'The ill effects of the tariffs have not fall into place for the U.S. yet': Caldwell

Key Concepts

• Section 301 Tariffs: US trade law allowing tariffs on imports deemed harmful to US national interests.
• Section 122 Tariffs: Specific tariffs recently struck down by the US Supreme Court.
• Efficiency Drag: The negative impact of tariffs on overall economic efficiency.
• Private Fixed Investment: Business spending on assets like equipment and structures.
• AI Investment Boom: Current surge in investment driven by Artificial Intelligence technologies.
• AIPA Tariffs: Tariffs that were recently struck down by the US Supreme Court.

Economic Impact of US Tariffs & Investment Trends

This discussion centers on the economic implications of US tariffs, particularly following the Supreme Court’s decision regarding certain import levies, and the current state of US investment, with a notable focus on the role of Artificial Intelligence (AI). Preston Caldwell, Chief US Economist at Morningstar, provides analysis throughout the conversation.

State of the Union & Future Tariffs

The conversation begins with a critique of President Trump’s State of the Union address, characterized as “backwards looking” and lacking concrete details regarding future tariff policies. Caldwell emphasizes that the real impact of tariffs won’t be fully realized for “weeks and even months” due to the lengthy process involved in implementing Section 301 tariffs. He draws a parallel to the 2018-2019 period when tariffs on China were implemented, noting it was a “multi-month prolonged process.” Unlike the recently overturned AIPA tariffs, which could be implemented “with the stroke of a pen,” Section 301 investigations require substantial “paperwork, documentation, and argumentation.”

Tariffs as Revenue & Economic Efficiency

Tariffs have generated over $100 billion in revenue for the US government. While some have likened this to a federal sales tax, Caldwell argues that tariffs represent a “significant efficiency drag on the economy in the long run.” He explains that the negative effects haven’t fully materialized because companies haven’t yet passed the tariff costs onto consumers. This is attributed to companies selling pre-tariff inventory in 2025 and awaiting the Supreme Court decision. However, with tariffs remaining in place for at least 150 days and the potential for further Section 301 investigations, Caldwell anticipates companies will begin passing costs onto consumers, leading to “larger magnitude” negative economic consequences – specifically, increased costs for goods more efficiently produced abroad.

He further clarifies that tariffs are an “inefficient way to tax” because they apply a “high tax rate to a narrow tax base,” resulting in substantial efficiency consequences. The revenue generated, while significant (“a few tenths of a percentage point of GDP”), doesn’t outweigh these drawbacks.

Manufacturing & Investment Trends

The discussion addresses the goal of rebuilding America’s manufacturing base through tariffs. Caldwell states that this is a “slow-moving event” and that there has been “no impetus to the US manufacturing sector from tariffs so far.” Manufacturing employment and output have been “flat” over the past couple of years, and consumers haven’t shifted from imported to domestic goods due to the lack of a price signal.

A key point raised is the current state of business investment. Caldwell reveals that private fixed investment in the US, as of the fourth quarter of 2025, would have been in negative growth territory except for the impact of AI. AI is currently the “single driver” propping up positive growth in fixed asset investment. He cautions that this “boom in AI” may not be sustainable, and that investment remains “somewhat vulnerable” given other factors like high interest rates.

Logical Connections & Synthesis

The conversation logically progresses from an assessment of the President’s address to a detailed analysis of the economic impact of tariffs. It then expands to broader investment trends, highlighting the unusual reliance on AI investment to maintain positive growth. The central argument is that while tariffs generate revenue, their long-term economic consequences are negative, and the anticipated benefits to US manufacturing haven’t materialized. The current investment landscape is characterized by weakness across most sectors, with AI being a crucial, but potentially temporary, exception.

The main takeaway is that the economic impact of tariffs is complex and delayed. While providing a short-term revenue boost, they ultimately create inefficiencies and haven’t yet achieved the intended goal of revitalizing US manufacturing. The current economic situation is heavily reliant on AI investment, raising questions about long-term sustainability.