Sweeping US tariffs
Are widespread tariffs an effective US strategy? Viewpoints from multiple sides.
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What’s happening
This week, President Trump announced a 90-day pause on sweeping “reciprocal” tariffs issued against roughly 90 countries globally, hours after they went into effect. The Trump administration said the pause was in response to 75+ nations indicating a willingness to negotiate, with Trump later telling reporters that financial market uneasiness was also a driver.
The administration subsequently elevated tariffs on China to an effective rate of 145%, citing “the lack of respect that China has shown to the World’s Markets.” It also left in place baseline 10% tariffs on most countries that Trump had introduced alongside the “reciprocal” tariffs last week on a day he called “Liberation Day.”
Reminder: Tariffs are essentially taxes on imported goods, paid by domestic importers of materials and products from other countries. Historically, they have been used with intentions of raising government revenue, extracting concessions from foreign governments, or protecting domestic manufacturers. Some economists highlight their potential to pass along higher prices to consumers.
The “Liberation Day” tariffs: The paused “reciprocal” tariffs applied country-specific rates to the target nations on top of the baseline 10% tariffs. Had the “reciprocal” tariffs not been paused, total effective tariff rates (including the baseline 10%) for some countries would have reached 40%-50%.
The Trump administration explained the “Liberation Day” tariffs as a response to a trade system in which the US is continually taken advantage of and equated persistent trade deficits to a “national emergency that threatens our security and our very way of life.”
White House officials said the “reciprocal” tariffs were calculated by dividing a country’s trade surplus with the US by its total exports to the US, and dividing the result by two. Several goods exempt from the “reciprocal” tariffs include semiconductors, pharmaceuticals, and “energy and other certain minerals that are not available in the United States.” Countries with small trade surpluses or trade deficits with the US, such as the UK and Brazil, will only face the minimum 10% baseline tariff.
Existing tariffs: Canada and Mexico, which currently face 10%-25% tariffs on goods not covered under the United States-Mexico-Canada (USMCA) trade agreement, were excluded from the new “Liberation Day” tariffs. Other recently-imposed tariffs such as 25% duties on foreign automobiles and 25% tariffs on metals are separate from the new sweeping tariffs and remain in effect. (See our previous coverage of the viewpoints on Trump’s metal tariffs here.)
Escalating trade war with China: China ultimately responded to the 145% tariff imposed by Trump with an effective 125% tariff on US goods, saying it would not raise tariffs further because current rates have virtually eliminated the market for US goods in China. Both countries exchanged tariff increases in a rapid tit-for-tat escalation following Trump’s “Liberation Day” announcement last week. The Trump administration announced yesterday that smartphones and other certain electronics would be exempt from the new tariffs on China.
The likelihood of “reciprocal” tariffs being resumed after the 90-day pause is still unclear and the long-term impact of active US tariffs remains uncertain. We take a look this week at the viewpoints from multiple sides on the merits of a sweeping US tariff policy. Let us know what you think.
Notable viewpoints
More supportive of sweeping tariffs:
Tariffs are needed to boost domestic manufacturing and strengthen national security.
There is precedent for using trade policy to successfully boost domestic manufacturing. After Former President Ronald Reagan took office in 1981, he negotiated a voluntary export quota (VER) from Japan, where Japan capped the number of automobiles exported to the US. It helped create “hundreds of thousands of American jobs” and save Detroit, with the Toyota Camry consisting of more American-made components than many other cars driven in the US.
Tariffs will help increase the domestic production of critical inputs to national security such as shipbuilding, microelectronics, and bio-manufacturing, making the US more self-sufficient for defense manufacturing and less likely to be caught in short supply or reliant on other countries in an emergency. (Summarized from White House fact sheet.)
American trading partners over the past few decades have actively enacted policies – including currency valuation, wage suppression, and subsidies – to boost their domestic manufacturing at the expense of US manufacturing, costing American jobs. It is reasonable for the US to demand more balanced trade in return for continued access to US markets.
Support for broad 10% tariffs exists on both sides of the aisle for their potential to improve American manufacturing. For example, Senate Democrat Jared Golden (D-Maine) introduced legislation in January that would codify 10% tariffs into law.
Trump’s sweeping tariffs are an effective negotiating tactic to get more from trading partners and allies.
