Morning Wire - Trade Deals, Tariff Truce & Trillions in US Investments

Episode Date: May 17, 2025

Economist EJ Antoni breaks down the U.S. trade deal with China, a massive $2 trillion investment influx from the Middle East, record-setting market gains, and a sharp decline in inflation. What does this all signal for the nation's financial future? Get the facts first on Morning Wire. Learn more about your ad choices. Visit podcastchoices.com/adchoices

It was a historic week of dealmaking and causative economic news. President Trump and his team hammered out details of a trade truce with China, secured nearly $2 trillion in investment from Saudi Arabia and Qatar, and the stock market surged and inflation hit its lowest levels in years. In this episode, we speak to public finance economist and senior fellow at Heritage, E.J. and Tony for some perspective on those sweeping investments and the health of the U.S. economy. I'm Daily Wire Executive Editor John Bickley with Georgia Howl. It's Saturday, May 17th, and this is a weekend edition of Morning Wire.

Joining us now as economist E.J. and Tony E.J., thank you so much for coming on. My pleasure. Thank you for having me. So look, we saw this week how tariffs the stock market inflation are all interconnected, a really dramatic fashion this week with all these trade deals, inflation numbers. Let's look at these separately at first. The first thing we saw is the big trade deal with China hammered out by Treasury Secretary Scott Bessent. What did we see there? Is this a good deal for the United States? Well, I would say it's a step in the right direction.

Honestly, it feels a bit of an overreach to call it a deal. This is basically rolling back some, but not all, of the escalation in terms of tariff rates that we've seen for the last several weeks since April 2nd. and it essentially is an agreement not so much to do anything concrete, but to continue talking. So, again, that's a step in the right direction. I don't mean to poo-poo it and say, this represents no progress whatsoever. I just don't want to overstate the case and make people think that this is somehow tremendous progress and we have anywhere near the same kind of deal that we do with the UK, for example. So more of a truce than anything else.

Yeah, I think that's a very good way to put it. Well, that said, I mean, is this good news for United States to have rolled back these really exorbitant tariffs? Well, it's certainly going to be good for the consumer in the short run. But when we talk to producers, in other words, when we talk to businesses, what we find, regardless whether they're small or large businesses, is the exact same thing. They're all really struggling with the volatility that tariffs have created. And it's not simply that we're having a discussion about tariffs or that tariffs were put in place. it's that the tariff rates have not been consistent. They have not been steady. They've gone up. They've gone down. So this on again, off again, movement has essentially made it impossible for a lot of folks to do business. So that's created, unfortunately, again, a lot of turmoil. And we hope to have that resolved in the coming weeks as we get concrete deals and then as we get them ratified in the Senate. Now, more concrete are the deals from the Middle East. We saw $2 trillion worth of a range.

there. What is happening there? Again, is this a good news for the United States? Yeah, this is actually particularly good news, what we're seeing with a lot of these nations in the Middle East, where they are essentially going to be pouring investment into this country. This is where we've got to remember the capital surplus is the flip side of the trade deficit. For literally every year, except for seven, from colonial times through 1870, that was the arrangement that the United States essentially had with, the rest of the world where we were buying more from abroad than they bought from us, but they were investing much more here than we were investing abroad. And that not only created those investments, that is, here in the United States, not only created revenue streams, in other words, future income for foreigners, but it also created future income for folks here in the United

States, whether that was an American investor or the American worker. And we saw extremely good numbers in both the stock market and inflation data. Why are inflation numbers down? Let's start with that. A lot of that has to do with the fact that Trump has been very successful in slowing the rate of increase in terms of government spending. We saw, for example, with the first GDP report, that government purchases actually declined in the first three months of this year compared to the last three months of 2024. That's great news. Doge is working.

It's having an effect. But at the same time, the government has also been up against the debt ceiling. And so even the spending that they've been doing, they haven't been able to borrow. They've been having to go through cash at the Treasury. They're down about $500 billion or so. So that means that essentially the government is not only spending less, but they're borrowing less. This takes away the primary impetus behind inflation.

So most of that price pressure is now gone. It is going to return, unfortunately, at some point. So we have to hope that this tax bill is not only cutting taxes, but cutting spending too. You say it's going to return. Is this connected to the tariffs and we still have 10% on most countries? Is that the issue that's going to drive prices up? No, I don't think so. I think it's primarily going to be the issue of the government spending, borrowing, and then printing too much money to pay its bills. In terms of tariffs, we actually really haven't even seen those effects yet.

because when we look at something like the consumer price index, that comes from a survey which is conducted three times a month, the beginning of the middle and the end, to try to eliminate any temporary spikes within a particular month. Well, when we look at the price increases that we saw in the month of April, for example, that were related to tariffs, they didn't arrive until the very end of the month the last week. So only one of the three surveys in that month in terms of prices

would have picked up any of those increases. we're much more likely to see the impact of tariffs in May, even though those tariffs were first introduced back in April. Let's look at the stock market next. We saw really surging market, all of them looking really, really positive this week. And this was because of this trade truce with China's, at least the most direct correlation.

