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Republicans are making progress toward a tax deal that can stop increases at the end of year and even deliver on some of President Donald Trump’s proposed new tax cuts.
His new tariff regime threatens to eclipse all of that.
Trump’s party is nervously eyeing the short- and potential long-term economic and political fallout from his blanket new tariffs and escalating retaliatory tariffs against dozens of countries. Most in the party want to give the president time to cut new trade deals, but the blunt market downturn on Thursday and prospect of imminent price increases to everyday products are quickly sinking in on Capitol Hill.
“If the market today is any indication … they are overshadowing everything else. The markets are roiled up, and I think expressing great dissatisfaction with the tariffs,” said Sen. Rand Paul, R-Ky., perhaps the sharpest GOP critic of Trump’s levies on imported goods.
“A day of this is maybe something people could get over,” Paul added. “A week of markets like this, I don’t think [so].”
The timing of Trump’s “Liberation Day” is inauspicious. He rolled out the tariffs just as congressional Republicans neared the next step in their blueprint for a massive tax cut bill, a vote that promises to be a win for both Trump and Senate GOP leaders.
But if the tariffs hang around too long, consumers will contend with rising prices that would quickly eat into some of the benefits they might get from extending tax cuts and cutting taxes on overtime and tips. And with that economic peril comes a political one for Republicans.
“That’s a risk. This is a bold and reasonably risky move. It just is. The president has to understand that,” said Sen. Ron Johnson, R-Wis. “He believes this is exactly what he has to do. And I hope he is right and I hope the naysayers are wrong. I don’t know.”
Sen. Bill Hagerty, R-Tenn., a former private equity executive and close ally of the Trump administration who serves on the Banking Committee, told Semafor he’s “had more conversations with CEOs the past three weeks than ever before.”
Hagerty said he’s urging them to weigh the tariffs in the context of other GOP priorities like extending tax cuts, rolling back regulations, and “unleashing American energy.”
“All of these things must be taken together to really assess what the impact will be on the economy,” Hagerty said.
Like Hagerty, most Republicans are willing to give Trump weeks, if not months, of space before losing their patience with a moribund stock market, stubbornly high interest rates and the potential inflationary impacts of his tariffs.
There’s some trouble brewing, though: A bipartisan bill requiring congressional approval for new tariffs introduced by Sens. Maria Cantwell, D-Wash., and Chuck Grassley, R-Iowa, is slowly gaining GOP momentum.
Passing that would amount to an epic clash with Trump. Instead of asserting legislative power, multiple GOP lawmakers told Semafor they’re concluding that the tariffs won’t be around long-term.
“I think it’s going to be changing daily, quite honestly. There is a thought that in the next several months, everything will settle,” said Sen. Shelley Moore Capito, R-W.Va. “The long-term effects are something that I think need to be considered. But I don’t see a permanence in this. It would provide some serious headwinds, for sure.”
Investors aren’t just bracing for higher prices and retaliatory tariffs. They’re also leery of the chance that other countries, which own a good chunk of US mortgage-backed securities, might dump those investments in protest — which would drive up already-high mortgage rates.
“China and Japan are huge holders of agency MBS,” said Eric Hagen, who tracks mortgages as a managing director at BTIG. “That’s something we’ve started to think about.”
Know More
Asked about the stock market Thursday, Trump told reporters that things are “going very well” and that financial markets will “boom.” Still, Republicans said the White House had to have foreseen Thursday’s nosedive.
“Anyone confident to begin down this path should have anticipated, so I’m going to give them time to demonstrate they did,” Sen. Thom Tillis, R-N.C., said. “The market is exactly where I expected it to be.”
Sen. Mike Rounds, R-S.D., said he’s hoping the White House resolves any uncertainty around the tariffs “fairly quickly,” in order to quell uneasiness among investors.
“What I really think we have to do is, No. 1, wait for some of the Day One chaos to dissolve,” Rounds said. “As the White House has more time to define, and to answer questions about what is a stackable tariff versus a non-stackable tariff — I think a lot of those questions will start to be resolved.”
Tillis, a former adviser to banks at PriceWaterhouseCoopers, said if he were still working in finance, he’d be telling clients that “any decisions about deployment of capital need to wait until we have a better answer on the tax and the trade environment.”
A handful of Republicans, and pretty much all Democrats, are referring to the tariffs as tax increases on Americans, given how tariffs are enforced and can increase the cost of goods.
Asked how the tariffs could affect prices, Sen. Lisa Murkowski, R-Alaska, responded: “Could affect prices? I think they already have.”
As for the possibility that tariffs would overtake the benefits from tax cuts, she replied: “Sure, there’s real-life implications.”
Burgess and Eleanor’s View
Hagerty is tight with the administration, so what he’s telling CEOs carries weight. And quicker action on Trump’s tax agenda could blunt the impact of Wednesday’s tariffs.
It’s not clear whether private-sector players buy that argument — and even if they do, arguing that permanent tariffs won’t limit the effectiveness of Trump’s other pro-business policies is still a tough sell.
Don’t expect Republicans to hold up the tax legislation over tariffs; if anything, higher prices will help them make the case that tax cuts are needed. But it’s going to be a hell of a lot harder to sell the law in the midterms if prices are up and 401ks are down — let alone if the economy tips into a recession.
That’s why most in the GOP are maintaining the tariffs are likely to only deliver short-term pain: because long-term pain will be hard for the party to survive politically.
Room for Disagreement
If Paul and Sen. Mitch McConnell, R-Ky., are on one side of the tariff divide, more populist-leaning GOP colleagues like Sens. Bernie Moreno of Ohio and Josh Hawley of Missouri are on the other.
Hawley not only supports the Trump tariffs, he might even go further.
“I’d put even tougher export controls on China. I’d be fine to raise China’s tariffs even more,” Hawley told Semafor. “China will never work with us, but I hope that our allies will say, ‘okay, okay, okay, okay, we really have kind of been giving you the shaft in many ways. So let’s see if we can’t reach a better deal.’”
Notable
- Wednesday’s Wall Street selloff was the worst since the pandemic, AP reports.
- The dollar has wiped out all gains since Trump won office in November, Bloomberg reports.