The Kiplinger Letter, Vol. 102, No. 25

FORECASTS FOR EXECUTIVES AND INVESTORS
Reported from Washington, D.C. • kiplinger.com • Vol. 102, No. 25

Likely reaching deeper into the tariff toolbox to use additional powers that can stand legal muster.

TRADE

Reciprocal tariffs will not likely survive, despite an appeals court allowing them for now. The president used national emergency powers via a 1977 law. The U.S. Court of International Trade ruled 3-0 that a state of emergency wasn’t proved, voiding his reciprocal tariffs, his escalation of tariffs on China to 145% (later delayed) and the 25% tariffs on Canada, Mexico and China for fentanyl trafficking.

New trade actions will have staying power. Trump can rely on authorities used in his first term, which survived legal challenges. Tariffs on autos, steel and aluminum are based on industries vital to national security. Another example: Broad tariffs on imports from China in his first term were based on a law that allows for retaliation against countries that discriminate against U.S. exports. However…

They’ll take longer and be less sweeping. For example, the tariffs on China in Trump’s first term took a year to implement. Using the same authority on a country-by-country basis would take a lot of time.

Other trade actions, not yet tried, also could be looked at. Section 122 of the 1974 Trade Act allows the president to impose duties of up to 15% that last six months, but then need congressional approval beyond that time. That would require suspending the filibuster rule so that a simple majority in the Senate would suffice. This would save Trump’s widespread 10% tariffs, at least. There’s also power in the 1930 Trade Act, which allows up to 50% tariffs when U.S. exports are discriminated against. Never invoked, the Depression-era law was something the Trump administration considered before but hasn’t tried. Such a move would require an investigation into a target country’s trade practices.

For businesses, various court rulings on trade spell more uncertainty. Not knowing what tariffs will be permanent makes it hard to plan ahead. Currently, businesses will assume that punishing tariffs against China and the European Union could come back, and will try to import the goods they need before that happens. Expect a booming import business this month and possibly later this summer if tariffs are delayed again. (Reciprocal tariffs over 10% are now delayed to July 2.)

Trump will face tough decisions, balancing his strong belief in using tariffs to raise revenue and protect workers with the reaction of the stock market, which he watches closely. He is keen to negotiate trade deals that he can tout as wins.

THE ECONOMY

Nearly a third of manufacturers are reshoring production to the U.S. or are actively considering it, according to one survey of 500 firms conducted between Feb. and April of this year. Half have reshored at least once in the last 10 years. Of those considering the option now, more than two-thirds cite geopolitical issues or supply chain risk as an important reason for doing so.

Don’t overestimate their impact. Less than one-tenth of respondents have reshored more than 10% of their current business. The biggest reasons for not doing so include the U.S.’s higher costs and lack of skilled workers. Roughly half do not plan on doing any reshoring or have no need to do so.

True, tariffs will raise the cost of imports. 90% of contract suppliers say that they have lost business due to price competition from imports. What’s more, half of suppliers say that imports have cost them 20% or more of their sales over the past 25 years. The cost advantage of imports averages around 25%.

But manufacturers who depend on imported parts aren’t keen on tariffs the way suppliers of domestic parts are, because tariffs will increase their costs. Note that a quarter of imported goods are parts that U.S. manufacturers use.

Trade talks between the U.S. and the EU continue amid legal uncertainty. Recent federal court decisions have called into question the ability of President Trump to impose 50% tariffs on the EU, as he has threatened, reducing U.S. leverage and incentives for Brussels to accelerate negotiations. That said, Trump still has other tariff options, even if they take longer to implement, so expect the EU to keep talking in the hope of forestalling future U.S. duties.

Any agreement with the EU will likely be limited. A comprehensive deal won’t come together by July 9, the new deadline that Trump has given Brussels.

Both sides want to avoid an economically damaging trade war. That said, the EU is preparing countermeasures in case negotiations fail. These include duties that could apply to a range of American-made products, from machinery to whiskey.

REAL ESTATE

The Republican tax bill would block bans on algorithmic pricing systems by state and local governments for 10 years. These data-driven models are used to automatically set prices. Several U.S. metro areas, including Philadelphia and San Francisco, have already prohibited using the software when setting rents. Other cities, including San Diego and Jersey City, are close to enacting their own bans. Plus, there are proposals to expand these local bans beyond rents to other prices, too.

