these wood parts that they can only source from Vietnam or China. And that might be right from the company's point of view.

Right. I mean, it might be right. But from the point of view of the member of Congress, man, their ship has come in. I get to represent my company and fight for them and show that I care. But the real problem, of course, is the trade barrier. Well, whose ship really comes in, not even the members of Congress who are doing that as a matter of constituent service. It's the lobbying outfits who are also getting paid for

for representing those kinds of clients. It's not clear whether the Trump administration this time is going to set up any sort of official exemption system, but already you're hearing rumblings. Senator Chuck Grassley of Iowa is out there saying that Canadian fertilizer components are very necessary, vital for U.S. farmers.

Canadian potash. Correct. And is President Trump, who just declared in this speech to Congress that he loves American farmers and is always going to stand up for them, is he going to turn that request down? Yeah, I guess farm equipment too, Alicia, is also going to get some kind of an exemption. Right. Well, everything's getting an exemption right now for a month. For a month. Right. So, I mean, that's the issue is that so many businesses, small businesses, farmers, politically some powerful groups, but also Republican constituents are

are very opposed to these tariffs. They've already been squeezed by inflation over the last several years, and it would make them in many cases globally uncompetitive. All of a sudden their costs increase because of the tariffs. They'll have a hard time exporting. And not only that, Canada and Mexico had threatened retaliatory tariffs

against U.S. companies, U.S. farmers especially, and China has as well, which could really hit the farm belt, which has actually been dealing with low farm and agriculture prices for the last few years. And they've been losing money on most crops for the last three years, according to the American Farm Bureau Federation. That also, the 10% additional tariff on top of the 10% tariff Trump previously imposed on China, those now are taking effect.

And that will in particular affect American farm exports to China because China has retaliated with a 15% tariff on American farm exports.

certainly soybeans part of it. And that means, Alicia, they're going to lose those American exports are going to be less competitive than, say, Brazilian soybeans. Brazil produces a lot of those. So they'll presumably lose some market share. Right. I think that's definitely the farmers already anticipating this. And Trump said during his speech, well, that's OK. You can sell all your farm products

here and that'll be great for you. That's not how it works. I think some of his advisers have already teased using this Commodity Credit Corporation New Deal program, essentially farm subsidy program, to essentially bail out the tariffs and provide them with subsidies to offset the retaliatory tariffs from other countries. The income they'll lose from that loss of exports. And that wasn't cheap in the first term. I think I remember the figure being $30 billion or so in subsidies that had to go to the farmers.

And it might even be bigger this time if those tariffs are as widespread as we think, along with the retaliation that will come with it. All right. We're going to take a break. And when we come back, we'll talk about the impact on the swamp that is the lobbying in Washington of Donald Trump's tariff policies when we come back.

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Welcome back. I'm Paul Gigo here on Potomac Watch, the daily podcast of the Wall Street Journal Opinion Pages. And I'm here with Alicia Finley and Kyle Peterson. Back in the 1980s when we were writing about tax reform and the effort to simplify the tax code, there was a phrase that developed called Gucci Gulch, Kyle. And it referred to the Gucci loafers, expensive Gucci loafers.

that were worn by lobbyists in Washington as they sat outside the hearing rooms and the members' offices to grab the member and say, hey, you know that tax provision? You want to make sure that that doesn't go away or you want to write that one into law. Now, the line outside of the Commerce Department says,

It could go halfway around Washington, D.C. with all the tariff lobbyists that are going to be hired to beseech Howard Lutnick and his team to give an exemption for these tariffs, assuming that they do go ahead. And on that point about going ahead.

Lutnick still signaling and the president that April 2nd is going to be the date for what the president calls the big one on tariffs, which is that's a date for the imposition of reciprocal tariffs on the rest of the world. You have a tariff of 10% on a certain American good. We are going to impose a 10% tariff on your good.

