MW Why this trade expert says the U.S. economy will stall next quarter - and Apple's investment claims are 'inflated'

By Steve Goldstein

Another day, another tariff. President Donald Trump's 25% tariff on autos is particularly noteworthy given administration leaks earlier this week that so-called Liberation Day on April 2 would exclude sectoral levies. Sure, those reports were right, but only because the key sectoral tariff was announced beforehand.

Brad Setser, a senior fellow at the Council on Foreign Relations, is a former adviser to the Office of the U.S. Trade Representative and a former Treasury Department official. He shared his big-picture views on tariffs in an interview on Jack Farley's YouTube channel, Monetary Matters Network.

Setser said he isn't exactly sure what's coming. All announced tariffs - excluding the auto ones announced Wednesday night - equal about 1% of GDP. Reciprocal tariffs could double that, he said. He added that calculation excludes the impact of likely retaliation.

There is also the inflationary impact of other suppliers raising their costs due to a lack of competition. "In general, estimates of the inflationary impact are close to estimates of the just-pay-at-cost," he said. "That's partially because some of the tariff may be absorbed and not passed on to consumer prices. But it's also a reflection of the fact that if the price of imported autos goes up, some firms may increase the price of domestically made autos."

Setser said the pain would be felt right away, and potentially offsetting tax breaks would not occur until later. "Right now, if tariffs go forward on April 2, they will go forward ahead of any adjustments in tax. So they are a direct hit to the economy in the second quarter. And a hit that is big enough that you could imagine the U.S. economy coming close to a stall in the second quarter when you add in the uncertainty effects," he said.

Setser dismissed Apple Inc.'s $(AAPL)$ claim that it will invest $500 billion in the U.S. over the next four years. "Apple is taking credit for making orders for TSMC's future chip production in the U.S. They were doing that under Biden. This is not real investment," he said.

Setser did acknowledge many trade concerns articulated by Trump. He pointed out, for example, that Apple, pharma companies - and now Nvidia Corp. $(NVDA)$ - have their intellectual property abroad to benefit from low tax rates. He noted the irony that U.S.-based Eli Lilly & Co. $(LLY)$ makes its weight-loss drugs in Ireland, while Denmark's Novo Nordisk $(NVO)$ makes them in the U.S. "So you do have some important distortions, upward redistribution because American companies make very profitable products without necessarily employing a lot of manual labor in the U.S.," he said.

Setser said he doesn't see something like a Great Depression emerging. "I rule out a Smoot-Hawley 2.0 [referring to the 1930 tariff increase] because we don't have a bank failure, we don't have the precursors to the depression," he said. "It may be a self-induced recession, but that's not a depression, it's not going to trigger, in my view, a financial crisis."

He ruled out a scenario of a so-called escalation to de-escalate - in other words, the tariffs are just a stick to get other countries to liberalize. Canada could bend on its dairy policy, but there are not enough other steps to justify the U.S. lowering its tariffs. There's no way Europe can negotiate away its value-added taxes, Setser added.

Setser concluded that there will likely be a recession that doesn't lead to meaningful upside down the road. "If you do the tariffs and you pull away the CHIPS Act, I actually don't think you get a manufacturing renaissance in the U.S.," he said.

The markets

After a 1.1% drop in the S&P 500 SPX on Wednesday ahead of the auto tariff announcement, futures (ES00) (NQ00) actually edged up slightly.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              5712.2     0.65%  -4.09%  -2.88%  8.84% 
   Nasdaq Composite                                                     17,899.01  0.84%  -6.17%  -7.31%  9.14% 
   10-year Treasury                                                     4.394      15.90  12.90   -18.20  18.90 
   Gold                                                                 3057.4     0.15%  5.87%   15.84%  35.60% 
   Oil                                                                  69.52      1.68%  -0.87%  -3.27%  -16.36% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

President Donald Trump unveiled a 25% tariff on imported vehicles, scheduled to start on April 3. Foreign automakers, including Mercedes-Benz Group (XE:MBG) and Hyundai Motor Co. Ltd. (KR:005380), saw share-price losses as General Motors Co. shares $(GM)$ slumped.

Trump also threatened tariffs against Canada and the European Union if they, in his words, work together to do economic harm to the U.S.

Weekly jobless claims, the second revision of fourth-quarter GDP, advanced trade data for February, and pending home sales are all slated for release.

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The chart

A chart that certainly resonates today: Société Générale derivatives strategist Jitesh Kumar put together this one on the difference between trade policy uncertainty (through the roof) and actual market volatility, which isn't particularly elevated. Right now, there's the biggest divergence ever for the available data set. "A vase placed on a high shelf doesn't necessarily imply that it will fall and break. Nevertheless, it does cause a sense of unease - if anything were to knock the vase over, the damage is likely to be much worse than if the vase were placed at ground level," Kumar noted.

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-Steve Goldstein

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March 27, 2025 07:08 ET (11:08 GMT)

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