The provision will face an uphill battle in the Senate, where Democrats will try to use procedural hurdles to get the provision removed from the legislation. They have also introduced a bill to bar companies from using algorithms to set prices.

Algorithmic pricing systems continue to face legal challenges. Federal, state and local regulators have accused rental data algorithms, such as RealPage and Yardi Systems, of using nonpublic data to help landlords illegally collude on pricing. Even the provision in the GOP tax bill would do little to stop lawsuits alleging that RealPage violated antitrust and consumer protection laws.

CRYPTO

The Securities and Exchange Comm. has more info on crypto staking. The agency’s new guidance confirms that most such staking activities aren’t subject to federal securities laws. By law, a security is a financial instrument… stocks, bonds, investment contracts, derivatives, etc…through which people invest, expecting profits derived from the efforts of others. By contrast, crypto investors “stake” their asset holdings to a network for a set period in exchange for a reward. The SEC says staking will be treated like mining, the mechanism that is used for making new digital assets like bitcoin…the equivalent of printing money.

The guidance is a huge win for cryptocurrency exchanges. Several of them have started offering staking services again after being shut down by regulators.

CONGRESS

There’s growing momentum in Congress to hit Russia with sanctions. Almost the entire Senate (82 senators) is backing a bill to sanction Russia if it refuses to engage in “good-faith negotiations” for lasting peace with Ukraine.

The bill calls for a 500% tariff on imported goods from countries that buy Russian oil, gas, uranium and other products. The main sponsors of the bill are Sens. Lindsey Graham (R-SC) and Richard Blumenthal (D-CT).

The proposal doesn’t offer a hard deadline on the timing of sanctions, though it would call on the president to determine whether progress is being made within 15 days of the bill’s enactment, and then every 90 days thereafter.

It’s a rare attempt by Capitol Hill to wrestle back some control over foreign affairs. It’s also a message to President Trump that the Senate is tired of Russia’s reluctance to engage in talks to end its war with Ukraine, and would back him if he got tougher with Russia. Trump recently has hinted that he’s open to sanctions if Russia doesn’t come to the negotiating table soon.

The measure is among the most bipartisan major proposals this year, as the cosponsor list is closely divided between Republicans and Democrats. It includes John Thune (R-SD) and Chuck Schumer (D-NY) and their lieutenants.

While the bill’s prospects look good in the Senate, its fate is less certain in the House, which is a far more unpredictable body than the upper chamber.

DEFENSE

Ukraine’s daring attack on Russia won’t bring an end to the ongoing conflict, as evidenced by the lack of progress in the latest round of peace negotiations. Moscow has continued to insist that Kyiv make significant territorial concessions, in addition to limiting the size of its military. Both are nonstarters for Ukraine.

Nevertheless, the attack leaves Russia much weaker than it was before, having destroyed much of Moscow’s bomber fleet, including many combat aircraft that the country no longer produces at scale and that cannot be easily replaced. Russia had already been forced to relocate its planes in an effort to avoid the threat of Ukrainian drone attacks. While Kyiv has struggled with less U.S. military support, recent statements by Russia suggest the country is depleting its weapons stockpiles.

It also offers a glimpse into the future of warfare. Notably, Ukraine was able to strike deep in Russian territory using drones that were smuggled into the country via shipping container. China is developing containerized missile and drone systems that defense planners fear could be used to target the U.S. or Taiwan in the future.

REGS

First is a rule allowing pension plan fiduciaries to consider ESG factors… environmental, social and governance…and other collateral benefits in situations when they are deciding between two different investments. The rule had been in effect since 2022, surviving a legal challenge from a coalition of 26 Republican-led states, before a judge agreed to pause the rule at the Trump administration’s request.

Second is a warning against the inclusion of cryptocurrency in 401(k) plans, guidance that the Dept. of Labor also finalized in 2022. The agency specifically noted that such investments were volatile and speculative, and that most retail investors would likely be unfamiliar with them. The guidance too survived legal challenges.

The so-called fiduciary rule’s days are also likely numbered. The regulation, proposed last year under President Biden, was prevented from going into effect by the courts and remains stuck in legal limbo. The Dept. of Labor has asked for more time to consider how to respond to the multiple lawsuits against it. Officially known as the Retirement Security Rule, it outlines a detailed test for who meets the legal definition of a fiduciary…a person who exercises discretionary control over the management of a plan…under the Employee Retirement Income Security Act.