That's the date that the auto tariffs will click in. That's the date that the one on European and Asian cars, on computer chips, on pharma products. And of course, now that would be the date for the Mexican and Canadian tariffs as well. And presumably there'll be some retaliation against that. What does this tell you about Trump's real plan for tariffs? Because there's been a lot of discussion

particularly among Republicans who are trying to support the tariffs. This is just a negotiation. Get with it. He doesn't really want to put these tariffs on. Is that right? I think he does. I think it has been clear for a long time that Trump is a true believer in tariffs as an economic matter. You can go back to interviews

He gave during the campaign talking about how William McKinley made America rich and the Smoot-Hawley tariffs of the 1930s get a bad rap in the history books. The question in my mind has always been whether he would flinch when advisers told him about the economic damage that he could cause.

And the answer so far seems to be maybe. I mean, he has blinked a couple times on putting these tariffs on. But if he still wants this to be seen as a credible threat in negotiations, as the defenders say this is all it is, then at some point, doesn't he have to make good on the threat? If he blinks again in April, won't Canada and Mexico think, you know, this is just a lot of hot air. This is a lot of talk.

And he doesn't really mean it. Yeah, that's a very significant question. I agree with you, Kyle, that the president really does like tariffs for their own sakes. He thinks that they are a good economic tool, that they will draw investment back to the United States, particularly for manufacturing and employment. And he wants high tariff walls.

I think the problem he has is the costs of getting there, Alicia. And those costs may be right now leeching into economic performance in the United States. And one of the big effects is the tariffs on again, off again, on again, off again. Will he? Won't he? When will he? On whom? How much? How long? And what about the retaliation? All of those questions now are circling around the tariff issue.

And they seem to be having a big impact on uncertainty for business investment. Right. And you actually had a decline in business investment in the fourth quarter. And one reason is because there was an uncertainty surrounding the election. Now you have uncertainty about the tariffs.

which makes it hard to invest in new plants and deciding how to reorient your supply chains. Do you need to do this? Is Trump going to continue to offer reprieves? And then you also have for small businesses who are expecting their cost to increase. I mean, you've actually had continued increases in the producer price index, which is basically the prices that businesses pay for goods. That's continued to increase over the last several months.

And so they're looking at their bottom line saying, well, our costs are growing up. Should we really continue to invest? And then there's a broader economic uncertainty now where you're hearing talks about, well, there could be a recession around the corner. I mean, that's debatable. But now businesses have to keep that in mind. If there's also going to be a slowdown in consumer spending and overall macro environment, well, maybe they don't want to invest right now. We're going to take another break. And when we come back, we'll talk about the economic impact

of the tariff policies at a time when the economy is weakening when we come back. I can say to my new Samsung Galaxy S25 Ultra, hey, find a keto-friendly restaurant nearby and text it to Beth and Steve. And it does without me lifting a finger. So I can get in more squats anywhere I can. One, two, three. Will that be cash or credit? Credit.

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From the opinion pages of The Wall Street Journal, this is Potomac Watch.

Welcome back. I'm Paul Gigot here on Potomac Watch with Kyle Peterson and Alicia Finley. A tariff is a tax. A tax is anti-growth. The magnitude of the Mexican Canada tariffs, according to Dan Clifton at the consulting firm Strategas, is about $150 billion. That's 0.5% of GDP by his calculation. Not an enormous tax increase, but still a shot at growth. It's a hit to growth.

And unlike in the first term when they passed the tax reform that was pro-growth first and the deregulation was proceeding first, followed by some of the tariffs and much smaller tariffs than he's contemplating now.

The tariffs are coming first. So you're getting the anti-growth effect first, and there's still uncertainty about will that tax reform pass or the extension of the tax cuts pass. Will it be as good as it was the first time or will it be worse? And then deregulation is coming that's very pro-growth.

