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Trump’s tariffs may be bringing in a lot of revenue but they’ve also been a ‘tax on capital, so far,’ top economist says

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President Trump’s tariffs, highly touted as a lever to boost American industry, are now emerging as a substantial tax on business—putting pressure on corporate profits, labor markets, and prices, according to Morgan Stanley’s chief economist. Michael Gapen draws a striking conclusion in his Monday research note, US Economics Weekly: “Tariffs have been a tax on capital, so far.”

In the second quarter of 2025, U.S. corporations largely absorbed the escalating cost of tariffs, according to Gapen’s team, offsetting higher nonlabor costs with reductions in labor costs and profitability rather than passing them directly on to consumers. This is markedly different from the trends observed in 2021 and 2022, a phenomenon called “greedflation” by some, when businesses responded to rising costs by raising prices more than those costs, which led to boosted profits.

Since returning to office, President Trump has expanded “reciprocal tariffs” across major U.S. trading partners, collecting a record $25 billion in July alone—triple the amount from late last year. The Committee for a Responsible Federal Budget (CRFB) reports tariffs are on track to inject $1.3 trillion in new revenue by the end of Trump’s current term and as much as $2.8 trillion through 2034. For fiscal 2025, the take from tariffs has already doubled its typical share, accounting for 2.7% of all federal revenue with projections as high as 5% if current policies persist. This is functioning to date as a tax on capital, Gapen’s team concludes.

The mystery of the 2025 economy

Gapen is wrestling with a question that has been plaguing many other economists, about how 2025’s strong economy doesn’t feel like it, which he calls “the mystery between solid spending data and weak hiring.” He believes it “can be explained by a corporate sector that absorbed the initial cost of tariffs and reduced unit labor costs and profitability rather than raising prices.” Yale management professor Jeff Sonnenfeld wrote for Fortune that CEOs have been privately grumbling about this dynamic for months, concluding that President Trump’s tariffs policy is simply “bad for business.”

Gapen’s thesis, if correct, would also go a long way to explaining the anemic hiring market for entry-level workers and the “job-hugging” phenomenon from the worker perspective, or “hoarding workers” from the company perspective. In short, with the stock market roaring to many record highs off AI exuberance, the guts of the economy have been experiencing some major indigestion brought about by a radically different trade policy. It’s what Federal Reserve Chair Jerome Powell calls a “low-hire, low-fire” economy, and Gapen argues it’s because there’s been a giant, secret new corporate tax put in place by President Trump. But, the economist further argues, it’s not likely to function as a tax over the long haul.

Businesses squeezed, hiring cools

Data shows that, for now, firms have reduced hiring to manage the shock of higher costs from tariffs. Surveys indicate that while roughly two-thirds of businesses affected by tariffs have not yet raised prices, many plan to do so, foreshadowing inflationary pressures in the coming months. The diminished profitability is a direct byproduct of increased unit nonlabor costs—specifically, taxes on production and imports, which include tariffs paid by the nonfinancial sector.

This absorption of tariff expenses has contributed to a puzzling economic divergence: Solid growth in consumer spending actively contrasts with a distinct slowdown in employment growth. Without rapidly rising goods prices, household purchasing power has been maintained, but weaker labor markets have become more visible.

Whereas companies have so far shielded consumers from the brunt of these costs, the threat remains that as the pass-through process continues, price increases will follow, putting further pressure on both households and businesses. Academic studies reject the notion that exporters are significantly absorbing U.S. tariffs through price discounting, as evidenced by largely flat or higher import price indexes from major trading partners like the EU, U.K., Japan, and ASEAN economies. Instead, U.S. companies are bearing the brunt, and the effective tariff rate has spiked—reaching 16% after recent rounds of increases, with customs and excise deposits at the Treasury climbing to record levels.

Historical contrast and future risks

The contrast to earlier years is stark. In 2021 and 2022, when supply chains were disrupted and production costs soared, businesses responded by raising prices and, paradoxically, improving profitability. Now, however, the playbook has changed: Firms are managing costs internally, accepting lower profit margins, and avoiding immediate price hikes.

Looking ahead, Morgan Stanley analysts caution that if companies are not able or willing to pass more tariff costs on to consumers, profit warnings, greater cost control, and even corrections in equity markets could follow. This is a central concern for the Federal Reserve, as the potential for increased downside risk to the labor market grows. Alternatively, if unseen productivity growth emerges—potentially driven by efficiency measures and AI adoption—profitability could rebound without weakening labor markets, sustaining consumer purchasing power.

