In this episode of Tax Notes Talk, four policy experts discuss the Trump administration’s actions on tariffs, their economic impacts, and their effects on tax policy during a live recording from the American Bar Association Section of Taxation May meeting.
David D. Stewart: Welcome to the podcast. I’m David Stewart, editor in chief of Tax Notes Today International. This week: live from D.C., it’s Tax Notes Talk.
We have something a bit different for you this week. On Friday, May 9, I went down to the ABA Tax Section meeting and recorded a live podcast. I was joined by four guests — Ernie Tedeschi, Erica York, Ryan Finley, and Kyle Pomerleau — who you’ll hear more about in just a minute. We discussed the Trump administration’s tariff policies, their impact, and what to keep an eye on. I hope you enjoy the interview as much as I did recording it. And now, let’s go to that interview.
Hello, everyone, I’m David Stewart. I am editor in chief of Tax Notes Today International, as well as the host of the podcast Tax Notes Talk. And welcome to a live recording of the Tax Notes Talk podcast.
As the Trump administration continues to expand its economic plan, tariffs have proven to be a cornerstone. Back in February, President Trump announced a slate of tariffs he intended to apply to China, Mexico, and Canada. Since that announcement, we’ve seen additional tariffs levied on all countries trading with the U.S. However, the implementation of those tariffs has been turbulent, and the economic response has been volatility.
So what effects are the tariffs having here in the U.S. and abroad, and how should the tax community and beyond prepare? To explore those questions, I have these four panelists with me.
On my right is Ernie Tedeschi. He’s the former White House economic adviser and the current director of economics at The Budget Lab at Yale. Erica York, vice president of federal tax policy at the Tax Foundation. Ryan Finley, Tax Notes contributing editor and our resident transfer pricing expert. And Kyle Pomerleau, senior fellow at the American Enterprise Institute.
So to start things off, I think we should get a baseline of where things stand. And in general, in podcasts, you’re not supposed to date the show. You’re not supposed to say when you recorded it. But with this subject matter, I’m going to say we’re recording this on May 9 at 11:33 AM. And with that, Erica, why don’t you start us off? Where do things stand now?
Erica York: The U.S. is currently imposing tariffs that affect about 70 percent of goods imports. That includes two separate IEEPA [International Emergency Economic Powers Act] rounds of tariffs. The first round is the border security, fentanyl-related tariffs applying to all imports from China at a rate of 20 percent and applying to non-USMCA [United States-Mexico-Canada Agreement] trade with Canada and Mexico at 25 percent, except for 10 percent on energy and potash.
The second round of IEEPA tariffs are the so-called reciprocal tariffs. Those are, of course, on pause for 90 days as far as the higher rates on about 60 different trading partners go. But the 10 percent global tariff is in effect with some exemptions. Those exemptions include the section 232 tariffs, so any good that faces a section 232 tariff doesn’t face the 10 percent global tariff. There are also exceptions for energy-related goods and electronics.
The way that I think about that tariff in particular is that it seems like the 10 percent global tariff is the one that’s here to stay and the negotiations are over potential increases in those tariffs that would come online in July, as well as maybe some room for negotiation on the 232s. The 232s apply to steel and aluminum and a very expansive list of derivative goods that contain steel and aluminum. So you can think of like a tennis racket; the aluminum in the tennis racket would face the 232 tariff. So there’s some confusion over just how expansive this list is because there is no database of how much aluminum is in a tennis racket. And then you have 232s on autos and auto parts. There are exclusions for U.S. content of USMCA goods within those tariffs. And then we have pending 232 investigations on a variety of other sectoral goods like pharmaceuticals, semiconductors, copper, lumber, trucks, and maybe more to come.
So a big slate of tariffs, a lot of confusion over how they stack. At first, the Trump administration said they would, and then as recently as a couple weeks ago, they issued a new executive order clarifying that there’s actually a hierarchy of how those apply. The auto tariffs apply first, then the IEEPA tariffs on Canada and Mexico, and then the steel and aluminum tariffs. So there’s not a triple whammy for goods that would have been hit by all three of those.