Prior to Trump’s recent tariffs, the US had an effective tariff rate of roughly 3%, one of the lowest in the world. Given the outsized burden the US takes in defense spending (approximately $883B in 2024) compared to allies and the protection assurances it provides them, raising tariffs to balance trade is well within its reasonable right to demand more from allies.
“The notion of a ‘Mar-a-Lago Accord,’ based on the 1980s ‘Plaza Accord,’ fits squarely within [a trade-rebalancing] framework: bring US allies to the table to agree upon a revaluation of currencies that would help to rebalance trade, backed by the threat of tariffs or other trade actions against countries that fail to participate.” (Oren Cass, economist, Understanding America.)
Trump’s “reciprocal” tariffs are more about free trade than protectionism. For too long, foreign companies have been given access to the American market while exporters have been denied that access to foreign markets. Reciprocal tariffs will help compel foreign trade partners to reduce barriers to their markets and ultimately lead to more free trade, not less.
That some allied countries have capitulated in response to the "reciprocal" tariffs is a sign that Trump’s aggressive global tariffs were effective negotiating leverage. Israel, for instance, removed all of its remaining tariffs on US goods shortly before “Liberation Day” in anticipation of the tariffs.
Sweeping tariffs will help reduce the national deficit and benefit the economy.
Sweeping global tariffs may drive investors into historically safer investments such as the US 10-year Treasury note (T-note), which would drive down the T-note’s annual yield (the annualized return investors get from holding a 10-year T-note) and ultimately compel the US Federal Reserve to reduce interest rates. Every 0.01% reduction in interest rates, according to Treasury Secretary Scott Bessent, translates to $1B in debt cost savings for the government per year. For the period between Apr 2 and Apr 5 after the “Liberation Day” tariffs announcement, the 0.3% drop in T-note yields would have translated to $30B in savings. (Editor’s note: The 10-year T-note yield has since increased to 4.5% as of this writing, after sitting at roughly 4% just before Trump’s “Liberation Day” tariff announcement.)
The 10% baseline tariffs, which a 2024 study by A Coalition for a Prosperous America (CPA) projected will generate $728B in government revenue in their first year, will help enable the government to create tax cuts for consumers while maintaining Medicaid and Social Security programs.
Tariffs are needed to counter China.
Significant tariffs on China, along with cooperation among allies to exclude it from the Western sphere of trade, are important to counter China’s goal of dominating supply chains for valuable products and for technologies critical to military progress.
Trump’s first-term tariffs on China had minimal negative impact on US inflation or economic growth, with Former President Biden actually keeping and increasing some of them in order to boost domestic manufacturing in critical sectors such as semiconductors and clean energy. Biden, like many leaders on both sides of the aisle, recognized the importance of countering the China threat.
More opposed to sweeping tariffs:
Sweeping tariffs will hurt the US economy and consumers.
The baseline tariffs and now-paused “reciprocal” tariffs would together amount to one of the most significant effective tax hikes on American consumers in history, passing along higher costs to consumers. The Yale Budget Lab projected that the “Liberation Day” tariffs and other tariffs Trump has implemented since retaking office would collectively drive an approximate $3,800 decline in real purchasing power per household annually.
Sweeping tariffs, paired with Trump’s other in-progress policies such as immigration and federal workforce cuts, threaten to create a stagflation environment (i.e., high inflation with low economic growth), which hasn’t happened since the 1970s. An April University of Michigan consumer sentiment survey found that Americans predict inflation will rise 6.7% over the next year and roughly ⅔ expect unemployment to rise.
China has the upper hand in a bilateral trade war. Contrary to Treasury Secretary Scott Bessent’s argument that the US has the advantage because it exports “one-fifth” of the value of goods to China that China exports to the US, it is usually the country that has the trade surplus that wins. In this scenario, the US is effectively giving up vital goods and services it can’t produce competitively at home and for which it depends on China, while China is only giving up money, which it can find elsewhere (e.g., with other trade partners) or save by cutting back on spending.
There is no guarantee that the “Liberation Day” tariffs will bring down 10-year T-note yields, as some supportive of the tariff plan have contended they will. In fact, yields have increased since the “reciprocal” tariffs were first announced, which was likely a significant factor in Trump’s decision to pause them.
Tariffs will not drive meaningful improvements in domestic manufacturing.
