May 12, 2025

Macrofinancial Outlook for the Day

Summary

The U.S. and China have reached a temporary agreement to significantly reduce tariffs, with U.S. levies on Chinese imports dropping from 145% to 30% and Chinese duties on U.S. goods falling from 125% to 10%. This three-month agreement, announced May 12, 2025, includes China suspending restrictions on rare earth metals exports. However, it should be noted that this still represents a substantial increase from pre-trade war tariffs, and port capacity issues may lead to shipping bottlenecks and higher consumer prices as trade flows normalize. If this agreement follows similar historical patterns from Trump’s first term, questions about long-term sustainability are more than fair.

House Republicans have released text for a tax package that would cut taxes (mostly for the rich) by more than $4 trillion while reducing spending by $1.5 trillion over a decade, resulting in approximately $2.5 trillion in additional borrowing. Key provisions include extending Trump’s 2017 tax cuts, increasing the SALT deduction limit to $30,000, expanding tax cuts for estates and closely-held businesses, phasing out clean energy tax credits, and maintaining carried-interest tax loopholes. This combination could contribute to stagflationary conditions by increasing inflation through deficit spending while potentially weakening economic growth by eliminating incentives for clean manufacturing.

“Agreement” With China

May 2025: The U.S. And China Reached A Temporary Agreement That Would Result In Some Tariffs Falling By 115 Percentage Points. According to Bloomberg, “The US and China will temporarily lower tariffs on each other’s products in a dramatic ratcheting down of trade tensions that buys the world’s two largest economies three months to work toward a broader agreement. The combined 145% US levies on most Chinese imports will be reduced to 30% including the rate tied to fentanyl by May 14, while the 125% Chinese duties on US goods will drop to 10%, according to a joint statement and from officials in a briefing Monday in Geneva.” [Bloomberg, 2025-05-12]

• Bessent Claimed The Trump Administration Wasn’t Seeking A Complete Decoupling, Only Looking To Bring Back A Few Industries With National Security Interests. According to Bloomberg, “‘Both sides agree we do not want a generalized decoupling,’ Treasury Secretary Scott Bessent said in a Bloomberg Television interview Monday. ‘The US is going to do a strategic decoupling in terms of the items that we discovered during Covid were of national security interests — whether it’s semiconductors, medicine, steel,’ he said.” [Bloomberg, 2025-05-12]

• Bessent: The Headline Tariff Announcement Would Be A Floor For The Current Agreement, With Other Tariffs Remaining In Place. According to Bloomberg, “Bessent added that the tariff reductions don’t apply to sectoral duties imposed on all US trading partners, and the tariffs applied on China during the first Trump administration remain in place. Asked what would happen at the end of 90 days to avoid tariffs ratcheting back up, Bessent indicated there’s a chance to extend the truce further.” [Bloomberg, 2025-05-12]

As Part Of The Deal, China’s Restrictions On American Imports Of Rare Earth Metals Was Suspended. According to Bloomberg, “China also said it would suspend or cancel its non-tariff countermeasures imposed on the US since April 2. That’s an apparent reference to China’s addition on April 4 of seven rare earths to its export control list. Securing the removal of those restrictions was a priority for Washington as a range of industries faced disruption.” [Bloomberg, 2025-05-12]

Mark Williams, Chief Asia Economist At Capital Economics Said That The Chinese Did Not Make Any Concrete Concessions To Trump’s Primary Claim: An Unfair Trading Relationship. According to the Wall Street Journal, ““It will be interesting to see whether China is willing to offer anything substantive in these talks, but I can’t see that they’ll feel under a huge amount of pressure to do so,” said Mark Williams, chief Asia economist at Capital Economics, in an interview. “China has successfully called Trump’s bluff.” Williams said China didn’t make concrete commitments to address U.S. concerns about what President Trump sees as an unfair trading relationship, for instance by committing to open up its market to more U.S. goods.” [Wall Street Journal, 2025-05-12]

Potential Bullwhip Effect

Ryan Petersen: “Get Ready For A Shipping Boom” According to Bloomberg, “Ryan Petersen, the founder and CEO of digital logistics platform Flexport Inc., posted a note on X indicating he expects a race to transport goods across the Pacific given the tariff reprieve. “Get ready for a shipping boom,” he wrote without elaborating.” [Bloomberg, 2025-05-12]

Ports as Bottlenecks

For international trade, ports operate as the largest bottlenecks. The ocean is wide enough that there is basically no traffic for even the largest ships on most of their journeys, but each journey must start and end at a port, where each container has to be unloaded, placed onto a truck or train, and shipped out. As an example, the Port of Los Angeles has 84 ship to shore container cranes. Each crane can only offload a fixed volume of containers at a time, meaning that the capacity for the port is effectively capped.