As we saw just this morning, there are lots of changes pending. The president posted that maybe the rate on China, instead of 125 percent under the IEEPA trade deficit or reciprocal tariffs, would be 80 percent, but there’s no clarity yet on whether that is taking effect. So uncertainty is the name of the game. There’s no real clear idea on what’s durable, what’s not, what’s up for negotiation, what’s not. And there’s not really a clear purpose at play either. Is it for revenue? Is it for negotiation? Is it for protection? We just don’t know yet.
David D. Stewart: That brings me to that question is, what can we assume the purpose of these are, given the information that we’ve heard from the government so far? Kyle?
Kyle Pomerleau: Yeah, so I think there’s been a lot of confusion over what the purpose of these policies are. In fact, I think that there are a lot of narratives out there that are just flat wrong in trying to describe what is going on with the administration and trade policy.
I think the short and easy answer is that for a very long time, decades in fact, Donald Trump has been a big trade skeptic, and that he is pursuing these tariffs because he thinks trade is bad and is a loss for the U.S. economy, and that tariffs, by reducing trade, will be beneficial. Now, lots of reasons that is wrong, but I think that is the starting point in understanding why these are happen.
I think the more sophisticated narratives we’ve seen coming from people like his CEA Chair Steve Miran or even the Treasury secretary, that these tariffs are about some sort of currency deal or about raising revenue for tax cuts. I think those are some more after-the-fact justifications for the tariffs. I think you really just need to go back to what Trump says about tariffs in trade to understand what’s going on here. Because the starting point is just this general distrust of trade and no real strategy; that’s why we get a lot of these tariffs that seem contradictory and don’t make sense in the context of some of these more sophisticated justifications.
If you thought the tariffs were going to be a source of revenue to pay for or partially offset the Tax Cuts and Jobs Act, you wouldn’t see other advisers in the Trump administration talking about how these are negotiating tools meant to reduce trade barriers overall. You’re not raising much revenue if the tariffs are just going to go away.
And if you take Steve Miran’s words seriously, that this is about devaluing the dollar in order to eventually reduce the trade deficit, the trade policy doesn’t make sense or the general fiscal policy of the Trump administration doesn’t make sense either. Tariffs by themselves cause a dollar appreciation, not a depreciation, and a lot of the fiscal policy that the Trump administration is pursuing would also cause an appreciation of the U.S. dollar, not a devaluation of the U.S.
David D. Stewart: Is there any advantage to reducing trade deficits? What result could you expect from it?
Kyle Pomerleau: So I think that this gets the causation backwards. It’s not the trade deficit between the United States and the rest of the world that matters, per se. It’s underneath that, what is causing that — that’s the thing that might matter. And it’s not necessarily the case that it’s bad. In fact, for many reasons, the trade deficit of the United States is a good thing.
The trade deficit, what it’s coming from, is just a mismatch between the amount of spending in the United States and the amount of income. The United States as a whole earns some trillion dollars of income. It can either spend it on current consumption goods or investment goods. And if the United States has more investment opportunities than it has saving, we need to borrow from the rest of the world to finance that investment. And that borrowing from the rest of the world shows up mechanically in the national accounts as a trade deficit.
Now, is that borrowing necessarily good or bad? Well, it’s going to depend. So if we see the trade deficit go up, but that’s because investment opportunities are better in the United States than they are in the rest of the world, well, that’s a good thing. We should look at the trade deficit as a positive thing. But if the federal government decides to borrow a trillion more dollars to finance current consumption, well, that’s going to require either paying back in the future or an increase in taxes. And the mechanical effect of borrowing from the rest of the world to finance that present consumption is an increase in the trade deficit, and maybe we wouldn’t think that is as good as the other reason for the increased trade deficit.
Lawmakers in general should not be primarily focused on the trade deficit. They should actually just be focused on the real underlying economy and economic performance in general and the performance of the federal budget.