To achieve the sort of reindustrialization Trump says he is aiming to achieve with tariffs would take years if not decades, a politically untenable timeline to maintain tariffs that could hurt US economic growth in the meantime. Alcoa CEO Bill Oplinger recently illustrated this when saying in February that, “We make decisions around aluminum production that have a horizon of 20 to 40 years…We would not be making an investment in the United States based on a tariff structure that could be in place for a much shorter period of time.” (Summarized from CNN analysis.)
Widespread tariffs on automobile parts and other goods may actually hurt many domestic manufacturers. For example, a significant percentage of the parts that GM uses to make cars in the US come from other countries, and widespread tariffs will increase its production costs.
Sweeping tariffs won’t help domestic manufacturers. Any benefits gained from import taxes will be offset by higher input costs and retaliation abroad that will hurt American exporters and cost American jobs.
Sweeping tariffs will push away important allies.
Trump’s decision to apply sweeping tariffs on friendly nations – many of which, for example, fought alongside the US in Iraq and Afghanistan after 9/11 – will erode trust and weaken relationships with allies that are important to US national security.
The threat of dominance in global trade by China – which controls an estimated ⅓ of global manufacturing output – is real and needs to be addressed, but rather than penalizing US allies, Trump should work with them to collectively embargo China. Sweeping tariffs on US allies threaten to push them away and potentially closer to China’s sphere of influence.
“The cost in lost American influence will be considerable. Mr. Trump thinks the lure of the US market and American military power are enough to bend countries to his will. But soft power also matters, and that includes being able to trust America’s word as a reliable ally and trading partner. Mr. Trump is shattering that trust as he punishes allies and blows up the USMCA that he negotiated in his first term.” (Wall Street Journal Editorial Board.)
Trump’s apparent motivations for the tariffs are misguided.
While Trump likes to cite the alleged wealth and prosperity of the US during the late 1800s – when the US government had tariff-heavy policies – the US is much better off today than it was then. For instance, GDP per capita, adjusted for inflation, was 12x higher in 2022 than in 1870 and 6x higher than in 1913.
Trade deficits are not necessarily a “loss,” as Trump has contended. The US carries trade deficits and trade surpluses with various countries based primarily on differences in comparative advantage. For example, the US has a trade deficit with Germany because Americans like to buy German cars and carries a trade surplus with the Netherlands because the Dutch like to buy American medical supplies and pharmaceuticals.
Other viewpoints:
“[T]he United States must emphasize that there is no magic number for countries to spend that proves they are ‘doing enough.’ …Japan’s goal should not be to spend 2% of GDP on defense, at which point the US promises to defend it from China…No, Japan’s defense spending will be sufficient when it feels secure from China. Germany’s spending will be sufficient when it can successfully deter Russia.” (Oren Cass, economist, Understanding America.)
To achieve success, Trump should more directly communicate the long-term strategy of global tariffs, ensure their permanence through congressional legislation, and commit to maintaining them as firms need to trust his policies will remain in place before they commit to reshoring. He should also roll the tariffs out more gradually than through an all-at-once approach.
Snippets
In a 5-4 decision, the Supreme Court ruled that the Trump administration can resume application of the Alien Enemies Act (1798) to deport alleged noncitizen gang members, but added that deportees must have “reasonable time” to challenge their removals in court. Federal judges in New York and Texas issued orders to temporarily halt the deportation of several purported Venezuelan gang members, citing the ruling.
The Trump administration has paused roughly $790M in funding for Northwestern University and roughly $1B in funding for Cornell University while it conducts civil rights investigations into the schools. The pause comes amid similar investigations into universities including Columbia, Harvard, Brown, and Princeton.
Year-over-year inflation cooled to 2.4% as measured by March’s consumer price index (CPI), below the 2.6% forecasted by economists. Monthly rates were also lower than expectations, falling 0.1%.
A federal judge ruled that the Trump administration must restore the Associated Press’s full access to the White House press pool, declaring the government cannot punish the news organization for the content of its speech under the First Amendment. The White House had barred the outlet from certain events over its choice to continue using “Gulf of Mexico” after it was renamed the “Gulf of America.”
Democrats in Congress are calling for an investigation into whether executive branch officials engaged in insider trading or market manipulation by potentially benefiting from knowledge that President Trump would issue a 90-day pause of the “reciprocal” tariffs earlier this week.
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Music on the bottom
A rare but essential house music plug this week. And a throwback at that. Slip into a head-bobbing trance this weekend with Tiësto’s mix of Imogen Heap’s timeless “Hide & Seek.”
Listen on Spotify, Apple Music, or Amazon Music.