The monopoly round-up has lots of good and bad news. I got a quick legal analysis of Elon Musk taking over sensitive payments infrastructure, there’s been another offer to buy Spirit Airlines, a plane crash got politicized, Sam Bankman-Fried wants a pardon, and Friday was Lina Khan’s last day in office. But first, I want to delve a bit into Donald Trump levying new tariffs that will start on Tuesday, which has important implications for corporate power.
In late November, I noted that Trump would have to choose between Wall Street and tariffs, and it seems he’s picking tariffs. On Saturday, Trump signed executive orders charging across the board 25% tariffs on goods from Canada and Mexico, and a 10% tariff on Chinese goods, which goes on top of the existing 20-30% tariffs he implemented in his first term, and that Biden retained. These three countries are all major trading partners, and there are no exemptions for favored parties, nothing for Apple or Tesla. The reaction in financial markets and by foreign leaders was swift; the dollar gained in strength, all three countries considered retaliation, and the stock market is likely to swoon tomorrow.
So what exactly do these moves mean? What are the details? Will prices change? And will they cause a restructuring of industry?
Let’s start with the basics. As a macro-economic matter, trade is significant to America, with imports at about 14% share of our economy and exports at a little less than 11%. In terms of how we shape our markets, the ability of middlemen to offshore production provides leverage against workers, supplies, and communities. Here, for instance, is the percentage of sellers on Amazon based in China. Amazon may look like an American company, but it’s a node in a global system, facilitating hundreds of billions of dollars of goods from Chinese third party sellers into the U.S., such that it lists tariffs and regulation as a risk to its investors.
From the 2000s onward, America sent 90,000 factories to China, powering Trump’s rise and the new protectionist vision he articulated (and that Joe Biden followed). Trade is organized through many levers, and one of them, though not the only, is called a tariff, which is a charge or fee paid by the importer on the wholesale price of an article.
During the 2024 campaign, Trump made a lot of comments about raising tariffs, not just on certain sectors, but on everything, across the board. Wall Street didn’t believe him, thinking it was pure pandering. Well known analyst Dan Ives, for instance, was on CNBC in an absurd pink jacket on Friday talking about how Apple would of course get an exemption for its iPhone, as it did in 2018.
Now that Trump has acted, key stocks are declining.
Moving beyond the financial markets, the geopolitics are odd. It’s weird to choose just Canada, Mexico, and China for tariffs, with a higher tariff rate on the two allies than China. A few weeks ago, Trump issued a trade agenda in which closing the U.S. trade deficit seemed to be the goal, but these executive orders won’t do that. One possible dynamic here is Trump is negotiating a broader deal with China, and renegotiating the trade deal formerly known as NAFTA and now called USMCA with Canada and Mexico. Trump is also saying he’ll add tariffs to the EU. But we don’t know what’s really going on, these choices do not have an obvious logic.
Still, this move is a big deal, much bigger than in 2018. In his first term, Trump put some strategic tariffs on China, charging roughly 20-30% tariffs across a host of goods, but with a bunch of exemptions. Apple’s iPhone never got tariffed, for instance, and a lot of medical supplies went untouched. There’s a lot of hot air about tariffs increase consumer prices, but that’s not always true. The first round of Trump tariffs mostly didn’t increase consumer prices, but came out of corporate profits, so they didn’t generate inflation.
Why is that? Well it’s important to recognize that tariffs don’t apply to the retail price of a good, but to its wholesale price when imported. So a Nike shoe might cost $150 retail to an end consumer at a store but that’s before markup; Nike is paying $20 for it from a Chinese supplier. The $130 difference between what the Chinese supplier charges and the end American consumer pays is a mark-up, and it goes to Nike for branding, distribution, profit, etc. The tariff is charged on the $20. So even a very large 50% tariff will be just $10, which means Nike will still have a giant cushion, and can choose whether to pass the tariff along or reduce its profit, or both. Or it can negotiate some of the cost with its Chinese supplier.
This time, because the tariffs are hitting every sector, consumer prices are likely to change, though it will differ industry-by-industry. There are plenty of companies who have to raise prices to cover costs. But another reason for price hikes could be “seller’s inflation,” aka there’s market power throughout the economy, and corporations with such power have an excuse to charge higher prices, as they did during Covid. They can just blame Trump, and collect more profit. On the other hand, companies are scared of the new administration. So, for instance, Apple’s CEO Tim Cook may decide he will simply eat the extra $35 or so charged on each iPhone, and lose a few billion in profit, rather than anger Trump.
And what about re-shoring? That’s not clear, though there are obvious incentives to move production out of Mexico and Canada now.
That said, there are plenty of sectors who may actually offshore production in response to this particular set of tariffs because it’s more expensive to import the input goods that go into whatever they are assembling in America. And everyone knows this is the beginning of trade changes, not the end, so I’m not sure how likely anyone is to make permanent commitments in supply change disruptions until they get more certainty. But these particular tariffs will not foster a more balanced trading regime.