David D. Stewart: So one of the justifications was this idea that we’d bring in a lot of revenue. Ernie, what sort of revenue can we expect from tariffs? Is it enough to justify this external revenue agency idea?
Ernie Tedeschi: So when we’ve looked at the tariffs that have been applied in 2025 — so far, we project that if they stayed in force in perpetuity, so over 10 years, and assuming that the “pause” stayed in effect beyond the 90 days, we’d expect them to raise $2.4 trillion over 10 years. So that assumes that imports would decline because very few people in the end would end up wanting to pay 145 percent tariffs on Chinese imports. They would find substitutes.
It also assumes that because of income declines in the United States, net, the IRS is going to be raising less money in payroll and income taxes as a result of these tariffs. So at the end of the day, conventionally scored, you raise $2.4 trillion and then you probably even raise less than that because there are dynamic effects, because the economy is weaker in the United States. Using Congressional Budget Office rules of thumb, we project that you would actually raise even $600 billion less than that over 10 years.
On the question of whether it’s worth it, I mean, putting the question slightly differently, this is all being debated in the context of extending the Tax Cuts and Jobs Act. So to put that in perspective, if we were to extend the Tax Cuts and Jobs Act for 10 years — and we won’t do that for lots of mechanical legislative reasons — but if we were to do that, that would cost about $5 trillion over 10 years. So these tariffs cover about half the cost of the TCJA.
OK, so maybe you can get four or five years of TCJA extension with the revenue that you get from the tariff increases, but then you have to start thinking about some mismatches here. First of all, there’s a mismatch in efficiency. Tariffs are just a supremely inefficient way of raising revenue. You are deteriorating your base in a way that you do not with other ways of raising revenue. As you increase tariffs, you are by definition decreasing the amount of imports in the United States.
It’s just funny that in some ways the two goals of the administration here — decreasing the amount of imports in the United States, reducing the trade deficit and raising revenue — are at direct odds with one another because the more successful tariffs are at one, the less successful by definition they are at the other.
The second thing is that there’s a mismatch in distribution here, especially in the short run. So the Tax Cuts and Jobs Act, I don’t want to misrepresent it, the individual provisions do touch everyone and they reduce taxes for everyone, but they are skewed more toward the top than they are at the bottom. Whereas in the short run, tariffs are the reverse. Tariffs bite more for lower-income families than they do for upper-income families. That evens out more over the long run as tariffs start bleeding into capital income, so it’s more even distribution. But especially in 2026 in the short run, there’s a mismatch there. So it’s not a trade-off that I think a lot of Americans would want to make.
Look, what I told someone the other day is that this is almost like a Twilight Zone monkey’s paw because I said early on in this debate, I’m like, “Boy, I wish that revenues were on the table in the TCJA debate,” and this is the worst possible way that my wish could come true. I stand by that. I’m glad that at least the “Overton window” has been expanded and we are talking about raising revenues as a way of deficit reduction. That’s great.
I wish that we were doing so in a more efficient way. I think that there are lots of ways of doing that in a business-friendly way, in a way that I think even the Republican side of the aisle would find at least tolerable. But there are much more efficient ways of doing that than tariffs.
David D. Stewart: How do we expect this all to play out with the upcoming tax bill? Are we expecting to see these expected tariff revenues create a more ambitious bill, or are we expecting to see other changes in that area?
Erica York: So they won’t be officially included. A lot of the thinking was, well, they’re not going to be officially scored because Congress isn’t legislating them, but maybe they’ll be a rhetorical pay-for and lawmakers will say, “We’re going to increase the deficit with this piece of legislation by $3 trillion, but the administration is going to raise $3 trillion through tariffs. So on a net basis, we’re fine.” We haven’t really been seeing much talk of that from Congress. And my suspicion is that maybe they want to distance themselves so if there is a lot of blowback and this does lead to a recession or big problems in the economy, that the blame doesn’t fall squarely on Congress for that.
