Edward Conard

Top Ten New York Times Bestselling Author

  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a must-read for serious students of economic policy.” - Glenn Hubbard, Dean, Columbia Business School, and former Chairman of the Council of Economic Advisers
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…challenges misconceptions that distort our economic debates.” - Arthur Brooks, President of the American Enterprise Institute
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…reminds us that inequality sends a signal of what society lacks most, in America’s case, entrepreneurship and risk taking.” - Lawrence Lindsey, CEO, The Lindsey Group, former Director of the National Economic Council
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “Unintended Consequences is far smarter and more thought-provoking than most economics written for the general public” - Greg Mankiw, Harvard University, Former Chairman of the Council of Economic Advisors
  • “…serious thinking for serious thinkers. …a thought-provoking blueprint for growing middle- and working-class incomes.” - Mitt Romney, former Governor of Massachusetts
  • “…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
  • “…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
  • “…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
Upside of Inequality Oxford Unintended Consequences

Macro Roundup


Wednesday, April 2, 2025

AI Summary. Ample physical capacity keeps inflation low and stable and allows lower interest rates, but when demand catches up to capacity constraints, better returns in the physical economy pull capital back to fund expansion, making a commodity super-cycle a capital-expenditure cycle. In real terms, total energy investment is below its level 15 years ago.

Jeff Currie and James Gutman Carlyle Group
Date Posted:
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Global energy capex remains below 2010 levels in real terms. Per Carlyle’s Jeff Currie, supply investment is “inadequate” relative to demand growth, which is likely to exceed the 2.5% annual pace seen over the past 60 years.

How does physical capacity shape inflation, interest rates, and capital investment?

Core argument: Real overall energy investment today is lower than fifteen years ago, with oil and gas modestly crowded out by renewables, nuclear growing from a very low base, and grid investment flat, according to the authors.

When physical capacity is plentiful, inflation is low and stable, which allows for lower interest rates. Eventually, however, demand catches up to physical capacity constraints, creating potential for better returns in the physical economy than the financial economy, motivating the redirection of capital back into the physical economy, as we saw in the 1970s (1968-1980) and the BRICs super-cycle (2002-2014). The higher cost of capital simply reflects better returns in the physical economy and the need to attract capex to expand production capacity, which is where we believe we are nearing today. As a result, a commodity super-cycle is nothing other than a capex cycle. In real terms, overall investment in energy today is actually lower than fifteen years ago, when the focus on renewables really took off. Oil and gas have been modestly crowded out by renewables, nuclear has grown from a very low base, and grid investment has been flat.

Takeaways by Macro Roundup® AI

  1. Real overall energy investment today is lower than fifteen years ago, with oil and gas modestly crowded out by renewables, nuclear growing from a very low base, and grid investment flat, according to the authors.
  2. The authors argue that plentiful physical capacity keeps inflation low and stable and permits lower interest rates, until demand catches up to capacity constraints and returns in the physical economy exceed those in the financial economy.
  3. The authors contend a commodity super-cycle is nothing other than a capex cycle, as in 1968–1980 and the BRICs super-cycle of 2002–2014, and believe conditions are nearing that point today.

Related Articles:

  • Heliocentrism — An energy use must be electrified before green grid electricity can decarbonize it, and while US grid decarbonization continues at a steady pace, the electricity share of final US energy consumption has grown little. Transmission line growth runs well below Department of Energy targets for 2030 and 2035, and transformer delivery times have stretched from 4–6 weeks to 2–3 years.
  • Electricity 2025 — US electricity demand is projected to grow about 2% annually over 2025-2027, an upward revision from an earlier 1% forecast. A study commissioned by the US Department of Energy found data centre electricity use rose from about 60 TWh in 2014 to 176 TWh in 2023, and could reach 325-580 TWh by 2028.
  • Economic Growth Now Depends on Electricity, Not Oil — Average annual electricity load growth reached 3% and is projected to continue at that rate for five years, with utilities raising expected peak demand for 2029 by 12%, or 101 gigawatts, driven by data centers, new factories, electric vehicles, heat pumps, and hydrogen production.

AI Summary. Using variation in U.S. state minimum wages, the authors estimate that each $1 increase predicts a 5% (0.3 percentage point) rise in the likelihood of union membership among people ages 16–40. Membership declines among the minimum wage's most direct beneficiaries, consistent with free-riding, while gains occur among broader groups not directly affected.

Jeffrey Clemens and Michael Strain American Enterprise Institute
Date Posted:

During the 2010s, a $1 increase in a state’s minimum wage “predicts a 5% (0.3 pp) rise in the likelihood of union membership among individuals ages 16-40,” all from “groups that are not directly affected by the minimum wage.” @MichaelRStrain

Do minimum wage increases raise union membership?

