Trump's Trade Wars and the Decline in U.S. GDP
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From the opinion pages of The Wall Street Journal, this is Potomac Watch.

The U.S. economy shrinks in the first quarter of 2025 amid President Trump's tariff shock to business and trade. Though the job market keeps plugging along and parsing these official numbers through the tariff distortions, it's not an easy feat. Welcome, I'm Kyle Peterson with The Wall Street Journal. We're joined today by my colleagues, columnist Kim Strassel and editorial board member Mane Ukwe Berua.

A conventional definition of a recession is two consecutive quarters of declining gross domestic product. And as of Wednesday, the U.S. now has one of them in the can. The Bureau of Economic Analysis saying this week that GDP contracted in the first three months of 2025 by an annualized rate of 0.3%.

But the hard question seems to be what is coming in the second quarter. Some suggestions in the data of slowing consumer spending and get this in the first quarter, imported goods rose by about 51 percent. Kim, what is the way that you read this data? That last figure suggests to me that there was a lot of effort by companies elsewhere.

to front-run tariffs that were announced by the Trump administration and quick get everything off the ships and over the border and through customs before those border taxes take effect. That's the best, likeliest read of what we are seeing here in these numbers. You know, when you are calculating GDP, you essentially add up all the activity in the United States, you subtract

imports. And that import number was extraordinary. It subtracted more than 5% from the GDP number. And just the fact that it was such a huge increase over the prior month and the prior quarter, it's a really strong indication that there was this rush by companies in America to try to get ahead and take advantage of

This Trump pause that he has instituted, get ahead of the liberation day that he had announced. And, you know, I have talked to some businesses that are doing this. You know, for instance, they might source one piece of equipment, one thing that they need for their manufacturing process out of Mexico.

And they heard that Trump was going to go all in on tariffs and they tripled their order to try to get as many as they could and lock in that price. So that's what we see happening. We're going to talk about this, I think, in a bit, but there are some indications in the jobs report that this is also what was going on.

So that's a little concerning, especially if you combine it with what seems to be a drop in personal consumption, which certainly suggests that there is a plunging consumer sentiment. We're also hearing that from businesses that are saying that they are seeing that in their storefronts. People are not spending as much money. Folks are rattled both in the business community and

in their homes. And that's, I think, the lesson of the Trump tariffs is this is a big shock to the system and in ways that I think are still going to be very problematic. Menae, what's your read of these figures? And one other thought that I would add here is that this GDP report is for the first quarter of 2025. So that's January, February and March.

And Liberation Day, as Trump calls it, when he announced these huge reciprocal tariffs, was April 2nd. So as I understand it, that is not reflected in this economic contraction. Trump later put those Liberation Day tariffs on hold for 90 days.

On the other hand, you know, that didn't stop the uncertainty. He seemed to be reacting to huge moves in the financial markets. So that is a story that is now coming in the next GDP report. That's part of this second quarter story that we are still trying to figure out as it is unfolding here before us. Yes, I'm glad that you called attention to the timing of

both the jobs numbers and the GDP report, because you're right, they cover a period that doesn't include much of the adjustments that businesses would be making in the wake of Liberation Day, which is when we got the very large reciprocal tariff announcement, which had the possibility to upend just about every industry in the country.

And so what we did see was businesses knowing that President Trump had campaigned on imposing tariffs, had talked from his first days in office about imposing them and what form they might take. Of course, we got those early announcements of

tariffs on Mexico and Canada, which later were delayed, but he still intended to reimpose those. Those are two of the United States' biggest trading partners, and a lot of different businesses would be affected by them, whether they were imposed right away or 30 days down the line. Same thing for steel and aluminum. For companies that are in productive industries and are making use of those metals, they know that they're potentially going to have

a big price shock somewhere down the line. And so you saw businesses starting to make tentative adjustments in advance of the potential imposition of these and other tariffs, but they didn't stop their hiring altogether because as of now, they're still getting fairly robust demand. It's unclear whether Trump is going to move ahead with the plans in exactly the form he proposed or whether he might merely suggest them and then get to work

trying to cut deals very soon. And so if you're a business owner, you're trying to attach a probability to the likelihood that the full tariffs will actually be imposed, but might not be willing to actually lay off workers or halt your plans to expand your business in the meantime until there's a very strong indication that those plans actually are going to be implemented in the

harshest possible fashion. And so we're basically getting tremors right now, but we haven't gotten a full earthquake, or at least it hasn't showed up in the data yet because we're still in such an early period. But you can hear the uncertainty, I think, in the earnings calls, Kim, where in that season where public companies are reporting their results.