Inflationary ripples loom

Survey data underscores that tariff pass-through is not yet complete. A Federal Reserve Bank of Richmond poll found about 25% of affected firms intend to raise prices, while between 40% and 50% have already done so and plan further increases. Recent months have brought observable upticks in consumer price inflation for goods exposed to tariffs, and projections by leading analysts suggest annualized core consumer price inflation will approach 3.7% by the end of 2025.

On the ground, the effects are regressive. The Yale Budget Lab estimates tariffs cost families in the second-lowest income tier some $1,700 a year, jumping to $8,100 for those in the top income decile. National-security experts also warn higher costs for hardware and components could dent America’s military readiness, making it “more expensive to meet national defense requirements,” according to the Council on Foreign Relations.

President Trump’s tariff policy—once framed as a pathway to industrial revival—is, in the immediate term, raising nonlabor costs and squeezing margins for American businesses. With the effective tariff rate near record highs, firms are forced into tough decisions about pricing, employment, and profitability. Whether these pressures will eventually cascade into the broader economy through higher consumer prices or persist as a drag on business investment and hiring remains an open question. Fortune senior editor-at-large Shawn Tully and Steve Hanke, the Johns Hopkins economist known as “the money doctor” for his globe-trotting adventures slaying hyperinflation, warned in August that Trump’s tariffs were really a tax in disguise all along: “A giant national sales tax that will hobble U.S. economic growth.”

For this story, Fortune used generative AI to help with an initial draft. An editor verified the accuracy of the information before publishing. 

Fortune Global Forum returns Oct. 26–27, 2025 in Riyadh. CEOs and global leaders will gather for a dynamic, invitation-only event shaping the future of business. Apply for an invitation.



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Elon Musk’s X fined $140 million by EU for breaching digital regulations

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European Union regulators on Friday fined X, Elon Musk’s social media platform, 120 million euros ($140 million) for breaches of the bloc’s digital regulations, in a move that risks rekindling tensions with Washington over free speech.

The European Commission issued its decision following an investigation it opened two years ago into X under the 27-nation bloc’s Digital Services Act, also known as the DSA.

It’s the first time that the EU has issued a so-called non-compliance decision since rolling out the DSA. The sweeping rulebook requires platforms to take more responsibility for protecting European users and cleaning up harmful or illegal content and products on their sites, under threat of hefty fines.

The Commission, the bloc’s executive arm, said it was punishing X because of three different breaches of the DSA’s transparency requirements. The decision could rile President Donald Trump, whose administration has lashed out at digital regulations, complained that Brussels was targeting U.S. tech companies and vowed to retaliate.

U.S. Secretary of State Marco Rubio posted on his X account that the Commission’s fine was akin to an attack on the American people. Musk later agreed with Rubio’s sentiment.

“The European Commission’s $140 million fine isn’t just an attack on @X, it’s an attack on all American tech platforms and the American people by foreign governments,” Rubio wrote. “The days of censoring Americans online are over.”

Vice President JD Vance, posting on X ahead of the decision, accused the Commission of seeking to fine X “for not engaging in censorship.”

“The EU should be supporting free speech not attacking American companies over garbage,” he wrote.

Officials denied the rules were intended to muzzle Big Tech companies. The Commission is “not targeting anyone, not targeting any company, not targeting any jurisdictions based on their color or their country of origin,” spokesman Thomas Regnier told a regular briefing in Brussels. “Absolutely not. This is based on a process, democratic process.”

X did not respond immediately to an email request for comment.

EU regulators had already outlined their accusations in mid-2024 when they released preliminary findings of their investigation into X.

Regulators said X’s blue checkmarks broke the rules because on “deceptive design practices” and could expose users to scams and manipulation.

Before Musk acquired X, when it was previously known as Twitter, the checkmarks mirrored verification badges common on social media and were largely reserved for celebrities, politicians and other influential accounts, such as Beyonce, Pope Francis, writer Neil Gaiman and rapper Lil Nas X.

After he bought it in 2022, the site started issuing the badges to anyone who wanted to pay $8 per month.

That means X does not meaningfully verify who’s behind the account, “making it difficult for users to judge the authenticity of accounts and content they engage with,” the Commission said in its announcement.

X also fell short of the transparency requirements for its ad database, regulators said.

Platforms in the EU are required to provide a database of all the digital advertisements they have carried, with details such as who paid for them and the intended audience, to help researches detect scams, fake ads and coordinated influence campaigns. But X’s database, the Commission said, is undermined by design features and access barriers such as “excessive delays in processing.”

Regulators also said X also puts up “unnecessary barriers” for researchers trying to access public data, which stymies research into systemic risks that European users face.

“Deceiving users with blue checkmarks, obscuring information on ads and shutting out researchers have no place online in the EU. The DSA protects users,” Henna Virkkunen, the EU’s executive vice-president for tech sovereignty, security and democracy, said in a prepared statement.