Core argument: Using variation in U.S. states' minimum wages during the 2010s, the authors estimate that each $1 increase in the minimum wage predicts a 5 percent (0.3 percentage point) rise in the likelihood of union membership among individuals ages 16–40.

Over the past decade, organized labor has played a significant role in advocating for minimum wage increases. Why might this be, given that the minimum wage may act as a substitute for the bargaining power offered by labor unions? In this paper, we study the interplay between minimum wages and union membership. Using variation in U.S. states’ minimum wages during the 2010s, we estimate that each dollar in minimum wage increase predicts a 5 percent increase (0.3 pp) in the likelihood of union membership among individuals ages 16–40. Consistent with a classic “free-riding” hypothesis, however, we find that minimum wage increases predict declines in union membership among the minimum wage’s most direct beneficiaries. Instead, increases in union membership occur among much broader groups that are not directly affected by the minimum wage. A variety of non-monetary motivations may be at work. Coalition politics, for example, can shape the strategies and tactics of unions as well as the outlooks of their members, [and] policy advocacy may bolster an interest group’s cause by enhancing its public image.

Takeaways by Macro Roundup® AI

  1. Using variation in U.S. states' minimum wages during the 2010s, the authors estimate that each $1 increase in the minimum wage predicts a 5 percent (0.3 percentage point) rise in the likelihood of union membership among individuals ages 16–40.
  2. Consistent with a "free-riding" hypothesis, the authors find that minimum wage increases predict declines in union membership among the minimum wage's most direct beneficiaries, while gains occur among broader groups not directly affected.
  3. The authors point to possible non-monetary motivations for labor's advocacy, including coalition politics shaping union strategies, tactics, and members' outlooks, and policy advocacy bolstering an interest group's cause by enhancing its public image.

Related Articles:

  • “Compensate the Losers?” Economic Policy and Partisan Realignment in the US — The authors argue that partisan realignment by education reflects Democrats' declining supply of "predistribution" policies such as job guarantees, higher minimum wages, protectionism, and stronger unions, which less-educated Americans favor while more-educated Americans prefer taxes and transfers. They estimate changing views of the parties' economic policies explain roughly half the shift.
  • Do Minimum Wages Reduce Job Opportunities for Blacks? — The authors find evidence that higher minimum wages reduce employment among low-skill Black workers across every group examined — teens, high school dropouts, and young workers with at most a high school education — with larger effects for Black males, while such effects are not very detectable for whites.
  • Menu Adjustment in Response to the Minimum Wage: A Return to the New Jersey-Pennsylvania Border — Comparing New Jersey restaurant menu prices with those in neighboring Pennsylvania, where the minimum wage was unchanged, the authors estimate that each $1 increase in the minimum wage raised the price of an item by 7.0 cents on average. Pass-through was larger for items requiring more employee preparation steps, adding 0.3 cents per additional step.

AI Summary. Steel tariffs added about 1,000 jobs among protected steelmakers while cutting 75,000 jobs in steel-using industries such as autos and construction, and across all tariffed industries duties raised factory employment 0.4% but reduced payrolls 2%. Tariffs on Chinese furniture and appliances raised US prices and were borne by US importers and consumers.

Michael Cembalest J.P. Morgan
Date Posted:

Michael Cembalest notes in 2019, tariffs on Chinese furniture resulted in “almost a 1:1 increase in furniture prices, and US domestic furniture production declined.”

Do tariffs cost more jobs downstream than they protect?

Core argument: Steel tariffs added roughly 1,000 jobs among protected steelmakers while cutting employment by 75,000 in steel-using industries such as autos and construction as prices rose and sales fell.

When thinking about tariffs, it’s important to look at the big picture as well as the affected industry itself. While steel tariffs created 1,000 jobs for steelmakers protected by tariffs, they reduced employment by 75,000 in steel-using industries such as autos and construction as prices rose and sales fell. Similarly, in all industries affected by Trump tariffs, duties boosted factory employment by 0.4% but reduced payrolls by 2% due to rising overall costs and retaliatory tariffs. We can also take a closer look at both furniture and appliance sectors. In 2019, the US raised tariffs on Chinese furniture. There was almost a 1:1 increase in furniture prices, and US domestic furniture production declined. This is the opposite of what the Administration believed would happen. The same is true when looking at tariffs on Chinese appliances. US importers and consumers paid the price, rather than Chinese appliance manufacturers whose prices remained stable.