for the first quarter and doing calls with investors. One story is suggestions that consumers have been reeling in their spending. The Journal says McDonald's reported its worst sales since the pandemic for established U.S. restaurants. Harley-Davidson sales down by about a quarter from a year earlier. The other side of the ledger, suggestions in these calls that companies are

raising prices or planning to raise prices. Stanley Black and Decker saying that it had raised prices on its tools. Adidas suggesting if the tariffs come into place, shoe prices will go up. Procter and Gamble. And so, Kim, that's another place to be looking for a read of

on what these companies are doing. And again, sometimes it can be hard to tell. They are often saying that our previous guidance about our earnings and our outlook is you can no longer rely on it because the economic environment has changed so much.

But there are many places you can look for warning signs in these calls where companies are suggesting that there's real damage being done to their businesses and their bottom lines. Yeah, a couple of things about what we're hearing from industry. One thing that really stands out in these calls

conference calls and these results are beginning is that people are seeing a pullback from consumer spending across the board. And I think that's just really important because sometimes when you're having certain types of economic difficulty, it might be lower income Americans that are really tightening their belts. But one thing that people were saying that when you've got Harley Davidson, these are not small purchases, for instance, you're seeing that

both higher income Americans and lower income Americans are and middle income Americans are all being a lot more cautious about what they are spending, in particular, their disposable income on. And that is a classic sign of a consumer population that is anxious about the future and worried about what is next to come. So that gets to the confidence question. Hang tight. We'll be right back in a moment.

I'm Kim Strassel from the Wall Street Journal editorial board, and you may know me from my weekly column, Fox News, or the Wall Street Journal's daily podcast, Potomac Watch. I'm excited to tell you that my own weekly podcast, All Things with Kim Strassel, has its very own podcast feed, one that I'm really hoping that you'll hit the button and subscribe to.

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Welcome back. The other piece of these earning calls that I think is worth noting are companies that are tariff advocates for their own industries. They want protection from imported products, but now are screaming or complaining or explaining to investors how broader tariffs

And these Liberation Day tariffs, these 10% global tariffs are going to hurt their bottom lines. The journal has an editorial on one of them called How First Solar, a Tariff Winner, Became a Tariff Loser. This is a quote from the CEO. The president's implementation of reciprocal tariffs earlier this month with rates of 26%, 24%, and 46% applicable

to India, Malaysia and Vietnam respectively, creates a significant economic headwind for our manufacturing facilities in these countries selling into the U.S. market. Another company I would point to as an example of this is the steelmaker Nucor.

And notably, Vice President J.D. Vance was visiting and touring a Nucor Steel facility in South Carolina yesterday on Thursday. This is a piece of what he said to the workers there. We're so proud of every single one of you.

We're so proud of what you do. We're proud of the hard work you do. We're proud of the beautiful products that we make with American steel. And we are never going to allow your job to get shipped off to a country that hates us. We want to protect your jobs, and most importantly, we want to protect the great work you do right here in South Carolina and all across the United States of America.

But listen in to Nucor's earnings call this week. And one of the topics of conversation was tariffs on the equipment that it needs for new expansions, which comes from Europe. It's purchased from Europe and on its raw materials, pig iron and another iron product called DRI. Here was one of the questions from a

market analyst on that call, are you in discussion with the U.S. administration to remove those tariffs on pig iron and DRI? And the Nucor CEO said, essentially, we're working to make sure that the administration has the right information, the right understanding of the impacts related to this industry. Absolutely. We're doing that every day.

And Manet, that just shows, I think, how tangled this tariff story often is. There is pig iron that comes into the United States, much of it from Brazil. Nucor itself has a subsidiary in Trinidad that makes this DRI iron that goes into its steelmaking operations.

And all these companies, they want protection in their business for their competitors. But when the tariffs get broader than that, it starts to turn out that it's their raw materials and their equipment that gets hit. And meantime, everybody is hoping that consumers don't notice. And this tariff situation doesn't push the economy into a recession. Yeah, well, on the first point about how businesses can be both helped and hurt by tariffs, I

There isn't a single complex business in this country that doesn't have some kind of components that it's importing for the logistics of how it produces goods, or at least is not dependent on suppliers, for example, or on purchasers who are also depending on imports coming from overseas.