And instead, we’ve been seeing Congress talk a lot about using dynamics or increased economic growth as their rhetorical pay-for for the deficit increase. Tariffs still create a problem for that though. Because if you are dragging down growth and offsetting any of the economic benefit of the potential tax package, then there are no dynamic revenues to gain. And that’s what our modeling at Tax Foundation shows. We estimate the tariffs imposed so far and the retaliation announced and imposed so far would reduce long-run GDP by about 1 percent. We estimate that full TCJA permanence, including the business provisions like bonus depreciation and R&D expensing, which really drive the economic result there, would boost long-run GDP by 1.1 percent. So you’ve about wiped out the benefit with the tariffs so far. There are potentially more tariffs coming online. So I think it complicates the debate in Congress.
There’s a chance where correlation is obviously not causation, but if Congress passes a tax bill and then right after that we go into a recession, that complicates the debate around the tax bill. The finger could get pointed at Congress and “look what you did on taxes” even though it would be caused by the tariffs. So I think there’s lots of issues, but I haven’t seen the tariff revenues playing as much into the way Congress is talking about the tax bill as a lot of people thought we might at the beginning of the year.
Kyle Pomerleau: And just to add to that, and I also don’t think tariffs are making them more aggressive on the income tax side, I think what they want to do is set with a few things at the margin, say the Trump proposals, tips, overtime — adding those. But I think that they have always felt that they wanted to offset the costs of those. But the core of it — extending the individual provisions, extending many of the business provisions — I think that’s pretty much set and they’re moving from that.
If they’re not using tariffs to justify borrowing $4.8 trillion over a decade, it’s going to be something else. So it’s going to be economic growth, or it’s going to be other sources of revenue that they think they’re going to get, or it’s going to be bashing the scorekeepers, whatever strategy they need to take here in order to convince the members who are ultimately voting on the package that actually this is not going to increase the deficit. So if it’s not one thing, it’s another.
David D. Stewart: Well, all of this is happening with the background of efforts on an international level to reach a consensus on taxation of multinationals. Things have been moving along at a pretty brisk pace. What effect is this new U.S. approach going to have on that international consensus?
Ryan Finley: I’m so glad you asked. So I’m going to go off on a bit of a tangent. I generally write about and talk about transfer pricing. Even within international tax, it’s very much its own kind of self-contained universe. It will have its own unique interplay with a really high tariff environment.
Transfer pricing, you’re pricing transactions between commonly controlled entities, because the price they charge each other doesn’t mean anything because they’re dealing with themselves. So they could set that price wherever they want for tax reasons, and you could shift income by doing so. You need rules that give that an appropriate price and thereby get income where it ought to be. Clear enough.
But it turns out that, and I saw there’s a KPMG report, put the percentage of global cross-border trade of which related-party transactions accounts for is like 60 to 80 percent. I’ve seen lower estimates to that too, but there’s enormous overlap in the transactions that are going to be subject to tariffs and transactions that are going to fall within the transfer pricing regime. And it’s also interesting because there are deeper conceptual parallels between customs valuation and transfer pricing that — they used to draw more interest I’d say and maybe more organized advocacy efforts maybe before BEPS. Kinda died down after that.
But to some extent, if you’re importing a physical good and you have a U.S. distributor buying from — just say its parent company as a foreign manufacturer — you have a transaction that is going to be subject to transfer pricing rules. And unless you’re in one of these exemptions, at least a 10 percent tariff. These transactions are going to fall squarely within both realms.
It’s interesting how I think the two, both of them, want you to get the price right in a sense, but what they think the right price is is a little bit different once you dig beneath the surface. Normally maybe that would be a manageable level of discrepancy, but the high tariffs raising the stakes to such a great extent, this long-standing, but usually tolerable, friction between customs valuation and transfer pricing might become a lot more significant. So it’s interesting.
This subject was never interesting to me at all until months ago when the tariffs went up because for exactly these reasons. In the broader tax planning perspective, most of the time it made more sense to focus on the transfer pricing and where you’re going to be subject to corporate income tax than to overly worry about your dutyable value when you import something to the U.S. for customs purposes. Obviously depending on the company, on the specifics of the arrangement, the tax structure they have, the margins they earn, you could very easily have a situation where the tariff exposure could considerably exceed the income tax exposure through transfer pricing. So it’s interesting.