Therefore, the way to maximize throughput is the have a fairly constant flow of trade through a port. With tariffs having been as inefficient as they have been over the last month, that is much harder. Importers need to try to time the arrivals of their purchases by what tariffs are in effect when, meaning that there will be a much stronger cycle of when imports will come in.

Our ports are not built to handle this kind of variance, meaning that at different times, the port will alternatively be above and below capacity. When it is overworked, prices will rise, and those prices will have to be passed on to the source of the money that is paying for those goods: American consumers and businesses.

Examining The Agreement In The Context Of Where It Came From

Paul Krugman: Despite Backing Away From The Most Extreme Levels, Trump Has Raised Tariffs On All Imports From 3 Percent To 13 Percent. According to Paul Krugman, “A 30 percent tariff is still really, really high, especially combined with the 10 percent tariff we’re imposing on everyone else. The back of my envelope says that the average U.S. tariff rate will now be around 13 percent, up from around 3 percent when Trump began his trade war. Before all this drama that would have been seen as wildly protectionist.” [Paul Krugman, 2025-05-12]

• Paul Krugman: The Functional Embargo That Existed Will Have Consequences. According to Paul Krugman, “This retreat probably hasn’t come soon enough to avoid high prices and empty shelves. Even if shipments from Shanghai to Los Angeles — which had come to a virtual halt — were to resume tomorrow, stuff wouldn’t arrive in time to avoid exhaustion of current inventories.” [Paul Krugman, 2025-05-12]

Precedent

During Trump’s First Term, It Took Almost Two Years For The Preliminary Agreement Between The Trump Administration And Chinese Government To Result In A “Phase One” Trade Deal. A Deal China Failed To Live Up To. According to Bloomberg, “While markets have cheered recent reports of progress, history suggests that it could take a long time to reach a detailed agreement, if one is possible at all. In 2018, the two sides also agreed to put their dispute ‘on hold’ after a round of negotiations, but the US soon backed away from that deal, leading to more than 18 months of further tariffs and talks before the signing of the ‘Phase One’ trade deal in January 2020. In the end, China failed to live up to the purchase agreement in that deal and the US trade deficit with China jumped during the pandemic, setting up the current trade war.” [Bloomberg, 2025-05-12]

• January 2020: Shortly After The “Phase One” Trade Deal Trump Reached In His First Term Was Announced, Trade Experts Noted It Was Almost Guaranteed To Fail. [Chat P. Bown at the Peterson Institute for International Economics, 2020-01-21]

Taxation

Tariffs Replacing Income Taxes

include("../scripts/oxocarbon-plot.jl")
theme(:oxocarbon)
using CSV, DataFrames, Dates, Statistics
rev_data=DataFrame(CSV.File("../resources/2025-05-12/Net-Tax-Monthly.csv"))
min_income_tax_rev_row = argmin(rev_data.Income)

Tariff Revenue data for April 2025 was posted to the Monthly Treasury Statement, and while it showed that Tariff revenue jumped by 91.41 percent, it was still only 34.44 of the lowest month of net income tax collection in the last ten years, which occurred in February 2018.

If April 2025 was the amount of Tariff revenue raised every month, it would take 13.52 months to equal the average net income tax revenue over each of the last 12 months.

Tax Cuts for the Rich

House Republicans Proposed Tax Bill Would Have Raise The Deduction For State And Local Taxes To $30,000, A Massive Tax Cut For People Paying More Than $10,000 In State And Local Taxes. According to Bloomberg, “One of the thorniest issues — including a contentious standoff over increasing the state and local tax deduction — is still not resolved. The draft calls for increasing the state and local tax deduction to $30,000 for both individuals and couples, up from $10,000, with income limits for single taxpayers earning $200,000 or joint filers making twice that. But some lawmakers representing high-tax areas want an even bigger tax break — as much as $124,000 for joint filers.” [Bloomberg, 2025-05-12]

