Overall U.S. Tariff Level Still High Despite Exemptions

With Congress out for the next two weeks for Easter recess and a short trading week in New York, it should be a quieter week – though tariff-related news continues to capture headlines.

Exemptions suggest some flexibility around tariff policy

As of Monday 14 April, President Donald Trump has suggested flexibility around the previously announced tariffs on the auto industry, telling reporters that automakers “need a little bit of time” to relocate production to the U.S.

This followed a White House announcement late Friday night (11 April) on a series of exemptions from tariffs that were imposed as part of President Trump’s self-described “Liberation Day” on 2 April. The action carved out a large portion of consumer and downstream technological products (including smartphones, tablets, laptops, personal computers, smart-home devices, smartwatches, semiconductor devices, and memory chips) from the baseline 10% tariff and from the higher add-on reciprocal tariffs. The most salient of these are the 125% levies on some goods from China, since they are the only add-on tariffs now in place (the add-on tariffs for other countries have been delayed for 90 days).

While these moves gave some relief to consumers, businesses, and markets, they only apply to a minority of goods from China, albeit very popular ones, which are otherwise still subject to the 145% tariff (125% reciprocal + 20% fentanyl-related). Additionally, Trump and his advisors over the weekend suggested that there will be forthcoming tariffs for some, if not most of, the products that were exempted on Friday night.

Either way, over the longer term, we expect that these technology products will be subject to significantly lower tariffs than the 145% tariff for most goods coming from China. For example, we may see a 25% tariff for semiconductors with a potential future increase, which could be done through national security authorities established by Section 232 of the 1962 Trade Expansion Act. Section 232 tariffs require an “investigation” by the U.S. Trade Representative and the Commerce Department, a process that typically takes months but could make these tariffs much more legally durable. (Section 232 is the same authority that Trump has used to impose tariffs on autos, steel, and aluminum.)

Speaking of legality, the 11 April exemptions may undermine Trump’s reasoning behind using the emergency authorities under the International Emergency Economic Powers Act (IEEPA) for the 2 April tariffs. IEEPA gives the President wide latitude to “to deal with any unusual and extraordinary threat … if the President declares a national emergency with respect to such threat.” But IEEPA has never been used before for tariffs, and even if tariffs are determined to be a fair use of the statute, IEEPA does not really seem intended for exemptions because either the country is in a balance of payments crisis or it is not, at least according to some IEEPA critics. There is a related, more technical question of the “major questions doctrine,” where the Supreme Court has ruled that the White House should have less, not more authority.

Even if the legal challenge to using IEEPA to impose tariffs ultimately is successful, it will likely take a while to wind its way through the courts, so this is not something that the markets should hang their hats on as of now. In addition, Trump has a lot of other legal authorities he could use instead to impose tariffs if he cannot use IEEPA.

Where do we stand on tariffs?

Trump’s flexibility is positive for sentiment (and markets closed higher on the Monday following the technology exemptions). However, there are still significant tariffs in place that – even if no other tariffs are implemented – will mark a significant increase in the effective tariff rate on U.S. imports, resulting in a drag on growth, thereby increasing the probability of recession. Existing tariffs now include:

• A 10% universal tariff on all countries, with some specific sector carve-outs
• A 145% tariff on Chinese goods (the 125% reciprocal tariff and the 20% fentanyl-related tariff), with some carve-outs for consumer technological goods, semiconductors, and semiconductor equipment; we believe there will be additional, yet lower, tariffs on these products at some point
• A 25% tariff on goods not compliant with the United States–Mexico–Canada Agreement
• A 25% tariff on goods imported from any country that imports Venezuelan oil
• A 25% tariff on aluminum and steel
• A 25% tariff on autos and auto parts, though Trump’s comments on 14 April suggest some flexibility here; similar product tariffs are expected shortly on pharmaceuticals and semiconductors/technological components
• Reciprocal, add-on tariffs: These higher, punitive tariffs announced on 2 April have been put on hold until 9 July

Baseline outlook on U.S. tariffs

While the market should take some comfort that there is a degree of flexibility from the White House on broader tariffs, we would encourage caution as well. After all, as Trump wrote on social media on 13 April, “nobody is off the hook.”

As of this writing, we expect more tariffs to be announced on semiconductors, other technological goods, and equipment, as well as pharmaceuticals. And the tariff rate as well as tariff-related policy uncertainty are still high and could pose significant headwinds to U.S. growth and inflation (perhaps a 1 to 2 percentage point hit to GDP growth and a similar uptick in inflation).

While Trump is likely to be swayed by the markets (sort of) but likely more so by public opinion (polls suggest that while the majority of Americans agree with his goal around tariffs, they dislike the approach), he is nevertheless committed to his broader trade policy agenda and rebalancing the economy, and we do not think the latest announcements reflect a broader pivot away from that.

Our base case continues to be that the ultimate tariff destination will include a 10% across-the-board tariff, higher tariffs on China (but lower than the current 145% rate), and Section 232 product tariffs on aluminum, steel, autos, lumber, copper, and semiconductors/technological goods. Additional tariffs are possible come 9 July, but we think they will be much less draconian than those announced on “Liberation Day.”

Elsewhere in Washington: the debt ceiling and tax policy

As tax payments roll in (15 April was the U.S. tax filing deadline), the U.S. Treasury Department may be able to push back the deadline for Congress to increase the debt ceiling. Congress seems on track to increase the debt ceiling by $5 trillion, bringing the total to roughly $42 trillion, as part of the tax package that is winding its way through the legislative process.

Congress cleared a major threshold on Friday 11 April by passing a unified budget. This is an important first step in order to pass a tax bill with only 50 votes in the Senate, not the usual 60 (through the reconciliation process). The budget only provides a framework for writing the tax bill, but we now know the ceiling for the ultimate package: $5.6 trillion over 10 years (not including interest expense). The ceiling for both tax cuts and spending increases or cuts now includes:

• $3.8 trillion for extension of the Trump tax cuts that expire at end of 2025
• $1.5 trillion of new net tax cuts
  • Note: House Republicans insist that they will keep cuts to Medicaid of up to $900 billion, even though the Senate has thrown cold water on this size (some Capitol observers estimate Medicaid cuts could range from $200 billion to $500 billion over 10 years)
• $150 billion in new defense spending
• $195 billion in new spending on immigration/border
• $4 billion in non-Medicaid spending cuts
• $5 trillion for a debt ceiling increase
• Note: None of these numbers include interest expense

Again, this simply sets out a framework for the tax writers as part of the tedious reconciliation process, and the bill could produce lower tax cuts and higher spending cuts than these ceilings suggest; if the ultimate bill resembles the framework, all signs suggest a bigger bill with a larger deficit impact. The Congressional Budget Office put together estimates that imply 2-percentage-point higher primary deficits over the next 10 years, which all other things remaining the same would amount to 7% or greater deficits. Tariff revenue, growth, and interest expense are all important dynamic variables that will influence this.

Bottom line on taxes and the budget: Despite some concerns about fiscal profligacy apparent in the bond market, there is no sign that most members of Congress are really focused on this (or at least, they are not aligned on the extent of the problem) and could ultimately approve a tax bill as large as net $5.6 trillion over 10 years (if not bigger when interest expense is penciled in).

The overall size of the package could be lower, but given very skinny Republican majorities, we may see more movement on the easier stuff (tax cuts) than the harder stuff (spending cuts) – so we are anticipating a larger net deficit bill, not a smaller one. Regardless, we expect it will take several weeks (if not months) for an ultimate bill to be passed.