This has the potential to overturn long-standing patterns. But just a bit on how these two — it’s sort of one of those dangerous things where like baseball and cricket, you think they’re kind of the same. So you think you kind of understand cricket and then you don’t at all. It is sort of like that where there’s this basic conceptual link. But once you actually get into how the methods work, you start to see why there’s no reason to expect consistent alignment between the customs value of an imported good and the arm’s length price for that good (in transfer pricing parlance). There’s very little reason to expect discrepancies between those two prices or values to be the exception and not the rule.
So some background on that. I don’t want to get too much into the technical guts of the customs valuation rules, but basically, if anyone’s familiar with the 482 regs and the methods and the best method rule, basically the analysis you have to use to choose a method and apply method for customs purposes, it looks like the 1968 version of the section 482 regs. It’s basically what a lot of taxpayers wish the 482 regs said.
Very much the emphasis is on applying this method, the transactional value method, which is pretty close to what you’d call the comparable and controlled price method in a transfer pricing context. In that situation, you would not expect to have any major, I don’t think, deviations between the results. But in this context, you have to apply that method to determine the dutyable value or price, whatever, for the imported article. And apparently, the preference is so strong that it accounts for 90 to 95 percent of import transactions that fall within this ambit of imports that are between related parties that are both subject to tariffs and the 482 regs and the transfer pricing rules. And so you see that methodological correspondence.
The whole idea in both cases is — they word it differently, but it’s to try to find a price for a transaction that didn’t really happen. It’s a legal fiction that there ever was a transaction because you’re moving it from one part of a broader commonly owned business entity to the other. So in terms of that method, and then as you get into the methods that I suppose account for the other 5 to 10 percent of custom valuation price determinations, they pretty much correspond to some other transfer pricing methods too. The one looks a bit like the resale price method. One looks a bit like the cost-plus method. Where depending on whether you use operating profit, it would be more of a version of the CPM. The 482 regs have this — I think they call it a fallback method. It’s basically like an unspecified method if nothing else works. I think that the takeaways are that there’s a much stronger force to corral you into the transaction value, the CUT method equivalent, pricing the transaction in accordance with what would’ve been charged for the same transaction had that common ownership relationship not been there.
David D. Stewart: Given these different spheres, do tax people have to become tariff people? Is there need for an interdisciplinary understanding in order to figure out how best to structure transactions?
Ryan Finley: Absolutely. Like I was saying before, I remember getting moved off a transfer pricing project because there was an issue where this company was importing goods and they just could not get the customs valuation to reconcile with the price they determined applying the CPM. And that’s routine, and there are a bunch of methodological reasons for that.
But yeah, I think you’re never going to make yourself an expert in another thing, but you probably do have to know the things to definitely not do, the key traps. You have to be aware that just because this transaction value method is what you’re going to end up using for customs purposes, that really doesn’t mean much in terms of what you’re going to have to use for transfer pricing purposes, which makes the whole alignment and harmonization effort, which like I said has been going on for a while and I think it’ll intensify, it makes that a lot harder.
I think there are limits to how far you can get with that. But it’s just interesting how these are two parallel systems of methods that look the same, are supposed to do the same, but if you dig beneath them, there are plenty of reasons to often get inconsistent results when you apply one and you apply the other. And that will be a pain because taxpayers, one of the things they get dinged on in a transfer pricing context is a major discrepancy between customs valuations and the prices determined for transfer pricing purposes. In fact, there’s a code section specifically says that the price for tax purposes cannot exceed — basically, the deductible cost cannot exceed the customs value for that same item. So there’s a uncomfortable interplay between the two, and I think the problems that that generates will only intensify in this environment.
David D. Stewart: Pulling back to a larger issue out here, one of the main policies that the U.S. has been pushing internationally for the last several years has been trying to tamp down on digital services taxes around the world. Now that we’ve seen all the tariff policy, is there anything left? Is there any ammunition left to deal with that other issue?
