FORECASTS FOR EXECUTIVES AND INVESTORS
Reported from Washington, D.C. • kiplinger.com • Vol. 102, No. 16
View The Kiplinger Letter Archive • Kiplinger Personal Finance Adviser
| Washington, April 10, 2025 |
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Dear Client:
The steepest tariffs are on hold, for now.
Investors are breathing a sigh of relief.
But a new U.S. trade regime is still here, with broad 10% duties on imported goods…higher for cars and key metals. And most important…
The trade war with China is escalating.
President Trump seems to have pulled back from his plan to levy higher tariff levels on a country-by-country basis, despite avowals from some of his advisors that these were not up for negotiation. Turmoil in financial markets, particularly the bond market, may have prodded him to think again. Instead, he says the individual rates are delayed 90 days while the U.S. seeks trade deals with individual countries. The one glaring exception:
Tariffs on China are soaring to 145%, even higher than Trump first announced. Beijing had hit back at Washington with its own, higher rates, so Trump is singling out China as a special case.
Amid the chaos, here are our takeaways:
The 90-day pause could become permanent when it comes to higher, country-specific duties. Trump had been playing hardball, threatening rates as high as 50%, to induce trade partners to do more than lower rates on U.S. goods. He wanted them to vow to buy more American goods, build factories in the U.S. or take other steps to narrow the trade surpluses many run with us. But those concessions could be very hard to get, and meanwhile financial markets were panicking about the potential damage to the economy. Trump relented, it seems, opting for a 10% flat rate and time to get trade partners to curb duties on U.S. goods.
Trump is likely to get some concessions he can tout in the coming months.
But he will probably settle for less than he wanted on “buy U.S.” promises.
When it comes to China, there is little sign of any reconciliation. Beijing can’t be seen to be submitting to Trump, even if sky-high U.S. tariffs cost it dearly.
We could be entering a trade cold war, featuring two rival superpowers, and smaller countries having to choose whether to align with the U.S. or China.
Trade with Canada and Mexico…two key trade partners…is up in the air.
Trump’s earlier 25% duties remain in place for goods that don’t comply with the three countries’ free-trade pact, which is up for renegotiation next year.
On the economic front: We see GDP growth slowing and inflation rising as a result of the 10% blanket tariffs, plus higher duties on cars, metals, etc. GDP will eke out a small gain, while inflation could hit 4%. That puts the Federal Reserve in a bind, forcing it to choose whether to cut rates to boost growth but fan inflation. We suspect the Fed will stand pat at its May meeting, but cut rates later in the year. On stocks: Expect continued volatility. Don’t panic-sell, but caution is essential now.
The trade fight has major implications for growth and inflation in China. The new reciprocal tariffs on Beijing are being stacked atop older tariffs, though the reciprocal tariffs won’t apply to autos, semiconductors, pharmaceuticals, energy and most metals. The latest round of tariffs has brought the effective tariff rate on China to 145%. Beijing, meanwhile, has begun levying 84% additional tariffs on all U.S. imports, bringing its average tariff on American goods to about 106%.
However, the extent of the damage will depend on Beijing’s next move. China depends on U.S. demand for just 2.8% of its GDP, meaning it won’t suffer as much as many other countries in Asia. If China’s central bank allows the yuan to weaken a lot, then the hit to China’s GDP this year could be kept to less than 2%. Absent such adjustment in the exchange rate, the damage would be more severe.
Low-dollar Chinese shipments are now also subject to tariffs. The termination of “de minimis treatment” for imports of Chinese shipments valued under $800 closes a major loophole that had let goods enter the U.S. duty-free. At least 10% of Chinese exports to the U.S. benefited from that exemption last year. The move is a blow for Chinese e-commerce giants Temu and Shein. The Chinese firms figure to lose market share to Amazon, which has struggled to compete with them on price.
Reciprocal tariffs on the European Union will hurt the bloc’s economies, on the order of a 0.3% decline in GDP in coming quarters. The EU has said it will wait before responding to Washington’s reciprocal tariffs, to allow time for negotiations. The bloc has also delayed its plans for retaliatory measures in response to U.S. tariffs on steel and aluminum. EU growth would suffer more if it does retaliate forcefully.
