Tariff Terror
The Long-Dreaded Trump Tariffs unfolded at the beginning of April with rates that were in addition to current levels, making China’s over 50%. Of course we have to remember that these taxes assessed at the factory value, not at retail, so the impact is on the cost of the good, which is generally 10-30% of the final price that we see in the stores. Apple, as an example, just announced that it expected to pay $900 million in tariff costs in Q2, but their quarterly revenue exceeds $90 billion! That is an impact of only 1%. Obviously a discounter like Walmart will have a larger bottom-line impact, but this is (so far) distant from the economic disaster claimed by Trump’s opposition.
Tariff Revenue ($17.4 Billion in April)
Helped Offset the Budget Deficit and more increases were projected. For example, the University of Pennsylvania government budget model forecasted incremental tariff revenue about $450-510 billion, which would be a tax of about 1.5% on the $30 trillion US economy. That said, what else will have that level of impact on the $2 trillion US government deficit? GM just announced that the new tariffs would cost it $4 billion to $5 billion this year but given the US government bailed out the company in 2009, perhaps they should be happy to pay that price. Also, now is time to recall that energy commodities were excluded. The 10% baseline on all imports to the United States, and higher for many major trading partners, won’t apply to crude oil, natural gas and refined products. Lower energy costs translate into lower inflation risk. Steel, aluminum, gold and a long list of other industrial and precious metals also were not subject to “reciprocal” tariffs. Of course, Trump is well known for reversing himself (and re-reversing himself) so the revenue gains may not last but even so if in exchange for something else of economic value, then reserving judgement is warranted.
War: Ukraine-Russia
April 30th Saw a Mineral Deal Signed that will give the United States
preferential access to new Ukrainian minerals deals and fund investment in Ukraine’s reconstruction. While promising, it has zero immediate impact due to the ongoing war. On the other hand, perhaps Trump will be more supportive to Ukraine’s military effort. At least Trump has been more critical of Putin’s behavior, finally recognizing that Putin continued to rain missiles into Ukraine despite “ceasefires” for Easter and May Day. Movements on the frontlines remain incremental with Ukraine making progress in some areas while giving up ground in others. With spring, Russia may have instigated a new offensive but not likely to get far or fast with their decimated equipment stockpiles. Ukraine, on the other hand, continued to achieve successes in rocketing Russian oil refineries and ammunition storage, which hamper the Russian war effort at a strategic level. It also assassinated a senior Russian general outside of Moscow, demonstrating that no place is safe.
Macro: Asia
China’s Trade Data for March saw exports spike
+12.4% y/y in USD terms, well above market forecasts of +4.4%, reflecting “tariff front-loading.” Meanwhile, Chinese imports declined -4.3% y/y, worse than market consensus of a -2.0% decrease. Of course, the real hit will come in May as the graph right shows the containers shipped to the US as collapsing. It takes ~30 days for containers to go from China to LA, 45 to Houston by sea and 55 to New York by sea. “That means that there are no economic effects of what was done on April 10th until about May 10th. Around that time (it’s already started to happen) trucking work is going to dry up” per Molson Hart, whose firm manufactures in China for the US market. Of course, with the front-loading mentioned above, there will be few shortages until June or later. As a side note, China increased its base tariff on US goods to 125%, though both the US and China have exempted about 25% of their respective imports from tariffs – there are some goods that are just too important to put up for negotiation.
In my opinion, the greater risk to China is the Elimination of Duty Free Exports to the US of low-value packages (assessed at less than $800) in favor of a cost of 30% of their value or minimum $25 per item as of May 1st (increasing to $50 per item after June 1, 2025). In the last fiscal year, 1.36 billion shipments came into the US tariff-free through that loophole, more than triple the number of shipments in 2018 (411 million shipments), according to Customs and Border Protection. China can try to “tariff wash” them through Canada, Mexico or other countries, but I doubt that the volumes can reach the above levels. Fentanyl and footwear, smuggled together in the same shipment?