Erica York: I think they can always do more tariffs. We saw on the first Trump administration section 301 investigations into DSTs with the potential of tariffs going into place in retaliation to those. I think that’s certainly a possibility down the line if that’s not something that gets negotiated in this 90-day period.
In the U.S.-U.K. outline of a deal that might be coming that was announced this week, there wasn’t anything really written about digital trade, digital services taxes. But in the talk around it, they say that’s something we’ll continue exploring as we work to actually reach this agreement.
So I think that’s definitely being discussed in relation to the IEEPA tariffs, which are into anything deemed unfair, which obviously would in the Trump administration’s purview cover DSTs. So I think they’re included in the negotiations there with the potential for tariff increases if agreements aren’t reached. I think you could also see 301 investigations pop up again or be renewed into DSTs.
Ryan Finley: If I could just add something on that, being someone focused on the international tax nontariff area, the U.S. has spent so much time flexing its muscles, making every moral argument, many of which are sound, to deter countries from adopting DSTs and to get the ones that have them to repeal them. And it’s just funny. Now you’re going to have the people who just did this tariff, this curious tariff policy, are going to lecture you about the harm of the DST. I suspect that will be an interesting dynamic going forward.
Erica York: Well, that’s one of the really unfortunate things about the way the Trump administration has gone on for tariffs because there are things that are discriminatory against the U.S. But then we have these so-called reciprocal tariffs that are based not on any actual explicit discrimination, but trade balances. I’m talking about retaliating against value-added taxes, all these things that are not actually discriminatory. So it distracts from the real issues that exist and the real progress that could have been made on them.
Ernie Tedeschi: And just to add to something Erica said, this is not a DST-specific comment, but the reason why we might expect more work coming from the Trump administration in terms of a DST or its services tariffs in general. Up until last week, most of the tariffs that have been announced were pretty straightforward goods taxes that had a very clear nexus with imports coming in at different ports.
And then the second that he raised the idea of a movies tax — that is a Pandora’s box or that’s a threshold into something very different categorically from what he talked about before now. Who knows if specifically that film tax would actually work out? His Treasury Department and his Commerce Department followed up, and it was very clear that the idea had caught them by surprise. I’m not suggesting that you bet on that specific policy, but the president raised the idea; his staff are going to work on it. And that’s going to open up a whole line of thinking around services tariffs in general and DSTs probably specifically.
David D. Stewart: Is there any way that a policy that can work?
Ernie Tedeschi: So we were talking about it internally. I mean, it’s not even clear what the import is in the case of movies. There are policies you could implement that I wouldn’t call a tariff that would be like a tax on profits, et cetera. But in the case of a movie, what is being imported? A single reel that you are then duplicating for distribution when it comes to the — it’s not clear what the actual — it is a service, right? It’s not really a good. The way you conceptualize it is totally different.
The one service that actually is easier to think of as a tariff are airline fares. That is a service. When there’s a foreign-owned airline and you buy an airplane ticket from British Airways, that is a service import in the United States. But that’s a pretty straightforward thing to tariff as a line item on what you pay. I’m actually shocked that that’s not the first service that they tariffed in the United States. Once you go from that though, it gets just much more complicated to think about.
Kyle Pomerleau: Well, yeah, you look at the Venn diagram, it starts looking a lot more like just general income taxation and capital taxation. You go from goods to services; now you’re talking about importation of services. That’s the right to use intellectual property. And you’ve just gone full circle back to figuring out things like pillar 2 or pillar 1 again.
Import taxes on movies may look in some way like some sort of withholding tax on royalties, for example. But then you’re back to talking about things we’ve been debating for years and years. It’s also not clear that this is something that Trump can do with the existing authority that he has. We’re not even at the point of “Is this actually a real thing?” Probably not.
David D. Stewart: I’m just imagining the difficulty of determining the country of origin of a James Bond movie.