Takeaways by Macro Roundup® AI

  1. Steel tariffs added roughly 1,000 jobs among protected steelmakers while cutting employment by 75,000 in steel-using industries such as autos and construction as prices rose and sales fell.
  2. Across industries affected by Trump tariffs, duties raised factory employment by 0.4% but reduced payrolls by 2% as overall costs rose and trading partners retaliated.
  3. The 2019 US tariffs on Chinese furniture passed through to prices nearly 1:1 while US domestic furniture production declined, and tariffs on Chinese appliances were borne by US importers and consumers as Chinese producers' prices held stable.

Related Articles:

  • Help for the Heartland? The Employment and Electoral Effects of the Trump Tariffs in the United States — The authors find that the combined effect of U.S.-China trade war import tariffs, retaliatory tariffs, and farm subsidies on employment in exposed U.S. locations was at best a wash and possibly mildly negative, while residents of tariff-protected areas became less likely to identify as Democrats and more likely to vote Republican.
  • Steel Productivity has Plummeted Since Trump’s 2018 Tariffs — Output per hour in the U.S. steel industry has fallen 32% since 2017, following the imposition of 25% tariffs on steel imports, while output per hour for the economy as a whole rose 15%. U.S. steel-using firms, which employ roughly 45x as many Americans as steel producers, pay about 75% more for steel than global competitors.
  • Trump Warned U.S. Automakers Not to Raise Prices in Response to Tariffs — The White House warned chief executives of major U.S. automakers that it would look unfavorably on raising car prices in response to tariffs, leaving some executives concerned about retaliation. Automakers depend on federal regulators for critical approvals, though it is unclear what action the administration could take.

AI Summary. Broad 25% tariffs are projected to cut Canadian and Mexican GDP by about 5% and 7% respectively, and US GDP by over 2%, as intermediate goods like steel grow more expensive and export industries suffer. Measured by total goods trade with the US as a share of GDP, the US is 3-4x more exposed than most of its trading partners.

Ben Inker and John Pease GMO
Date Posted:

Total goods trade as a % of GDP shows the US is 3-4x more exposed than its trading partners, noting tariff risks, on top of high valuations, make the “American stock market a hard pitch”, suggests global asset manager GMO.

Do broad tariffs hurt the U.S. economy more than assumed?

Core argument: Under broad 25% tariffs, the authors expect GDP shocks of roughly 5% for Canada and 7% for Mexico, alongside a hit of over 2% of GDP for the United States.

U.S. exceptionalism often has us assuming that an American-made trade war would be worse for the world than it would be for America. It begs reminding that U.S. trade is of much larger relevance for the U.S. economy than it is for the economy of most other countries in the world. Under broad 25% tariffs, we should expect extreme shocks to the GDP of Canada and Mexico (5% and 7%, respectively). We should also expect a very unpleasant jolt to the U.S. economy (of over 2% of GDP), where intermediate goods (like steel) will become more expensive, and export-driven industries take it on the chin. Exhibit 2 – which looks at total goods trade with the U.S. as a percentage of GDP – shows that the U.S. is 3-4 times more exposed than most of its trading partners. As we see it, U.S. companies have at least as much at risk as non-U.S. ones from U.S. tariffs, so we don’t see a reason to retreat from our non-U.S. versus U.S. bet on those grounds.

Takeaways by Macro Roundup® AI

  1. Under broad 25% tariffs, the authors expect GDP shocks of roughly 5% for Canada and 7% for Mexico, alongside a hit of over 2% of GDP for the United States.
  2. The authors argue U.S. trade matters more to the U.S. economy than to most other countries, citing total goods trade with the U.S. as a share of GDP, which leaves the U.S. 3-4 times more exposed than most trading partners.
  3. The authors see U.S. companies as having at least as much at risk from U.S. tariffs as non-U.S. ones, with intermediate goods like steel becoming more expensive and export-driven industries taking the hit, and maintain their non-U.S. versus U.S. bet.

Related Articles:

  • Message to President Trump: We (Europe) Take As Much From You (The US) As You Take From Us — The US trade deficit with the euro area in goods and services combined is about €57bn, under 0.2% of US GDP, and the euro area pays roughly €49bn more in investment income and wages to the US than it receives. Counting these flows, the euro area's current account with the US is effectively balanced.
  • The Trade War Will Pound Stocks — Efforts to cut U.S. trade deficits and escalate tensions with allies risk deterring foreign capital, and foreigners need only stop buying U.S. assets to hit prices, as China and Russia already have. Bridgewater estimates nonfinancial U.S. firms capture 39% of global profits though the U.S. is 15% of world output.
  • US Exceptionalism: Drivers of Equity Outperformance and What’s Needed for a Repeat — US companies need about 7% earnings-per-share growth to deliver a normal 4% equity risk premium above the risk-free rate, versus about 3% for other developed markets, with the highest expectations embedded in technology and the largest US tech firms. Chinese companies could generate a 4% risk premium over Chinese bonds with no earnings growth.