So if you are in one of these big legacy industries and are producing commodities, you might feel like we're going to be net beneficiaries of tariffs because we face so much steep foreign competition. With steel, for example, about 35% of steel consumed in the United States is produced domestically. That means about two thirds is coming from overseas. A lot of that is coming from China. And so these steel companies say, bring on the tariffs. We absolutely love those. But as you pointed out,

The equipment that they need to be able to produce the steel, if they're expanding or refurbishing their plants, is largely coming from overseas. Very little of it is produced in the United States. I think Germany in particular produces a lot of the components that are used in these steel plants, both the big blast furnaces and also the recycled steel for companies like Nucor. And so they have to simultaneously be thinking about

how can we use our relationship with the White House to say, it's not enough to just put a tariff on imported steel. We're actually going to need exemptions on some of these other tariffs that you've imposed on a whole bunch of other goods. And because Nucor and some of these other steel producers are politically connected, you could very well see those kinds of exemptions come down the line very soon. The problem is,

you're not going to see that for every single company in every single industry. It's going to depend a lot on these relationships. It's going to depend on what the Trump administration thinks is going to be politically valuable to them. And so we're going to see a lot of carve outs, and that's not necessarily going to reflect fairness or sanity in the American economy. That brings us to the jobs numbers, which were released by the Labor Department on Friday.

Kim, a pretty decent number. It looks like the U.S. in April adding 177,000 net new jobs. Economists polled by the Journal suggested that they were expecting about 133,000. But given all this uncertainty, the Journal's news story quotes an investment banking economist saying that this is solid data that no one wants to trust.

So, Kim, what is your read of these jobs numbers, given everything else that happened in the month of April in the economy, all this tariff business? So just on its face, you would certainly think that this is a good, solid number. It came in above expectations. The number itself is a healthy job growth. It marks 52 months.

of consecutive job growth in the United States. The reason no one trusts it is for the same reason everyone's looking with a skeptical eye at what those GDP numbers mean. There is worry that what you see here are businesses on the hiring front as well, having rushed to get ahead of the tariff moment there.

And hiring more workers, maybe on a temporary basis in order to make that happen. And one of the things that stuck out in those jobs numbers were, for instance, there was a big portion of them were hires in the transportation and warehousing sector.

So could that be folks that are driving the trucks, imported goods, the people that are warehousing and stockpiling this stuff to get ready for the longer tariff siege? That's one thing. The other reason that no one has a lot of trust is that the last couple of months of unemployment numbers came in pretty healthy and then they were revised down once government agencies had taken an even closer look at things. And also because these numbers...

do not yet take into account certain things that have happened and yet are coming. Like, for instance, a very pretty small, modest number were layoffs from the federal government, even though we know that Doge is doing a lot of cutting there and that the administration is really right-sizing this federal government. The reason those haven't shown up yet is because a significant number of those workers are still on furlough or they took their retirement benefit

package, their severance package, and they're still getting paid. And so officially, it still looks like they're on the government payroll, even though they're not. Those numbers likely won't really start to filter through the system until later this fall. So there's a great deal of unknowns about what these ones mean. People, I think, are looking at March as a sort of like, well, we're going to have to wait to see what it really means in the coming months. Hang tight. We'll be right back in a moment.

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Don't forget, you can reach the latest episode of Potomac Watch anytime. Just ask your smart speaker. Play the Opinion Potomac Watch podcast. From the opinion pages of The Wall Street Journal, this is Potomac Watch. Welcome back. A big unknown to Manet, as always, is what Donald Trump might do next. He put a 90-day pause on those reciprocal tariffs. The White House and advisers keep suggesting that there are scads of negotiations going on

deals forthcoming. You get conflicting reports about how much substance there actually is to that. And then particularly on China, the huge tariffs that President Trump put on China, there have been suggestions by the Treasury Secretary that those are likely to come down. On Friday, China opened the door, I guess, to that a little bit. Here is a statement from

from a Commerce Ministry spokesperson saying, China's position is consistent. If you want to fight, we will fight to the end. If you want to talk, our door is wide open. If the U.S. wants to talk, it should show sincerity to talk and be prepared to act in correcting its erroneous actions and canceling unilateral tariffs.

unquote. And, Manay, I am not sure if that is intended to goad President Trump into not canceling the tariffs, but it's easy for me to imagine that might be the kind of result essentially suggesting that China is okay to do some talking on these tariffs and these trade negotiations. But first,

President Trump has to back down. I'm not sure how likely that is. And on the other hand, I'm not sure how likely some people in the White House even think that should be, given how China is a bad actor on the world stage, including in its mercantile trading relationships and its theft of U.S. intellectual property.