OK, because we’re talking about authority here, there have been a couple of legal challenges to the president’s authority in the tariff realm. So what are we seeing there, and is there any chance that this unilateral authority that has been asserted will get dialed back?
Erica York: To me, just looking at IEEPA, the statute, it doesn’t mention the word “tariff” in it at all, and it’s about a discrete national emergency. It’s not about an issue that has been ongoing. And if you look at the most recent reciprocal IEEPA order, it’s talking about the trade deficit. We’ve had a trade deficit since I think 1976. So it’s not like this is an urgent thing that just popped up. This has existed for decades. And so I think certainly there is room to challenge that does have some legs to it.
Now, whether the court is willing to rule on that against the president and step into what is a national emergency, what isn’t, I don’t have a clear idea on that. But it certainly does seem well outside the bounds of that authority to impose a global tariff for revenue purposes so-called in relation to the trade deficit.
Kyle Pomerleau: Speaking more about the politics than the actual legal argument, saying I think in the short term, the only institution that can really stop this are the courts. I think it takes a little bit more time before Congress will be willing to step in. Because I think right now Congress views going after the tariff authority as a distraction from their central goal, which is passing the reconciliation bill.
But if things go poorly in the real economy, so we go beyond just the market and the bond market being upset about this and goes into the real economy and people start losing their jobs and real incomes start declining, that’s when constituents start bugging their congressmen saying, “Well, OK, maybe this isn’t great,” and that’s when they might start entertaining this. But that has a time lag. Right now I don’t think that there’s much chance that we see these small little debates over pulling back some authority actually going anywhere.
Ernie Tedeschi: Right. And I would add, remember that pulling back IEEPA authority requires a law from Congress, which President Trump can then veto. So really you need two-thirds in both houses to be able to overcome that threshold. And you even have divisions in the Democratic Party right now over how they feel about tariffs.
And I completely agree with Kyle. You need to see real bite in the economy right now. There’s a lot of anxiety and vibes about it. We are only just beginning now to see actual, in real prices and real data direct, effects from tariffs. And so I agree that in terms of actual voter impact, political impact, we’d have to wait a little bit longer if that happens.
Erica York: And I think even that is an if, and I know that the tariffs this time around are much larger than the tariffs in Trump’s first term, but if you look at the specific constituencies hurt like the [agriculture] sector, if you look at congressional districts that experienced net economic losses, there’s research even saying they supported it because they believed in the president, they were willing to sacrifice their own livelihood for this idea, buying into the tariffs and the trade wars is going to help.
So I think even if we do start to see the economic pain hit, there may not even be a big enough push for the political incentives to align for Republican members of Congress to stand up against the president.
David D. Stewart: As we sit here today, we’re in this 90-day pause on the largest of the tariffs. What can we expect? Do you expect to see maybe another pause as the time starts to expire or for these tariffs to actually come into effect at the end of 90 days?
Ernie Tedeschi: I mean, look, I’m not an expert in the mentality of this administration and the strategy, such that it is. If I had to bet, and to be clear, I wouldn’t bet, I’d save my money to buy toys for Christmas, but I agree that I think that fundamentally what’s driving this is that the president likes tariffs, dislikes trade. I also think that more than taking the president seriously, I think that what the president has said literally in the past is a good view into his underlying guiding principle.
The president said in the campaign in 2024, he proposed a 10 percent universal tariff and a 60 percent tariff on China and brought up the idea of slightly different commodity tariffs. The other panelists may have different views about where we’re going, but if I had to bet, I’ll bet that that’s probably the equilibrium of where we’re going is roughly a 10 percent universal tariff, 60 to 80 percent on China, depending on where the 20 percent tariff ends up, and slightly different variations of 25 percent commodity tariffs, depending on how deal negotiations go with different countries.
Erica York: Yeah, I think we got a good preview that that is the case with the U.S.-U.K. deal this week. One of the few trading partners we have a trade surplus with is still stuck with the 10 percent global tariff. So I think that’s the floor. And you saw the commerce secretary even say yesterday, “10 percent is the lowest we’ll go. It’s up from there.” So I think, yeah, 10 to 20 percent global tariffs plus all the others is where we’re going to be.