The Commission also wrapped up a separate DSA case Friday involving TikTok’s ad database after the video-sharing platform promised to make changes to ensure full transparency.

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AP Writer Lorne Cook in Brussels contributed to this report.



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Nvidia CEO says U.S. data centers take 3 years, but China ‘can build a hospital in a weekend’

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Nvidia CEO Jensen Huang said China has an AI infrastructure advantage over the U.S., namely in construction and energy.

While the U.S. retains an edge on AI chips, he warned China can build large projects at staggering speeds.

“If you want to build a data center here in the United States from breaking ground to standing up a AI supercomputer is probably about three years,” Huang told Center for Strategic and International Studies President John Hamre in late November. “They can build a hospital in a weekend.”

The speed at which China can build infrastructure is just one of his concerns. He also worries about the countries’ comparative energy capacity to support the AI boom.

China has “twice as much energy as we have as a nation, and our economy is larger than theirs. Makes no sense to me,” Huang said.

He added that China’s energy capacity continues to grow “straight up”, while the U.S.’s remains relatively flat.

Still, Huang maintained that Nvidia is “generations ahead” of China on AI chip technology to support the demand for the tech and semiconductor manufacturing process.

But he warned against complacency on this front, adding that “anybody who thinks China can’t manufacture is missing a big idea.”

Yet Huang is hopeful about Nvidia’s future, noting President Donald Trump’s push to reshore manufacturing jobs and spur AI investments.

‘Insatiable AI demand’

Early last month, Huang made headlines by predicting China would win the AI race—a message he amended soon thereafter, saying the country was “nanoseconds behind America” in the race in a statement shared to his company’s X account.

Nvidia is just one of the big tech companies pouring billions of dollars into a data center buildout in the U.S., which experts tell Fortune could amount to over $100 billion in the next year alone.

Raul Martynek, the CEO of DataBank, a company that contracts with tech giants to construct data centers, said the average cost of a data center is $10 million to $15 million per megawatt (MW), and a typical data centers on the smaller side requires 40 MW.

“In the U.S., we think there will be 5 to 7 gigawatts brought online in the coming year to support this seemingly insatiable AI demand,” Martynek said.

This shakes out to $50 billion on the low end, and $105 billion on the high end.



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Trump finally meets Claudia Sheinbaum face to face at the FIFA World Cup draw

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Their long-delayed first face-to-face discussion focused on next year’s World Cup — and included side discussions about trade and tariffs — but immigration was not the top issue. That’s despite Trump’s push to crack down on the U.S.-Mexico border being a centerpiece of his administration, and the driving force in the relations between both countries.

Trump has been in office for more than 10 months, and his having taken so long to see Sheinbaum in-person is striking given that meeting with the leader of the country’s southern neighbor is often a top priority for U.S. presidents.

Trump and Sheinbaum had been set to meet in June on the sidelines of the Group of Seven summit in Canada, but that was scrapped after Trump rushed back to Washington early amid rising tensions between Israel and Iran.

Soccer took center stage — but tariffs still loom large

Trump and Sheinbaum sat talking in the president’s box and also appeared onstage with Canadian Prime Minister Mark Carney at the Kennedy Center for Friday’s 2026 World Cup draw. The U.S., Mexico and Canada are co-hosting the tournament, which begins in June.

A senior White House official, who spoke on the condition of anonymity to discuss private meetings, said Trump, Sheinbaum and Carney met privately after participating in the draw.

Sheinbaum had said before leaving Mexico that she’d talk to Trump about tariffs that his administration has imposed on automobiles, steel and aluminum from Mexico, among other things. She said after appearing at the Kennedy Center that the three leaders “talked about the great opportunity that the 2026 FIFA World Cup represents for the three countries and about the good relationship we have.”

“We agreed to continue working together on trade issues with our teams,” Sheinbaum posted on X.

Mexico is the United States’ largest trading partner. The the U.S.-Mexico-Canada Agreement which Trump forged in his first term as a replacement for 1994’s North American Free Trade Agreement also remains in place. But U.S. Trade Representative Jamieson Greer has begun scrutinizing it ahead of a joint review process set for July.

In the meantime, the U.S. and Mexico’s priorities have been reshaped by the steep drop in the number of people crossing into the U.S. illegally along its southern border, as well as the White House’s — so far largely unrealized — threats to impose large trade tariffs on its neighbor.

Before speaking in-person, Trump and Sheinbaum had repeatedly talked by phone, discussing tariffs and Mexican efforts to help combat the trafficking of fentanyl into the U.S. But despite other world leaders, including Russian President Vladimir Putin and Chinese President Xi Jinping, having already met with Trump this term, the meeting with Sheinbaum hadn’t happened until Friday.