AI Summary. Underlying inflation is running about 1–1.5 percentage points faster than normal, driven by both services and goods, with goods inflation accelerating while services inflation slows, partly an illusion tied to healthcare measurement. Income growth is slowing but remains persistently faster than pre-pandemic, consistent with modestly above-target inflation.

Matt Klein The Overshoot
Date Posted:

Wages are growing at a 4.2% annual rate, well above the pre-pandemic level of 2.9%, consistent with inflation running “about 1-1.5 percentage points faster than normal.” @M_C_Klein

Is underlying inflation still running faster than normal?

Core argument: Underlying U.S. inflation is running roughly 1–1.5 percentage points faster than normal, reflecting excessive inflation in both supercore services and goods.

Underlying inflation is still running about 1-1.5 percentage points faster than normal, thanks both to excessive inflation in supercore services and goods. Goods inflation had been accelerating, while services inflation had been slowing, although that is partly an illusion thanks to issues with healthcare inflation. Income growth is slowing somewhat, but is still persistently faster than pre-pandemic, consistent with the modestly faster-than-target inflation. Job churn has stabilized below where it was before the pandemic, consistent with the collapse in relative wage gains for job-switchers over job-seekers, but there is still a large gap between actual labor churn and what would be expected based on the pace of wage growth.

Takeaways by Macro Roundup® AI

  1. Underlying U.S. inflation is running roughly 1–1.5 percentage points faster than normal, reflecting excessive inflation in both supercore services and goods.
  2. Goods inflation had been accelerating while services inflation had been slowing, though the services slowdown is partly an illusion stemming from issues with healthcare inflation.
  3. Job churn has stabilized below its pre-pandemic level, consistent with the collapse in relative wage gains for job-switchers over job-seekers, yet a large gap remains between actual churn and what the pace of wage growth would imply.

Related Articles:

  • From Above to Below — Tariffs are estimated to weigh on growth through three channels: higher consumer prices that cut real income, tighter financial conditions, and trade policy uncertainty that delays business investment. The authors estimate tariffs will subtract 0.8pp from US GDP growth over the next year, with only 0.1–0.2pp offset by tax cuts and deregulation.
  • Consumer Sentiment Deteriorating Rapidly — University of Michigan survey data show consumer sentiment declining for households earning both above and below $100,000, with job-loss worries at levels typically seen in recessions and a record-high share of consumers saying business conditions are worsening. Income expectations are falling while inflation expectations are rising rapidly.
  • The Richest Americans Kept the Economy Booming. What Happens When They Stop Spending? — The authors of an Institute for New Economic Thinking paper estimate that wealth gains among the top 10% of US households were large enough to explain the rise in total consumer spending above its longer-term trend, sustaining their spending even as their inflation-adjusted incomes shrank.

AI Summary. China's economic problem is too few good jobs rather than too few workers, a demand shortfall rather than a supply constraint, and surplus rural labor means that will remain true for a long time. Further manufacturing investment would produce more excess capacity and invite protection against Chinese export surges, including from Europe.

Martin Wolf Financial Times
Date Posted:

Martin Wolf predicts that Europe will mirror Trump’s tariffs to counter “inevitable surges of Chinese exports.” He argues that Chinese policy needs to shift “income towards households, developing the social safety net and increasing public consumption.”

Is China's problem too few good jobs, not workers?

Core argument: China's core economic constraint is a shortage of good jobs rather than of workers, a demand problem rather than one of potential supply, and surplus rural workers will keep it that way for a long time.

Many think that China’s demographic challenges are bound to destroy the economy. But the problem right now is too few good jobs, not too few workers. It is a demand problem, not one of potential supply. That will remain the case for a long time, because of surplus rural workers. During the early part of this century, the demand hole was partly filled by a huge current account surplus. Then, when this became impossible, after the financial crisis, the still bigger hole that then emerged was filled by a huge surge in investment in real estate and infrastructure. The former is already falling. But investing even more in manufacturing just guarantees ever more excess capacity and thus protection aimed against the inevitable surges of Chinese exports. Thus, the Europeans will follow Trump’s example. Indeed they will do so because of the diversion of China’s exports to their markets that will follow from his example.

Takeaways by Macro Roundup® AI

  1. China's core economic constraint is a shortage of good jobs rather than of workers, a demand problem rather than one of potential supply, and surplus rural workers will keep it that way for a long time.
  2. China's demand shortfall was filled early this century by a large current account surplus and, after the financial crisis, by a surge in real estate and infrastructure investment, with real estate investment already falling.
  3. Further Chinese investment in manufacturing guarantees more excess capacity and protection aimed against surges of Chinese exports, and Europeans will follow Trump's example as those exports are diverted to their markets.