House Republicans’ Tax Plan Would Expand Tax Cuts For Estates And Owners Of Closely Held Businesses. According to the Wall Street Journal, “The GOP tax plan, broadly, would extend the Trump tax cuts beyond their scheduled Dec. 31 expiration date, preventing tax increases and adding some new ideas, including versions of Trump’s plans to eliminate taxes on tips, overtime pay and Social Security benefits. It would also temporarily boost the standard deduction and child tax credit while also expanding tax cuts for estates and owners of closely held businesses.” [Wall Street Journal, 2025-05-12]

House Republicans’ Tax Plan Would Keep The Current Tax Treatments Of Carried-Interest Income. According to the Wall Street Journal, “The tax treatment of private-equity managers’ carried-interest income wouldn’t change, even though Trump wanted to do so.” [Wall Street Journal, 2025-05-12]

House Republicans Proposed To Cut Taxes For The Rich, Eliminating The 39.6 Percent Tax Rate, Rather Than Just Raising Its Threshold As Trump Had Suggested. According to Bloomberg, “The House Ways and Means Committee release of the tax measures, ahead of planned debate on the panel Tuesday, is a sign the Republican-controlled chamber is moving toward a floor vote this month on the legislation. The bill aims to cut taxes by more than $4 trillion and reduce spending by at least $1.5 trillion over a decade. The proposal doesn’t include a tax hike on the wealthiest Americans, after weeks of debate among Republicans about whether to raise levies on millionaires. The bill would permanently extend the 37% top rate for individuals that was set in Trump’s 2017 tax law. That’s despite Trump telling Speaker Mike Johnson as recently as last week that he wanted a 39.6% rate for individuals making more than $2.5 million.” [Bloomberg, 2025-05-12]

Trump’s Proposed Tax Hike For The Rich Was A Tax Cut For The Rich

When the TCJA was passed the tax rate was lowered to 37 percent for ten years, but it would go back to 39.6 percent in 2026. In 2024, that bracket kicked in at $609,350 for an individual (I know that the brackets would change around a bit more in a way that materially matters, but for the sake of this explainer, that is not necessary to the conversation). Therefore, under current law, those taxpayers would have their income above that threshold taxed at the 39.6 percent rate. Trump’s proposal to have that rate kick in on income over $2.5 million would mean that almost $2 million in income would be moved from that 39.6 percent tax bracket to the 37 percent tax bracket. That is a tax cut for the rich, plain and simple.

Stagflationary Policies

Higher Inflation

May 2025: House Republicans Released A Tax And Spending Plan That Netted Out To $2.5 Trillion In Additional Borrowing Over The Next Decade. According to Bloomberg, “The House tax committee is seeking to increase the state and local deduction and make official several of President Donald Trump’s campaign tax pledges in a multi-trillion dollar package that will serve as Republicans’ signature legislative effort. The House Ways and Means Committee release of the tax measures, ahead of planned debate on the panel Tuesday, is a sign the Republican-controlled chamber is moving toward a floor vote this month on the legislation. The bill aims to cut taxes by more than $4 trillion and reduce spending by at least $1.5 trillion over a decade.” [Bloomberg, 2025-05-12]

Weaker Output Growth

House Republicans’ Tax Proposal Would Quickly Phase Out Tax Credits For Clean And Advanced Manufacturing, And Limit The Ability For New Companies To Monetize Their Tax Credits. According to the Wall Street Journal, “Credits for producing renewable energy or investing in it would start shrinking in 2029 and be eliminated after 2031. The bill includes new limits on the sale of tax credits, pinching a market that has boomed since the Inflation Reduction Act in 2022. The tax credit for producing clean hydrogen would end after 2025, allowing projects that start construction this year to qualify. Tax credits for producing components for batteries and renewable energy would generally expire after 2031, with a 2027 expiration for wind-energy components.” [Wall Street Journal, 2025-05-12]