Do we expect the stock market to stabilize some in the coming weeks, or do you think it's still going to be very erratic? Well, unfortunately, that's going to depend largely on how these trade deals shape out because like we were just saying, they aren't really deals in the sense of we don't have anything concrete, not just in terms of these things haven't been ratified by their respective governments, but they don't even have concrete details in them in the case of something like China. So markets are probably going to continue overreacting to whatever news comes out. In other words, if a piece of good news comes out, we'll see that big bull run.

But if a piece of bad news comes out, it'll go the other way. Markets overreacted in the days after April 2nd, and frankly, they're overreacting now again. That's just the nature of the market. These markets are a beast. And how have they settled out in the last few days? Are we back even before the Liberation Day announcements? Not quite, although we are vastly improved since the infamous Jim Kramer said we're going to have another Black Monday event. It turns out that that was probably the market bottom.

But, you know, again, for the most part, if we look at a lot of different, a lot of different things, not just equities. You can look at the Treasury markets and others. We're basically back, not quite, but we're basically back to where we were on April 1st. Trump's economic policies are likely to be tested in the courts. Do you expect the tariffs and some of these other policies he's had, he's implemented, to stand up to scrutiny? Well, I'm no attorney, but the attorneys that I have talked to, to on certain tariffs say there's absolutely no way they hold up. Things like the tariff on foreign films, for example. I mean, it just has nothing to do with the emergency powers that

he's citing for why he's able to do this. You know, another one is that 10% baseline tariff. I've heard from a lot of legal minds that say that's the least likely to hold up in court. You're much more likely to see things like the individual rates on particular countries hold up in court. So a 35% rate on China versus a 25% rate on Canada, whatever the case may be. The individual rates are much more likely to hold up than the 10% across the board. But frankly, that's all the more reason why you should put that 10% rate into statute. Don't do it as a tariff. Do it as a border adjustment tax. So that way you're not doing things like double taxing an item that crosses a border more than once. That happens a lot in the automotive

industry as parts go back and forth before they turn into a final assembly. The other really nice thing about that is the fact that once you have enshrined that into statute, now you can actually use the revenue from something like a border adjustment tax to offset the lost revenue for reducing personal marginal income tax rates. I think that's a win-win because you're helping to shift some of the tax burden overseas. Yeah, you know, you mentioned the tax cuts. And we've got this budget bill that's working its way through Congress. What do you hope survives in that bill?

Certainly reductions in rates, also the expensing provisions where you're not going to force a business that has to buy a large item like a factory today to then take the tax deduction over multiple years. If they're outlaying the cash today, they should be able to take the full deduction today. Now, although that is in the bill, the problem is it's not. permanent. It's only going to last for a few years. And then we just have to go through this whole rigmarol all over again to try to get that provision renewed once more. So I would love to see things like that, the most pro-growth parts of this tax bill become permanent. And as always,

I would like to see even further reductions in terms of those marginal tax rates. A final question, looking a little longer term, where do you think our economy is heading in the next few quarters? Oh, I would not be surprised if, paper, and this is an important distinction here, if on paper you do see a recession, and we can look at the first quarter GDP print as evidence for that, you saw the headline number drop about three-tenths of a percentage point? Well, government spending, the reduction there in government purchases contributed a quarter percentage point decline. In other words, it accounted for almost all of the decrease. Well, you continue down that trend of shrinking government purchases,

reducing government spending, what's going to happen to headline GDP? It's going to continue to go down. But that's not a sign of impoverishment. That's a sign of wealth. It's exactly the opposite of what happened during the Biden administration where we continue to get these apparently blockbuster official metrics, if you will, all the while Americans' standard of living went down and their cost of living went up. So I care much less about what these, again, quote unquote, official numbers look like. I care much more about what the average American can actually buy with his or her weekly paycheck. And so far, under the Trump administration, that figure has gone up, not down. And it's recovered about a quarter of the losses under Biden.

That I expect to continue for the quarters ahead. I'm sure a lot of people will be glad to hear that. E.J., thank you so much for coming on. Oh, my pleasure. Thank you for having me. That was economist E.J. Anthony, and this has been a weekend edition of Morning Wire.