Related Articles:

  • Economist Michael Pettis on China’s Consumption Paradox and the Pitfalls of a Trade War — China's low household consumption share of GDP is not an oversight but is integral to its manufacturing competitiveness, so raising one requires lowering the other. Japan's experience shows consumption share fell for five years after it pledged to raise it, then took 17 years to rise 10 percentage points as manufacturing's share shrank.
  • China is Suffering its Own ‘China Shock’ — Academic analysis of 12 labour-intensive Chinese manufacturing industries estimates average employment fell about 14%, or nearly 4mn jobs, between 2011 and 2019, with textile roles down 40%; a further analysis of the same sectors found 3.4mn more jobs lost through 2023. Researchers argue industrial upgrading and automation are cutting demand for lower-skilled workers and depressing their wages.
  • China Needs a Very High Consumption Share of GDP Growth — If consumption growth accounted for 70% of China's future GDP growth with nominal GDP growing 6% a year, the author estimates it would take 16 years for consumption to rise from 53.4% of GDP to 63–64%. Even with consumption driving 90% of growth, the shift would take 6 years.

Thursday, April 3, 2025

AI Summary. The authors estimate that all US tariffs enacted in 2025 bring the average effective tariff rate to 22.5%, the highest since 1909, raising the short-run price level by 2.3% — an average consumer loss of $3,800 per household, or $1,700 for the lowest-income households. They project US real GDP growth 0.9 percentage points lower and $3.1tn in revenue.

Ernie Tedeschi Yale University
Date Posted:

The new round of tariffs leaves the mean US effective tariff rate at 22.5%, the highest level since 1909. All 2025 tariffs to date raise $3.1 trillion over 2026-2035, at the cost of a persistent 0.6% yearly reduction in real GDP. @ernietedeschi.

How much do new tariffs cost households, growth, and revenue?

Core argument: All 2025 U.S. tariffs bring the average effective tariff rate to 22.5%, the highest since 1909, with the April 2 action alone equivalent to a 11.5 percentage point rise in the effective rate.

The April 2nd action is the equivalent of a rise in the effective US tariff rate of 11 ½ percentage points. The average effective US tariff rate after incorporating all 2025 tariffs is now 22 ½%, the highest since 1909. The price level from all 2025 tariffs rises by 2.3% in the short-run, the equivalent of an average per household consumer loss of $3,800 in 2024$ [$1,700 at the bottom of the income distribution]. The price level from the April 2nd announcement alone rises by 1.3% in the short run, the equivalent of an average per household loss of $2,100 in 2024$ [$980 at the bottom]. Both the April 2nd tariffs alone and all 2025 tariffs together disproportionately affect clothing and textiles, with apparel prices rising 17% under all tariffs. US real GDP growth is -0.5pp lower in 2025 from the April 2nd announcement and -0.9pp lower from all 2025 tariffs. In the long-run, the US economy is persistently -0.4% and -0.6% smaller respectively. All tariffs to date in 2025 raise $3.1 trillion, including the effect of retaliation to date, with $582 billion in negative dynamic revenue effects.

Takeaways by Macro Roundup® AI

  1. All 2025 U.S. tariffs bring the average effective tariff rate to 22.5%, the highest since 1909, with the April 2 action alone equivalent to a 11.5 percentage point rise in the effective rate.
  2. All 2025 tariffs raise the price level by 2.3% in the short run, an average per-household consumer loss of $3,800 in 2024 dollars and $1,700 at the bottom of the income distribution, with apparel prices rising 17%.
  3. U.S. real GDP growth is 0.9 percentage points lower in 2025 from all 2025 tariffs and 0.5 points lower from the April 2 announcement alone, leaving the economy persistently 0.6% and 0.4% smaller in the long run.

Related Articles:

  • Steel Productivity Has Plummeted Since Trump’s 2018 Tariffs — Output per hour in the U.S. steel industry has fallen 32% since 2017, following the imposition of 25% tariffs on steel imports, while output per hour for the economy as a whole rose 15%. U.S. steel-using firms, which employ roughly 45x as many Americans as steel producers, pay about 75% more for steel than global competitors.
  • Help for the Heartland? The Employment and Electoral Effects of the Trump Tariffs in the United States — The authors find that the combined effect of U.S.-China trade war import tariffs, retaliatory tariffs, and farm subsidies on employment in exposed U.S. locations was at best a wash and possibly mildly negative, while residents of tariff-protected areas became less likely to identify as Democrats and more likely to vote Republican.
  • Without Spending Cuts, Brace for Slow Growth — The author argues that US trade deficits have funded debt-financed consumption rather than domestic business investment, noting that since 2000 real interest rates have tended to fall as trade deficits widen while business investment has been uncorrelated with both. If tariffs shrink trade deficits, interest rates could rise and worsen America's fiscal balance.