The Trump whisperer?

Waiting so long to meet in person hasn’t seemed to hurt Mexico’s president’s standing with Trump.

The two spoke by phone in November 2024, with the then-U.S. president-elect declaring afterward that they’d agreed “to stop Migration through Mexico” — even as Sheinbaum suggested her country had already been doing enough.

Trump soon after taking office threatened to impose a 25% tariff on goods imported from Mexico in an effort to force that country to better combat fentanyl smuggling, only to later agree to a pause.

The White House subsequently backed off tariff threats against most Mexican goods. Then, in October, Sheinbaum announced that the U.S. had given her country another extension to avoid sweeping 25% tariffs on goods it imports to the U.S. — even as many items covered by the USMCA trade deal remain exempt.

Mexico, though, hasn’t avoided all U.S. tariffs. Sheinbaum’s country continues to try to negotiate its way out of import levies Trump has imposed worth 25% on the automotive sector and 50% on steel and aluminum.

Sheinbaum’s success at mitigating many tariffs, and other successes in the bilateral relationship, has led some to wonder if she has a special gift for getting what she wants from him.

She’s largely pulled it off by affording Trump the respect the U.S. president demands from leaders around the world — but especially a neighboring country — and by deploying occasional humor and pushing back, always respectfully, when necessary.

Sheinbaum also defused another potential point of contention, Trump’s renaming of the Gulf of Mexico to the “Gulf of America,” by proposing dryly that North America should be renamed “América Mexicana,” or “Mexican America.” That’s because a founding document dating from 1814 that preceded Mexico’s constitution referred to it that way.

Still, Mexican officials continue to work furiously to lessen the trade blow from tariffs going into 2026 — levies that could wreck its already low-growth economy, particularly in its all-important automotive sector. Sheinbaum’s government has also sought to defend its citizens living in the U.S. as the Trump administration expands its mass deportation operations.

Sheinbaum’s government also lobbied unsuccessfully against a 1% U.S. tax on remittances, or money transfers that millions of Mexicans send home every year from the United States. It was approved as part of Trump’s tax cut and spending package and takes effect Jan. 1.

Trump’s push for mass deportations

Trump has directed federal officials to prioritize major deportation pushes in Democratic-run cities — an extraordinary move that lays bare the politics of the issues. He’s also deployed the National Guard in an effort to curb crime, which has led to a spike in immigration-related arrests, in places like Los Angeles, Chicago and Washington, as well as Memphis, Tennessee, and Portland, Oregon.

The Trump administration says its priority is targeting “the worst of the worst” criminals, but most of the people detained in operations around the country have not had violent criminal histories.

Such operations often meant targeting Mexican citizens who have lived and worked in the United States for years and may face deportation to a homeland they no longer know well. It also has meant serious threats of declining remittance income, which has fallen for seven consecutive months.

The lower number of illegal U.S.-Mexico border crossings has knocked immigration off its perch as the top agenda item for the U.S.-Mexico bilateral relations for the first time in recent memory.

Mexican officials now say conversations around immigration have shifted toward cajoling countries into taking back their citizens and reintegrating them to keep them from leaving again — a major Trump administration priority around the world.

Cooperation on security

Sheinbaum has blunted some of the Trump administration’s tough talk on fentanyl and drug smuggling cartels by giving her security chief Omar García Harfuch more authority.

Mexico has also extradited dozens of drug cartel figures to the U.S., including Rafael Caro Quintero, long sought in the 1985 killing of a DEA agent. That show of goodwill, and a much more visible effort against the cartels’ fentanyl production, has gotten the Trump administration’s attention.

That’s a significant improvement. Only a few years ago, the DEA struggled to get visas for its people in Mexico, and then-President Andrés Manuel López Obrador accused the U.S. government of fabricating evidence against a former Mexican defense secretary, though he never presented evidence to back up the allegation.

Not everything has gone so smoothly, though. Trump criticized Sheinbaum for rejecting his proposal to send U.S. troops to Mexico to help thwart the illegal drug trade.

Last month, Sheinbaum said there was no way the U.S. military would be able to make strikes in Mexico, after Trump said he was open to the idea. And she has denounced U.S. strikes on boats allegedly carrying drugs in the Caribbean and eastern Pacific.

“The president of Mexico is a lovely woman, but she is so afraid of the cartels that she can’t even think straight,” Trump said earlier this year.

Sheinbaum declined to take the bait — and avoided turning up the political pressure — by sidestepping Trump’s criticism.

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Associated Press writer Chris Sherman contributed from Mexico City.



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