The trade fallout will vary significantly across Europe. Among big economies, Germany and Italy are far more exposed than France or Spain. Germany’s economy will risk entering a recession because exports to the U.S. account for a large share of GDP and are heavily skewed toward autos. Tariffs could offset a large portion, though not all, of the boost from Germany’s higher defense and infrastructure spending.
The U.K. is also in for tough sledding after the Trump administration hit it with 10% tariffs on most imports. While the U.K. is less vulnerable than the EU, any slowdown on the Continent will hurt, since the EU is Britain’s top trading partner. U.S. tariffs on pharmaceuticals…still pending…will ding Britain’s hefty pharma exports.
Upheaval in the stock market has spilled over into the bond market, too.
We think the 10-year Treasury’s yield will eventually stabilize around 4%, though more near-term spikes are possible. Bonds are usually the safe haven at times when investors stampede out of stocks. That hasn’t been the case this week. Volatility has sent bond yields soaring after an initial drop, as traders weigh competing risks... slower growth but higher inflation due to the tariffs...and as risky bond trades unravel.
Mortgage rates should ease eventually once the turmoil in Treasuries calms, though they may rise in the near term. Farther out, look for the average mortgage rate for 30-year fixed loans to dip to 6.4% if the 10-year Treasury yield does end up at 4%.
March brought some good news on inflation. Overall prices barely rose at all from the prior month, while prices excluding food and energy actually slipped. In annual terms, headline inflation clocked in at 2.4%, with core prices up 2.8%. That’s the sort of progress toward 2% that the Federal Reserve has been looking for.
Unfortunately, the happy trend is unlikely to last. Tariffs will be raising prices in coming months, even after the White House deferred most of its steepest levies. April may not show much of an increase since gasoline prices will be heading lower. But farther out, the various tariffs on imports, especially Chinese imports, will appear in the monthly inflation readings. Look for electronics prices in particular to increase, since so many components come from China. Intricate supply chains can’t be rebuilt to avoid the tariffs on China in the near term. Also, 25% duties on cars and auto parts will have a big impact on vehicle prices, both used and new, plus repairs and insurance.
Many Republicans are still nervous over President Trump’s tariff policies, though their fears were eased, a bit, with his 90-day pause on some levies. Yet some aren’t convinced that his unpredictable tactics will work in the long run.
Lawmakers from states dependent on foreign trade lead the charge, especially those from states that trade heavily with Canada, fearing that the tariffs will drag down their states’ economies…and that angry voters will blame them.
A bill rejecting Trump’s 25% tariff on Canadian imports passed the Senate.
The measure will die in the House, but it’s a symbolic slap in the face.
A bipartisan Senate bill seeks to rein in presidential tariff authority, with even Republicans growing increasingly frustrated that the White House has grown so powerful at the expense of Congress. Among other things, the bill would require congressional approval for any new levies within 60 days.
A GOP-drafted House companion bill also is expected, but the legislation is largely symbolic and may not get a floor vote in either chamber. However…
Trump’s trade policy is causing a slight rift in the GOP’s once unified front.
If the president doesn’t dial back, he risks future, and stronger, pushbacks.
One idea that Republicans are mulling to help pay for Trump’s tax cuts:
Selling federal lands. The proposal is in the infancy stage and may not come to pass, but Republicans are desperately looking for ways to fund Trump’s agenda.
Leading the charge is Rep. Bruce Westerman (R-AR), who is the chairman of the House Natural Resources Com. Westerman says some fed-owned land in the West could be sold for housing, especially to alleviate supply crunches in urban areas. It could also be used to build dwellings for Park Service workers.
Another key potential supporter of the plan: Sen. Mike Lee (R-UT). Lee is the chairman of the Senate Energy and Natural Resources Com. and has argued that “unaccountable” government agents unfairly manage federal land in Utah.
The private sector already uses public lands in the West for profit, as the federal government routinely leases land for fossil fuel and minerals extraction. Plus, Trump last month signed an executive order designed to expedite permits for drilling on public land, though the EO stops short of calling for property sales.