AI Summary. US "reciprocal" tariff rates were set at roughly half of each country's bilateral trade balance as a share of its imports, with a 10% floor, so they bear little relation to standard measures of trade distortions. Because rates track bilateral deficits, the author argues negotiations are unlikely to deliver quick tariff reductions.

Alex Etra Money: Inside and Out
Date Posted:

Trump’s “reciprocal” tariffs have been set to target bilateral trade deficits: rates are ~50% of the bilateral deficit-to-imports ratio, with a 10% floor. @EtraAlex suggests “negotiations should not be expected to deliver any quick tariff reductions.”

Are reciprocal tariff rates based on bilateral deficits rather than trade barriers?

Core argument: The US "reciprocal" tariff rates were set at roughly half of each country's bilateral trade balance-to-imports ratio, with a 10% floor, rather than from measured tariff and non-tariff barriers.

The calculation of the effective tariff and non-tariff barriers was rather simple: linked to the bilateral trade balance-to-imports. The US reciprocal tariff was then set at roughly half this bilateral balance—with 10% as a lower bound. The reciprocal tariffs therefore bear little relation to perceived barriers. In other words, there isn’t any logic to the announced reciprocal tariffs when compared with standard metrics of “trade distortions.” And the focus on bilateral balances is quite remarkable in itself. With tariff rates set in proportion to bilateral trade deficits, it seems clearer now that the goal is simply to reduce such deficits (in line with Trump's long-standing rhetoric). This in turn may mean that negotiations should not be expected to deliver any quick tariff reductions—something many still hope for.

Takeaways by Macro Roundup® AI

  1. The US "reciprocal" tariff rates were set at roughly half of each country's bilateral trade balance-to-imports ratio, with a 10% floor, rather than from measured tariff and non-tariff barriers.
  2. Because the tariff formula rests on bilateral trade balances, the announced reciprocal tariffs bear little relation to standard metrics of trade distortions.
  3. Setting tariff rates in proportion to bilateral trade deficits suggests the goal is simply to reduce those deficits, which may mean negotiations will not deliver quick tariff reductions.

Related Articles:

  • The Evolution of Global Trade in 2024 — Global trade imbalances consist of one very large surplus and one very large deficit: China's goods surplus exceeds $1tn a year, while the U.S. non-petroleum deficit drives the Asian surplus. The author argues a Chinese surplus this large can be sustained only alongside a large U.S. deficit.
  • Redacted: Straight Talk From the CEO Front Lines On Liberation Day — Steel tariffs added about 1,000 jobs among protected steelmakers while cutting 75,000 jobs in steel-using industries such as autos and construction, and across all tariffed industries duties raised factory employment 0.4% but reduced payrolls 2%. Tariffs on Chinese furniture and appliances raised US prices and were borne by US importers and consumers.
  • Tariffs: Making the U.S. Exceptional, But Not In A Good Way — Broad 25% tariffs are projected to cut Canadian and Mexican GDP by about 5% and 7% respectively, and US GDP by over 2%, as intermediate goods like steel grow more expensive and export industries suffer. Measured by total goods trade with the US as a share of GDP, the US is 3-4x more exposed than most of its trading partners.

AI Summary. Bilateral tariffs mostly divert trade rather than shrink the overall US trade deficit, because they address neither the internal imbalances driving surplus countries' surpluses nor the US role in accommodating them. After an earlier round of US tariffs, the US deficit with China fell while both the overall US deficit and China's overall surplus rose.

Michael Pettis @michaelxpettis
Date Posted:

Bilateral tariffs mostly divert trade and do not alter the “internal” imbalances creating excess savings in the surplus countries, argues @michaelxpettis. “I continue to expect the US to run large trade deficits over the next year or two.”

Do bilateral tariffs reduce the overall US trade deficit?

Core argument: Michael Pettis argues bilateral tariffs mostly divert trade and, because they address neither the internal imbalances driving surplus countries' surpluses nor the US role in accommodating them, will shift bilateral balances without changing the overall US trade deficit.

Bilateral tariffs mostly divert trade, but because they don't address the internal imbalances in the surplus countries that drive their trade surpluses, nor do they address the US role in accommodating these surpluses, they will most likely just shift bilateral balances without changing the overall US trade deficit. This, remember, is what happened after the first round of US tariffs in 2018, when the US deficit with China declined, but the overall US deficit and the overall Chinese surplus both rose. [Another] problem with the latest round of tariffs is that they target the wrong countries. Trump focuses on whether or not a country has a trade surplus with the US rather than on whether or not that country is running large, persistent surpluses overall. Countries like Canada, Mexico and Japan are not part of the overall problem because they run overall trade deficits that help absorb some of the global imbalances. I continue to expect the US to run large trade deficits over the next year or two.