HIGHER ED

Colleges and universities are confronting a genuine crisis as the conflict with the White House over campus activism and foreign enrollment comes to a head. The administration’s demands that colleges curb unruly protests that sometimes cross over into unlawful actions have led to a larger confrontation: An attempted crackdown on foreign students, with demands for more vetting of who comes to America to study. At stake: Tens of billions of dollars in tuition as well as federal grant funding, which the White House is starting to redirect. The administration says its aim is to root out anti-Semitism and anti-Americanism, eliminate any Chinese communist influence, and pressure schools to adopt changes to admissions, hiring and campus policies. Schools say many actions are illegal and threaten academic freedom, the ability to lure global talent, and U.S. innovation. The courts will need time to settle the fight. But some of the fallout is foreseeable:

Cuts to federal R&D will hit universities across the country hard, since that is where tens of billions of dollars are deployed via research grants. Dozens of big schools get at least 10% of funding from the federal government.

A steep drop in foreign student enrollment is coming. Potential students from abroad will increasingly opt for schools outside the U.S. The biggest decline will be students from China, which are 25% of total foreigners, or 277,000 students. Already, other nations are trying to lure foreign students with more research funding.

There were 1.1 million international students in the 2023-24 school year, up from 560,000 in 2005. Foreigners account for nearly 6% of total undergrad and graduate enrollment. Foreign students often pay full price and pursue STEM, while helping with a looming demographic challenge: The U.S.-born population of college-going young adults is expected to fall by 15% between 2025 and 2029.

TECH

The industry will just barely eke out growth this year, says a recent forecast by market research firm IDC. Worldwide smartphone shipments are set to rise 0.6% in 2025 versus 2024, hitting 1.24 billion units, a downgrade from the 2.3% growth that IDC was predicting in Feb. Worse for phone makers is the long-term trend. Through 2029, a meager 1.4% average yearly growth is expected, as phone users hold onto devices longer than in the past and often opt for used/refurbished models.

Meanwhile, the PC market is chugging along nicely. Global PC shipments are set to rise 4.1% this year versus 2024, says IDC, as businesses refresh PC fleets before Windows 10 support comes to an end. Many small firms plan to upgrade, too.

SPORTS

Pickleball courts are popping up at campgrounds faster than any other perk, says a report by The Dyrt, a camping app. In 2024, 17% of private U.S. campgrounds that added amenities installed pickleball courts, overtaking Wi-Fi at the top spot. Still, Wi-Fi remains the most popular camping amenity overall, which is available at 71.5% of all private campgrounds, with many having offered the service for years.

Pushback is coming from some campers, many of whom choose camping for its quiet. Pickleball’s noisy nature is likely to become a camping flash point.

P.S. Just a reminder that there will be no Kiplinger Letter next week. This week, you are receiving a regular four-page Letter, plus a two-page special issue.

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FORECASTS FOR EXECUTIVES AND INVESTORS
Reported from Washington, D.C. • kiplinger.com • Vol. 102, No. 24

But less is written about the current state of U.S. trade… the size and nature of our trade deficit, what drives it, what things the U.S. imports (or exports) a lot of, what we do and don’t build.

Let’s take a look at the scale of U.S. imports and exports, where domestic manufacturing is growing, and whether more can be made here. The political debate over the president’s trade policies is fierce. Much less is said about how things stand now. You may find the following facts and outlooks useful.

WHERE WE STAND

Last year’s trade deficit totaled $918 billion, worth about 3% of U.S. GDP. That’s the value of exports minus imports, for both goods and services. The U.S. has run an annual trade deficit, of varying sizes, every year for 50 years.

When it comes to services, America is a net exporter, running a surplus of almost $300 billion last year. (More on the burgeoning services surplus below.)

That the country doesn’t make much here anymore. Consumers see items labeled “Made in China” and understandably think U.S. factory output has fallen.

Yet the U.S. is the second-largest manufacturer, with China first. Production has shifted away from lower-cost consumer products in favor of capital equipment, which consumers seldom see. Our domestic industrial output is nearly as large as all of Europe’s combined. Manufacturing has fallen to just 10% of U.S. GDP, but that is because service industries have grown so rapidly in recent decades.