China’s Other Economic Data covering March was stronger but seen as temporary. China’s headline real GDP increased +5.4% y/y in Q1 2025, the same pace as in Q4 2024, beating expectations for a +5.1% y/y gain amid stimulus measures and export production. YTD fixed asset investment grew +4.2% y/y (vs. 4.1% y/y previously), retail sales gained +5.9% y/y, the strongest growth in retail activity since December 2023. Industrial production increased by +7.7% y/y (strongest since June 2021), while the unemployment rate ticked down to 5.2%. Looking ahead, however, China’s job market will likely struggle, with as many as 20 million people potentially exposed to US-bound exports and there had been already a -30% drop in job openings over the past two months. Stimulus kicked in too as new loans reached RMB 3.64 trillion ($500 billion) from RMB 1.01 billion ($150 billion) in February. There is historically a pick-up in lending activity at this time of year but that is a large uptick.
Japan’s Central Bank Cut Its 2025 GDP Forecast from +1.1% to +0.5% to take
into account the US tariff impact, but interest rates continued to climb as salaries moved higher, which imply future inflation risk. The graph right demonstrates the correlation between salary rate increases and 10-year government bond yields. Current inflation rate hit +3.6% in March, largely driven by food costs (+7.4%). Core inflation however also moved up to +3.2% from +3.0%, implying that there are a number of causes. Certainly Japan (and Korea and other Asian nations) are lining up to replace as much of China’s business as possible.
Macro: US
US Performance Doing Just Fine So Far as Q1 GDP forecasts came in only
fractionally lower at -0.3% annualized (which implied that the number for the quarter was around -0.075%). The usual revisions could move that positive or decisively negative, especially as the underlying figures were dramatic as seen on the graph left. Net exports were crushed by a record $350 billion of goods imports, pushing the usually sedate number to -4.8%. Consumers perhaps were frightened by the tariff narrative as consumption grew by only +1.8% but businesses were preparing as inventories were up a strong +2.3% and business investment +1.3%. Not talked about in the press was the negative GDP impact of the January 2025 fires that devastated wide areas of Los Angeles. Initial federal government estimates indicated $34 billion in losses of private assets (homes and businesses) and $11 billion in state and local buildings and equipment. Mitigating the Q1 numbers was a forecast increase for Q2 GDP at +1.1% per the Atlanta Fed. Also on the positive side was that US inflation cooled broadly in March, indicating some relief amid the ongoing tariff tit-for-tat. The core consumer price index, excluding relatively volatile food and energy costs, increased +0.1% from February, the least in nine months, with the overall index declining by the same amount.
Looking at Tariff Impacts, keep in mind that 37% of all imports from China are intermediate products, i.e., products that are used by US manufacturers to finish their goods. While the knee-jerk reaction would say that US goods will directly be inflated egregiously, keep in mind that these in-between parts are at lower price points or shipped at scale – a 5¢ screw used to build a $300 table will not have the same tariff cost impact as importing a completed $100 drill set. Will there be price increases? Yes. Is it more complex than the click-bait headlines? Also yes.
Macro: Europe
Eurozone Inflation Held at 2.2% but the core rate moved higher to +2.7%, notably higher than last month’s +2.4%, driven by a reversal in services inflation. 
The Eurozone economy performed better than expected in the first three months of the year, with growth of +0.4% (+1.6% annualized), though the massive power outage in late April in Spain and Portugal may upend Q2’s results. Unemployment held steady at 5.8%. The European Central Bank lowered interest rates in April for the seventh time since last June as global trade tensions threaten to derail the region’s economic recovery, decreasing by a quarter-point to 2.25%. Officials dropped the word “restrictive” from their statement in relation to the monetary-policy stance as they stated that the outlook for growth deteriorated owing to rising trade tensions. For Europe, it seems that the central tariff issue is alcohol. French wines and spirits are set to take a 20% hit on sales to the US amounting to €800 million ($880 million), said Gabriel Picard, president of the French federation of wine and spirit exporters FEVS. Americans obviously enjoy their booze, though I suspect Trader Joes is responsible for big portion of all the food items listed to the right.
All the best in your investing!
David Burkart, CFA
Coloma Capital Futures®, LLC
www.colomacapllc.com
Special contributor to aiSource