Takeaways by Macro Roundup® AI

  1. Michael Pettis argues bilateral tariffs mostly divert trade and, because they address neither the internal imbalances driving surplus countries' surpluses nor the US role in accommodating them, will shift bilateral balances without changing the overall US trade deficit.
  2. Pettis points to the 2018 round of US tariffs, after which the US deficit with China declined while both the overall US deficit and the overall Chinese surplus rose.
  3. Pettis contends the tariffs target the wrong countries because Trump focuses on whether a country runs a surplus with the US rather than large, persistent overall surpluses, while Canada, Mexico and Japan run overall deficits that absorb some global imbalances.

Related Articles:

  • Trade Intervention for Freer Trade — The authors argue the United States should counter surplus countries' trade policies either by restricting their goods exports through tariffs or by restricting their capital inflows through taxes, volume limits, reserve requirements, transaction approvals, or investor eligibility rules. They contend capital controls are a more targeted alternative to uniform tariffs, which impose equal costs on more and less mercantilist countries.
  • A User’s Guide to Restructuring the Global Trading System — During the 2018–2019 U.S.–China trade war, the effective tariff rate on Chinese imports rose 17.9 percentage points while the renminbi depreciated 13.7% against the dollar, leaving after-tariff import prices in dollars up just 4.1%. The author argues this currency offset of more than three-fourths of the tariff explains why inflation pressure was negligible.
  • The U.S. Trade Deficit: Myths and Realities — Taxing capital inflows would weaken the dollar but could raise domestic interest rates and depress investment, harming long-term growth, while an interest rate cut absent recession would be inflationary and erode any real depreciation needed to durably improve the trade balance. Fiscal restraint could weaken the dollar and reduce the trade deficit.

AI Summary. The announced "reciprocal" tariff policy would set a weighted average tariff rate of 18.2%, though roughly one-third of imports would be exempt, reducing the effect to a 12.5pp rise in the effective tariff rate. The authors estimate all tariffs announced would raise the US effective tariff rate by 18.7pp, with risk of further escalation from retaliation and sectoral tariffs.

Jan Hatzius, Alec Phillips and Elsie Peng Goldman Sachs
Date Posted:

Jan Hatzius @GoldmanSachs estimates that Trump’s “reciprocal” tariff plan, plus other tariffs announced year-to-date, will raise the US effective tariff rate by 18.7pp from the 2024 baseline of 2.5%, the largest hike since the 1930s.

How much do announced reciprocal tariffs raise the effective tariff rate?

Core argument: President Trump's announced "reciprocal" tariff policy would impose a weighted average tariff rate of 18.2%, about 3pp above expectations, though exemptions covering roughly one-third of total imports cut the impact to a 12.5pp rise in the effective tariff rate.

The “reciprocal” tariff policy President Trump announced would impose a weighted average tariff rate of 18.2%, around 3pp higher than we expected. However, roughly 1/3 of total imports would be exempt, which reduces the impact to a 12.5pp increase in the effective tariff rate. We estimate this and other tariffs announced year-to-date would raise the US effective tariff rate by 18.7pp. While we assume that negotiations with trading partners will lead to somewhat lower “reciprocal” rates than announced today, the prospect for escalation following retaliatory tariffs and a high probability of further sectoral tariffs suggests a risk that the US effective tariff rate rises more than the 15pp increase we assume in our economic forecast.

Takeaways by Macro Roundup® AI

  1. President Trump's announced "reciprocal" tariff policy would impose a weighted average tariff rate of 18.2%, about 3pp above expectations, though exemptions covering roughly one-third of total imports cut the impact to a 12.5pp rise in the effective tariff rate.
  2. The "reciprocal" tariffs plus other tariffs announced year-to-date are estimated to raise the US effective tariff rate by 18.7pp.
  3. Negotiations with trading partners are assumed to yield somewhat lower "reciprocal" rates than announced, but retaliatory tariffs and a high probability of further sectoral tariffs pose a risk that the US effective tariff rate rises more than the 15pp increase assumed in the economic forecast.

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AI Summary. The yield on 10-year US Treasury notes fell as much as 13 basis points to dip briefly below 4%, as investors weighed concerns that US trade conflict will leave the American economy worse off.

Michael Mackenzie, Alice Atkins, and Ruth Carson Bloomberg
Date Posted:

10-year Treasury yields dipped briefly below 4% for the first time since October.

Are trade war worries pushing long-term Treasury yields below 4%?