Despite our trade deficit, we are the largest exporter after China, due to our mix of high-value manufacturing and abundant natural resources.

Some of our top manufactured exports: Industrial and farm equipment. Engines and generators. Electrical gear. Instruments used by many industries. Computers and accessories. Telecom components. Aircraft. Pharmaceuticals.

The domestic boom in oil and gas has unleashed a gusher of exports of petroleum. 20 years ago, the U.S. imported a net 13 million barrels per day. Now, we export 3 million bpd more than we import. Similarly with natural gas, the U.S. is now the world’s largest exporter of liquefied natural gas. New terminals to export even more are being built, which could up foreign LNG sales by a third.

Services exports hit $1.1 trillion last year, up from $769 billion in 2015. Most of that growth has been driven by the internet’s ability to distribute services around the world, especially in IT, finance and insurance. Think software licenses, cloud computing and data storage, along with industrial services made possible by the internet, such as precise logistics and licensing of U.S.-made equipment. U.S. manufacturers are the No. 2 exporter of these “digitally enabled” services.

Agriculture. Long the world’s chief source of exported food and feeds, the U.S. has begun running trade deficits in farm goods. Why? The strong dollar, stiff competition from Brazil and rising consumption of things not grown here.

ROOM TO GROW

The U.S. is the world’s second-largest producer of chemicals by volume, generating 250 million tons last year, compared with 1.3 billion tons for No. 1 China. America’s energy abundance provides it with a key advantage, since fossil fuels, especially natural gas, are used as both energy sources and feedstocks.

Chemicals are one of the few goods sectors where the U.S. runs a trade surplus, which reached an estimated $25.7 billion last year. That trade surplus is also expected to persist, though the current upheaval in U.S. trade relations muddies that outlook. But for now, chemicals account for around 10% of U.S. goods exports. Top products: Pharma preparations. Plastic materials and resins. Petrochemicals. Ethyl alcohol.

Recent investments in new chipmaking capacity are enormous. After the U.S. saw its share of global chipmaking fall from 37% in 1990 to 12% today, a rebound is under way, driven by pandemic supply chain disruptions and funding from Congress. As of last year, there were 90 new chip projects in development, backed by $450 billion in investments (including about $50 billion from the 2022 CHIPS Act). New plants in Arizona by TSMC and Intel are either up and running or coming online soon to produce the cutting-edge chips that historically have been made in Taiwan. Intel is also considering huge manufacturing investments in Ohio, while Micron is working on new memory chip plants in Idaho and N.Y. As a result of all this…

U.S. chipmaking capacity is on track to triple by 2032, with an emphasis on domestic production of the most advanced chip designs. There are challenges, admittedly. Hiring enough skilled technicians will be hard. And chipmaking plants require tons of electricity. The U.S. grid is already coming under capacity strains.

Then there’s aerospace, which is growing by leaps and bounds as firms race to deliver high-speed internet and other services from huge arrays of small satellites.

SpaceX is the dominant player for now, due to its Starlink internet service. It has a massive, just-expanded facility in Texas to build millions of satellite dishes, it builds thousands of satellites in Redmond, Wash., and it makes rockets in Texas and Calif. It is breaking ground on a new factory in Fla. this year to build Starship, the largest rocket ever. Meanwhile, Amazon is gearing up to challenge SpaceX, with plans to build thousands of satellites and millions of satellite-internet antennas.

Related to aerospace, the U.S. remains the world’s premier defense exporter, dominating the global trade in weaponry, with Russia, China and France far behind. A silver lining of the actual and potential conflicts roiling the world is steady demand for military hardware for the foreseeable future. The U.S. doesn’t lead in every type of weapon, but many of our systems are recognized as world-class. The big challenge will be keeping up with demand from both our military and friendly foreign militaries.

High-skilled workers, from engineers to tradespeople and machine operators. It’s hard to imagine the return of factories employing masses of assembly line workers. But the need for specialized, educated workers is clear. Worries about labor shortages are already cropping up and will worsen without enough young people getting degrees in STEM fields or going into skilled trades. Fortunately, interest among high schoolers in vocational training programs appears to be picking up. The president’s proposal to boost skilled-trade apprenticeship programs could also help if it gets implemented.