The plan faces hurdles, such as opposition from some Western lawmakers who view public lands as sacrosanct and vital for various forms of outdoor recreation.
Time is running out to update your driver’s license to a “REAL ID” if you intend to fly. Beginning May 7, Americans age 18 and over must have a REAL ID-compliant driver’s license or state ID, or a passport, to pass through the Transportation Security Admin.’s security checkpoints.
The REAL ID Act of 2005 established minimum security standards for state-issued driver’s licenses and identification cards to improve security for boarding domestic flights and for entering federal facilities. The requirement for a REAL ID came in response to a recommendation from the 9/11 Comm.
States have been issuing REAL IDs for years, though many Americans are still using older driver’s licenses that are not compliant. For example, in Pa., only 26% of state drivers had an updated REAL ID as of early April. To check if your driver’s license is a REAL ID, look for a star in the upper-right corner. Old-style driver’s licenses typically will still be valid for states’ purposes, including driving, after May 7, although laws vary from state to state.
Don’t wait until the last minute to update your ID, as long wait times already have been reported at many motor vehicle departments nationwide. While the deadline has been extended before, another extension isn’t expected.
As global spending on generative artificial intelligence soars this year…
Businesses are lowering AI expectations because of the high failure rate for pilot projects, according to market research firm Gartner. This paradox… business spending ramping up amid dissatisfaction…means that more firms will scrutinize projects and big AI rollouts this year and next. That being said, the lowering of expectations stems from the initially sky-high hopes as AI emerged on the scene with ChatGPT’s launch in Nov. 2022. It’s no surprise that views are now more realistic. Also, the lion’s share of spending is by Big Tech companies, building the underlying AI models, which power emerging AI apps and software. Expect the rollout of AI tools in businesses to be rocky at least this year and next.
Look for businesses and other buyers to increasingly opt for proven apps, rather than try to build their AI tools in-house. For smalls, off-the-shelf software is an obvious solution. Firms can also test the AI being integrated into all apps, from collaboration tools to Microsoft Windows. Many companies feel pressure to pay extra for AI software and add-ons to avoid falling behind the competition.
Despite the pause, there are concerns tariffs could slow the U.S. AI build-out.
At the very least, Big Tech will face higher costs to build data centers, with AI servers and other equipment facing higher prices. Alphabet, Amazon, Meta and Microsoft are already plowing hundreds of billions of dollars into data centers.
Even the chip industry, which is exempted from tariffs for now, will get hit. The semiconductor supply chain is hugely complex and global. Moreover, even chips that are made in the U.S. are frequently shipped to other countries for final assembly. This now includes some of Nvidia’s AI chips, packaged into servers for data centers. Semiconductor manufacturing equipment will cost more, leading to higher prices.
Other construction costs also risk escalating, including steel and copper.
Note that the administration is still doubling down on Chinese tariffs.
Plus, the current policy uncertainty also poses difficulties for the industry.
The headwinds come as the U.S. is in a heated competition with China for AI dominance. The U.S. has a large lead, both in tech and building data centers. But additional computing power will be necessary for further AI tech advancement.
The Trump administration is set to unleash AI across the federal government.
But it’s still not completely clear how federal agencies will handle AI risks and other issues. New guidance calls for federal agencies to adopt AI in a timely and cost-effective manner, while also addressing attendant risks. The administration is also concerned with one dominant AI player taking over and hindering choice, so it calls for requirements that make it easy for vendors to sell to the government.
The White House is pressing for fast adoption to unlock productivity gains and even streamline regulations and other bureaucratic processes for businesses and citizens. The potential for AI is huge, but implementation could be difficult.
As AI adoption ramps up in the government, expect problems to arise, including privacy and security concerns, as well as trouble finding effective uses.
Some critics already have concerns waiting to see how actual AI use unfolds. There have been reports that the Dept. of Government Efficiency, known as DOGE, has used AI tools in ways that are not compliant with transparency and risk practices.
Yours very truly,
April 10, 2025
THE KIPLINGER WASHINGTON EDITORS
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