Core argument: The 10-year Treasury yield fell as much as 13 basis points to dip briefly below 4%, its lowest level since October and since before President Donald Trump's election last year.

The yield on benchmark Treasuries fell briefly below 4% for the first time since October as Wall Street fretted that the US economy will end up worse off from President Donald Trump’s trade war. Ten-year yields declined as much as 13 basis points on Thursday to dip below 4%, the lowest level since before Trump was elected last year.

Takeaways by Macro Roundup® AI

  1. The 10-year Treasury yield fell as much as 13 basis points to dip briefly below 4%, its lowest level since October and since before President Donald Trump's election last year.
  2. The decline in 10-year Treasury yields below 4% came as Wall Street fretted that the US economy will end up worse off from Trump's trade war.

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  • Global Debt Report 2025 — About 60% of fixed-rate government debt in advanced economies maturing by 2027 — roughly $9tn — was issued before the recent interest-rate tightening, with weighted average yields below 2% versus projected 10-year rates near 3.6%, implying refinancing at nearly double the original cost. France, Spain, the UK, and the US face heightened vulnerability, with maturing debt exceeding 15% of GDP.
  • The Long-Term Budget Outlook: 2025 to 2055 — The Congressional Budget Office projects the 10-year Treasury note interest rate will average 3.8% over 2025–2055, close to its 3.7% average over the prior three decades, with the inflation-adjusted rate averaging 1.5%. It assesses that long-run rates are largely set by structural factors including demographics, saving and investment behavior, and federal debt.
  • Our Thoughts on Large US Deficits and Their Impact on Bond Yields — Total borrowing in the US is about average despite high government deficits, as high public borrowing has contributed to the need for higher interest rates that have depressed private sector borrowing. Risk premiums on long-dated debt look about average, with no market signs that economic or debt limits are currently being hit.

AI Summary. The authors find scant evidence of lingering pandemic effects on macroeconomic dynamics or on aggregate and sectoral growth, with the COVID shock and its anomalous dynamics largely gone. Estimated trend growth rates for consumption and employment in periods with a 4.1% unemployment rate are highly correlated, while industrial production reflects a long-term growth slowdown.

James Stock and Mark Watson Brookings Papers on Economic Activity
Date Posted:

The short, sharp contraction in 2020 resulted in lasting increases in work-from-home and the government debt, but Stock and Watson “find scant evidence of any long COVID effects at the level of macro dynamics or aggregate, and even sectoral, growth.”

Have pandemic shocks left lasting effects on economic growth trends?

Core argument: The authors find scant evidence of lingering COVID effects on macro dynamics or aggregate and sectoral growth, concluding the COVID shock and anomalous COVID dynamics largely disappeared by late 2022.

The COVID shock and anomalous COVID dynamics largely disappeared by late 2022. It appears that macrodynamics have returned to normal and that the structural shifts wrought by the pandemic have had limited effects on the underlying economic trends of key indicators, despite notable changes like the prevalence of remote work and the large increase in the debt-GDP ratio. Figure 16 provides the comparison of estimates of the instantaneous trend growth rate for 2019:IV and 2029:III, two quarters during which the unemployment rate was 4.1%, at or near for multiple sectors of consumption, employment, and industrial production. For consumption and employment, the smoothed values in 2024:III v. 2019:IV are highly correlated and fall along the 45° line, consistent with there being no substantial lingering changes. For industrial production, the correlation is also high but with a slope less than 1, reflecting the long-term slowdown of industrial production growth. In short, we find scant evidence of any long COVID effects at the level of macro dynamics or aggregate, and even sectoral, growth.

Takeaways by Macro Roundup® AI

  1. The authors find scant evidence of lingering COVID effects on macro dynamics or aggregate and sectoral growth, concluding the COVID shock and anomalous COVID dynamics largely disappeared by late 2022.
  2. Comparing two quarters with 4.1% unemployment, consumption and employment trend growth estimates in 2024:III versus 2019:IV are highly correlated and fall along the 45° line, consistent with no substantial lingering changes.
  3. Industrial production trend growth is also highly correlated across the two comparison quarters but with a slope below 1, which the authors attribute to the long-term slowdown of industrial production growth.

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  • The New Geography of Labor Markets — Matched employer-employee data show the mean distance from an American worker's home to their employer's worksite rose from 15 miles to 26 miles, with 12% of recent hires living at least 50 miles away, triple the earlier share. Separation and hiring rates are higher for distant employees.
  • The Curious Surge of Productivity in U.S. Restaurants — After roughly 30 years of flat productivity, real labor productivity at U.S. restaurants rose over 15% during the COVID pandemic and has persisted. The authors find this gain is strongly correlated with shorter customer dwell times, and the aggregate decline in dwell time can explain almost all of the increase.