One question might be, can the President just reorganize global trade without Congress? The answer is, probably. The legal authority is solid, though it rests on Trump offering something of a bullshit rationale for what he’s doing. He’s relying on a hodgepodge of authorities, notably the International Emergency Economic Powers Act (IEEPA), which says the President has wide discretion over transactions involved in foreign trade, in case of an emergency. Trump has declared such an emergency, claiming fentanyl imports threaten national security. Courts usually defer on issues of national security to the President, so the order will likely stand up. But the legal reason for the tariffs is not economic, it’s security. (This is the achilles heal of trade agreements, most of which have big never-used exemptions for national security.)
Finally, there’s an element here involving powerful middlemen like Amazon.
One notable aspect of this dynamic is that Trump has done something that liberals have long advocated, which is to suspend part of what’s called the “de minimis” loophole, an exemption that a person can import up to $800 into the U.S. every day duty free and largely uninspected. If you’ve ever been abroad and bought something as a tourist, you’ve had the experience of flying back to the U.S. and writing down on a form in the airplane what you bought. If it’s above $800 you have to go to a special place and pay duties, if it’s below that you don’t. That’s what de minimis was for.
Commercial importers didn’t use de minimis. Instead, they used “Formal Entry,” which, as it sounds, is far more structured to allow American customs officials to track what’s coming into the country. A commercial importer had traditionally bought in bulk, shipped those goods into the U.S. usually on a container ship or semitruck, and was required to use a licensed customs broker to manage the process. Say you were a bicycle wholesaler. You’d import a thousand bikes wholesaling at $300 from Taiwan or China. You would then list the tariff code of bicycles on your boxes, pay duties, have a licensed customs broker and a bond for liability, have your boxes potentially inspected, and then brought those boxes to a warehouse, where they’d be unloaded and sent to different retail stores for sale.
However, thanks to a 1990s era regulation allowing the consumer not the seller to be considered the importer, ecommerce vendors started sending individual packages where the value was less than $800 directly to end consumers, claiming these were “de minimis” and thus were de facto exempt from all duties, tariffs and customs requirements. So now Amazon can just send that bike to a consumer and avoid any duties and most paperwork while your local bike shop would have to pay tariffs on the bikes they stock. Today there are 1.4 billion package that come in de minimis, most from China. A lot of the four million daily de minimis packages are low-value fast-fashion online purchases. It’s effectively a completely tariff free no-inspection wild west zone of fentanyl and smuggling. This loophole is the basis of the business model of Shein, Temu, and Amazon, who have lobbied aggressively to maintain this kind of open border policy.
That said, there are two parts to the de minimis loophole, and Trump only ended one of them. The first is the tariff exemption, which is now suspended. Everyone has to pay tariffs on everything from China, Mexico and Canada. That’s particularly important for the higher end goods below the threshold, the $750 bike or auto parts, for which a tariff does matter in and of itself. But for low value goods, that $3 t-shirt from Shein, which might wholesale at 30 cents, it doesn’t really matter. In that case, Temu will have to pay 10 cents, which is virtually nothing.
The second exemption was mandating that importers go through the “Formal Entry” customs procedure so that CBP actually can tell what is in each box coming into the U.S. These orders didn’t touch that. That’s not as important for high value products, but this is the killer for the Shien and Temu-style products. These importers would have to radically upend their supply chains to comply, if that customs procedure were changed to require licensed brokers and bonding. Unfortunately, it wasn’t. And that means the flow of low-value de minimis packages will likely come in, mostly unabated. In fact, it means that the big guys, Temu, Shein, and Amazon, who have special customs relationships allowing them to easily pay the now-minimal tariffs, will now have an advantage over smaller importers who don’t. And the fentanyl flow won’t stop.
For years, progressive advocates pushed Joe Biden to end de minimis. He wouldn’t, largely because Treasury Secretary Janet Yellen and Commerce Secretary Gina Raimondo blocked doing so. Trump could have done it with this executive order, and has not. Although Trump ended the duty-free part, at least for three giant trading partners. That said, the Trump executive order is poorly drafted. So I suspect he likely just rushed it out the door. They could fix the situation with another executive order, and there are likely more coming on trade. But for now, this change on de minimis, while helpful to some industries like domestic bicycle makers, didn’t do what it should have.
More broadly, I don’t have strong views on whether these moves are the right or wrong way to reorganize trade. Obviously if these were the final rules, I would think it very foolish. But they aren’t, and I have no idea what comes next. The United States Trade Representative, which is the official charged with running trade policy, hasn’t even been confirmed.
But one thing we will learn is whether the love-fest toward Trump on Wall Street will keep going.
And now, the rest of round-up after the paywall. I asked an experienced government contracts attorney how he’d go after Elon Musk for the seizure of power at Treasury, and he had an interesting response. Plus, California may rewrite and strengthen its antitrust laws, and non-compete bills move through Indiana and Wyoming.