But it's still coming. It's real money that is being taken out of the economy no matter how many times President Trump gets on TV and says, you know, the foreign companies pay this. U.S. consumers don't pay this. The economic evidence is pretty overwhelming that most of the costs of his first term tariffs, almost all of it, I think,

was born by U.S. consumers. And the other part of it, I think Alicia's right, is just the uncertainty on both sides of the equation. If you are a U.S. business and you rely on steel or aluminum to make your products,

Are you going to hire right now? Are you going to open a second plant because you think there's some customer growth coming? Or are you going to put that on pause and say, I don't know what steel prices and aluminum prices are going to look like in six months or a year? And the same goes for consumers. If you have a car that is on its last legs, are you going to go out to the lots and try to buy one here shortly?

It seems like some people saw this coming and were doing that already and trying to front run the tariffs by buying autos in December last year. But now some people may be putting those purchases on hold. Well, maybe there'll just be a big surge, Alicia, in auto sales here in the next month before the April 2nd imposition of the Trump tariffs.

What do you think? I think you could probably expect that. And to Kyle's point, if you look at the figures in November and December, they all of a sudden shot up to about an annual rate of $17.5 million a year. And just to put that in perspective, they've been averaging about $15.5 million. So I think a lot of people are going to expect car prices go up.

potentially, you know, by 25 percent, especially with now Trump warning about across the board auto tariffs. And they're going to go out and buy and that may provide a small increase to consumer spending in the short term in the GDP report. That'll just be stealing GDP growth from the future.

quarters. So I wish that I could sit here and help our listeners and say, you know what, he's going to impose them or he's not going to impose them. What do you expect? This is simply too volatile to predict, Kyle. I mean, what I think we're getting is

is the simple fact, what we have to understand is that this all comes down to how Trump feels in any particular day. He wants tariffs. He likes tariffs. He'd love to impose them, but he's going to shift back and forth depending on the costs he's willing to endure at any particular moment. I would add one other thing to the possibility that tariffs are going to be bigger than a lot of market participants have thought, and that is

When it comes to the tax bill, they're going to be looking for some pay-fors, as they say, something to offset the estimated loss of tax revenue. And

Tariffs are one of them. And I think that that's where members of Congress are going to be looking. And I want to ask you about a question that comes from a listener by the name of Tom, a frequent emailer who likes tariffs. And he said the effect of tariffs is no worse than a VAT or a sales tax. They're the same thing, basically. And that therefore we should not be worried about a tariff because Mexico and Canada and the European Union all have these value added taxes, they're called.

What's your response to that? Well, I think I would say two things. One, these European countries are more highly taxed, their middle classes are, than in the United States. And if you believe that a tariff is similar to a value-added tax, then the question is, do you really want to put a 25% value-added tax on things that regular Americans are buying in the grocery store, particularly without any kind of offsetting tax relief? And my answer to that would be no.

And the second, I guess, is that they are also distortive in a way that a final sales tax is not. And if there are companies that are relying on these supply chains that they have set up over many years and put investment in, it upends their business in a way that a straight state or local sales tax does not.

A value-added tax is a tax on consumption. It's like a sales tax. It's taxed on every stage of production, but it's rebated at every stage of production as well when it moves down the chain of production.

So the ultimate effect of a value-added tax is to hit the end consumer once. So if it's a 20% VAT, it is paid by the consumer once. And that is whether or not the automobile, for example, or the widget is made in Germany, say, or imported into Germany. The American exporter does not get punished any more than the German exporter.

producer of that same product. They both get taxed in the end.

once with a value added tax, right? Right. And that hits on another key distinction is that a value added tax hits the consumer. Here, a tariff would actually hit a lot of businesses and then the intermediaries, automakers. And we were talking about parts that go across the border multiple times. You can have a compounding effect with the tariffs piling on. And again, it actually hits a lot of businesses and will dampen investment in that way.

Insofar that does that, it can also hurt workers. A tariff is easier to cascade and therefore have a multiple layered effect on the economy in a way that the value added tax, which only hits once at the end consumption. So

It actually has the potential to be more distorting economically than a value-added tax. So I'm sure Tom disagrees with that, but that's our answer, sir. And we're going to leave our discussion right there for today. We're here every day on Potomac Watch, and the daily drama of Donald Trump's tariff policy will be with us for a long time. Thanks for listening.