Well, in general, I do think that Trump seems to want to avoid the worst potential carnage that a lot of economists, a lot of investors are predicting would happen if he maintains particularly the China tariffs at the level that they are currently set.

I think that he went into this probably thinking that there was broad political support for a harsh approach to China in particular and wanting to see that through. But the reaction of investors seeing the stock market decline

also seeing the bond market be thrown into turmoil in a way that he really didn't expect. Nobody knows exactly who or what it was that got to Trump, but I don't think that he originally wanted to delay the reciprocal tariffs and he ended up doing that. And I think that he's been much more vocal and indicating much more clearly that he does want to get to a deal with China as opposed to merely maintain tariffs at that extraordinarily high level because he knows that the damage would be too much.

But I do think that he also wants to be able to exit the process, saying that he has delivered a win, that he's forced China to curb some of its most aggressive trading practices, that he has gotten companies to reinvest in the United States. And so the approach that China is taking of basically daring him

to back down before they will directly negotiate is not likely to actually attract him to any kind of process. He's going to want them to make some signals that they are willing to make concessions too. And so he'll be able to emerge from whatever talks ensue and say that this was a victory for the United States.

even if it ends up not being a deal that's particularly fruitful. We saw that in his first term with the negotiations with China too. You had them agree to make some purchases of American goods and agricultural products like soybeans, whatever. I think very few economists would say that this was economically significant, but it allowed Trump to go on the campaign trail and boast to his constituents about how he delivered for the United States. So

China has to be able to offer something that he feels is enough that he'll be able to spin it into a victory. Kim, what are your thoughts on this question of China? I find it difficult to read in part because the messages coming out of the Trump administration, the explanations for its trade actions seem to be so different and so contradictory sometimes. And I'd throw one last piece of news in here this week.

Multiple media reports that Apple is preparing to move production of most of the iPhones that are sold in the United States from China to India. And there's one view of what the Trump administration is doing that would see that as a success.

If China is the aggressor and the adversary, then friend-shoring, to use a term, would be good for the United States. Getting that kind of manufacturing, getting those supply chains to friendlier countries would be a success.

On the other hand, some of that happened during President Trump's first term. The tariffs on China that he imposed back then caused some people, I think, to move supply chains into other countries, including Vietnam. But there are some people surrounding the president who seem to think that that is the definition of failure, that that's evasion. And the only real answer is to bring everything back home. And so, Kim, that is part of why I find it hard to gauge

what is going on here is because the president is surrounded by different advisors who seem to have diametrically opposed views of what the whole point of these tariff regimes is supposed to be. Yeah, in terms of the question of China specifically, I would look at this more as a standoff in trying to gauge who will crack when. And I thought it was very notable that China made that statement because it suggests that some things are getting to them.

And look, the reality is, is that this is hard and tough on both countries. The United States is about to see some significant price hikes on goods from China for those that continue to come in. And that's going to be harder on the U.S. economy and harder on the companies and manufacturers that need those goods.

and it's going to be harder on consumers. At the same time, arguably, this is proving a lot more painful to China at the moment than it is to the United States because one, and this was part of the president's gripe, they don't rely as much on imports from us, but they are seeing a huge drop. There's a 60% drop since I think the beginning of April in container ships with products from China coming to the United States.

There are companies, as you note, major manufacturers that are relocating outside of China to work in another place. Part of the trade negotiations that the Trump team is having with other countries involves tightening up

This kind of loophole China had been using where they would send their goods to another country and that country would do the exporting to sort of get around some of the tariffs the United States had been imposing on it. So this is going to be hard on its economy. And it has continued to say, we're never going to give up. We won't surrender. And, you know, if the rest of the world bands together, the United States will be an island forever.

But right now, this is proving very economically disruptive to China. And I think the Trump team's bet, at least at the moment, is that if this is really going to be a war to see who can stand firm the longest, that the United States is in a better position. Again, we're not going to be able to do that.

Whether or not that's good for our economy is a different question. But if you are simply in a staring contest, I think the U.S. bet is that it can keep its eyes open a lot longer. Thank you, Kim and Manet. Thank you all for listening. You can email us at pwpodcast at wsj.com. If you like the show, please hit that subscribe button. And we'll be back next week with another edition of Potomac Watch.