And I also think we saw with the deal this week that any changes are going to be very small. There were some changes to U.K. imports of beef, but not big changes. They didn’t get into the actual rules and health guidelines and that sort of thing, just like a small quota change. So it doesn’t seem like anything really meaningful is going to be on the table.
Kyle Pomerleau: And then just looking broadly too, even if you think that most of this gets rolled back, in some sense, if you’re looking at the market or the bond market, a lot of the damage has been done. So if you looked at the reaction to these tariffs from the bond market or the U.S. dollar, for example, just initially, that’s odd.
So when you enact a tariff, the dollar is supposed to appreciate and you’d expect interest rates maybe wouldn’t change very much, but it would depend on what the Federal Reserve does. But we saw just across the board, everything going red, going negative. Interest rates went up, dollar went down, market went down. And I think a big part of that is that the market is now finally taking Trump seriously when it comes to the things he’s saying about trade and international relations. And that as long as Trump is in the White House and has the authority that he does, there’ll always be this little discount now that the market is expecting that he could do something, even if the current iteration of tariffs get rolled back in their entirety. It would, I think, take courts and Congress to step in to say, “No, you can’t do this,” to I think bring confidence closer to where it was a couple months ago.
Ryan Finley: To that I would add in terms of irreversible losses, U.S. negotiating credibility in the international tax forum. It’s hard I think to probably whenever you’re in a negotiation say, “You should abide by certain established standards,” and show in another not-too-unrelated field that you yourself are unwilling to. I don’t know how to restore confidence in the U.S. negotiating partners in that context. Probably just time.
David D. Stewart: So to finish things out, since we’re here among advisers, what can tax advisers tell their clients today about how to deal with this new reality they find themselves in?
Ryan Finley: If you scanned the client alerts that are coming out now, they don’t have a whole lot of direct tangible recommendations. I think it’s really hard. There are too many moving parts to say, “Here’s what you got to do.” Obviously you can say things like, review your inner company contracts carefully. Make sure that any differences between custom value and transfer price either don’t exist or they can be justified by specific things. Make sure you’re not contradicting yourself in any information you give to the IRS and the custom and border patrol. That’s all kind of obvious stuff.
I don’t think it’s — I mean, situations where you have a fully fledged manufacturer, a low-risk U.S. distributor, it’s going to be hard to restructure yourself back into something that’s going to on net help you more than it will hurt you now if we have a really high tariff regime. So I don’t think it’s possible to responsibly give any concrete evidence until a little bit of the smoke clears. I mean, we don’t even know which tariffs are going to be here when we leave, get out of this panel. So I don’t know.
Ernie Tedeschi: Yeah, I think anybody that tells you exactly what you should do is giving you bad advice in this environment. I think the best thing you can do is just widen the uncertainty bands about what’s possible in this environment, not take as given any policy announcement that you hear. Even if it’s something from the White House, that doesn’t necessarily mean it’s going to be true the next day. And I don’t mean that facetiously. I mean, we’ve seen announcements made one day that are then completely undone the next day.
That should inform your risk analysis and things that you should kick the tires on in terms of your contracts and your clients, but don’t assume that that’s the new normal or that that’s your baseline going forward. Your decisions should be based on the best, most economical way of going forward based on a lot of different scenarios, a wide range of scenarios. Unfortunately, that’s just the nature of uncertainty and risk right now. And hopefully, I think over the next six months, we will get some amount of more clarity on where the equilibrium will be.
There will be, I think, more deals akin to the U.K. deal that we had. There will be hopefully less movement in day-to-day tariff rates. And so in that sense, you can plan for more certainty in six months, even though we don’t know where that’s going to end up. But nevertheless, plan for certainty, but uncertainty about where the uncertainty is going.
David D. Stewart: All right, well, I think we should end it there. Thank you, Ernie, Erica, Ryan, Kyle, thank you very much for being here.
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