Corruption

Crypto

The Trump-Backed American Bitcoin Corp Announced Plans To Go Public Via A Merger. According to Bloomberg, “A Bitcoin-focused venture tied to the Trump family is to go public as part of a merger agreement with Gryphon Digital Mining. American Bitcoin Corp., which is majority owned by Hut 8 Corp. and partly backed by Eric Trump and Donald Trump Jr., will be acquired by Gryphon in an all stock merger transaction, Hut 8 said in a statement Monday. Shares of Gryphon jumped as much as 460% to $2.93, while Hut 8 increased 17% to $16.31. Launched in March, American Bitcoin is focused exclusively on Bitcoin mining and strategic Bitcoin reserve development. The company was formerly known as American Data Centers Inc., an entity formed by a group of investors including the Trump sons. It also plans to hold a large amount of Bitcoin on its balance sheet, emulating Michael Saylor’s Strategy. The newly combined company will operate under the American Bitcoin brand and is expected to trade on Nasdaq under the ticker symbol ‘ABTC,’ the statement said. The transaction is expected to close as early as the third quarter this year. Additional financial details weren’t disclosed.” [Bloomberg, 2025-05-12]

After The Merger, Hut 8 And The Trump Boys Would Own 98 Percent Of The Combined Compnay. According to Coindesk, “American Data Center, which was owned by Eric Trump and Donald Trump Jr, merged their firm with American Bitcoin in March. The Trump brothers own 20% of American Bitcoin, while Hut 8 holds the remaining 80%. The stock-for-stock transaction will result in Gryphon acquiring American Bitcoin, with the combined company adopting the American Bitcoin name and trading on Nasdaq under the ticker ‘ABTC.’ The merger is expected to close as early as Q3 of 2025. American Bitcoin will retain its current leadership and board, including CEO Mike Ho, and remain focused on scaling low-cost bitcoin (BTC) accumulation. ‘This transaction marks the next step in scaling American Bitcoin as a purpose-built vehicle for low-cost Bitcoin accumulation at scale,’ said Asher Genoot, CEO of Hut 8. ‘By taking American Bitcoin public, we expect to unlock direct access to dedicated growth capital independent of Hut 8’s balance sheet.’ After the merger, existing shareholders of American Bitcoin are expected to own roughly 98% of the new company. Hut 8 will maintain majority ownership and serve as the exclusive infrastructure and operations partner.” [Coindesk, 2025-05-12]

A Reverse Merger To Limit Disclosure

Normally, when a company wants to go public, it will file all kinds of disclosures with the SEC, and then go around to buyers, showing them its books to attract interest. There is, however, and easier way for a company to go public: a merger with a company that is already public. That is what appears to be happening here, and it is a sign that the owners of American Bitcoin are not interesting in making more information about them public than is necessary. This kind of merger also generally comes with fewer restrictions on when shares can be sold, meaning the Trump family will have a faster timeline to realizing a profit than if they had gone public the normal way.

Middle East Interests

Free Plane From Qatar

Trump Defended The Idea Of Taking A Free Plane From The Qatari Government, Which Would Go To His Presidential Library After His Presidency Ends. According to the Wall Street Journal, “President Trump defended Qatar’s gift of a plane and said he would be a stupid person to not take it, despite ethical scrutiny over such an offer from a foreign nation. Under the potential arrangement, the plane owned by the Qatari royal family would be used as Air Force One while Trump is in office after being retrofitted by a U.S. defense contractor. The U.S. wouldn’t pay for the luxury 747-style jumbo jet. Asked on Monday if he was planning to take the offer, Trump said he wouldn’t turn it down. ‘I mean, I could be a stupid person and say, “No, we don’t want a free, very expensive airplane.” But it was, I thought it was a great gesture.’ Trump is expected to visit Qatar this week in his tour of the Middle East, which also includes stops in Saudi Arabia and Dubai. The plane isn’t expected to be gifted this week as part of the trip, Trump said. The president said the current Air Force One plane in use is 40 years old. He has expressed frustration with Boeing over the delay in building a new plane, which was supposed to be finished last year. ‘If we can get a 747 as a contribution to our Defense Department to use during a couple of years while they”re building the other ones, I think that was a very nice gesture,’ Trump said. Democrats and good-government groups criticized the pending deal, saying the president’s opinion could be swayed by a large gift. Trump said it wouldn”t. ‘Nothing says “America First” like Air Force One, brought to you by Qatar,’ Senate Minority Leader Chuck Schumer (D., N.Y.) posted on X. ‘It’s not just bribery, it’s premium foreign influence with extra legroom.’ Trump said that he doesn’t plan to continue using the plane after he leaves office and that it would instead go directly to his presidential library, comparing it to a decommissioned Air Force One plane displayed at Ronald Reagan’s presidential library in Simi Valley, Calif. ” [Wall Street Journal, 2025-05-12]