Tariffs: The Day After

By Robert W. Gerber - https://www.thepresidency.org/the-dispatch/apr-4-2025#Tariffs-The-Day-After

President Trump signs an Executive Order on the Administration’s tariff plans at a “Make America Wealthy Again” event on Wednesday, April 2, 2025.

The day after his Rose Garden tariff announcement on April 2, President Trump fielded a reporter’s question about the stock market’s sudden 1400-point drop. Trump said that his Administration had inherited a “terrible economy” that required surgery. The President predicted, “It’s going to be a booming country. We have trillions of dollars committed to coming in… we’ll let (the tariffs) settle in.” He also said he was open to negotiations. 

President Trump’s enactment of a 10% tariff on all imports with higher “reciprocal” tariffs on several dozen target countries, paired with new duties on imported steel, autos, and auto parts, is a big gamble. The purported goal is to boost U.S. manufacturing, raise revenue, and to bring more fairness into the trading system. These are ideas that politicians on both sides of the political spectrum support. But there are potentially dire side effects from the heavy dose of tariff medicine the President is prescribing. Inflation will likely reignite, disproportionately hitting medium income and lower income workers, and making the Federal Reserve less likely to cut interest rate cuts. The levels and scope of tariff rates – unprecedented in modern times – boost uncertainty in the business climate. This has the effect of dissuading capital investment, regardless of whether company CEOs have announced new factories in the United States. These secondary effects of the Trump tariffs will be hard to avoid. 

Long ago, Trump correctly discerned that a new approach to reducing foreign trade barriers was overdue, and his supporters want him to correct the failings of globalization. Traditional trade negotiations are arduous, and they have frequently under-delivered for American manufacturing. The World Trade Organization (WTO) has likewise been unable to spur meaningful market openings in developing and middle-income countries, nor has it been effective in solving trade disputes. Trump used national security grounds to impose tariffs on steel, aluminum, washing machines, and more during his first term, with a public comment process. He raised tariffs on Chinese goods – which no prior president had been willing to do - and successfully concluded an upgraded U.S.-Mexico-Canada trade agreement with bipartisan support. President Biden’s “trade frameworks” failed to resolve longstanding Congressional trade priorities vis-a-vis the EU, UK, India, and the Indo-Pacific. President Trump’s new trade remedy for 2025 is designed to disrupt, leveraging the full heft of the U.S. economy. However, this rushed initiative seems to overlook some key U.S. strategic interests. 

Australia, South Korea, and Japan – all bilateral trade agreement partners and defense allies – were all hit with higher tariffs. Vietnam, Malaysia, and Thailand, who want to diversify away from China and depend to a large degree on exports to the United States, now face tariffs over 37%. Taiwan will see a 35% tariff plus additional future tariffs on semiconductor exports. These tariffs will come into effect without a phase in period, delivering an economic shock that seems incongruent with broader U.S. foreign policy goals in the Indo-Pacific. Countervailing duties against China make sense given Beijing’s decades long flouting of international trade rules. But China will retaliate against the latest tariffs (over 50%) and it will find ways to exploit the rupture Washington has caused with the EU and other likeminded trading partners. 

The “reciprocal” tariff rates also lack a logical rationale. Rates are not based on an exporting country’s “applied” or average tariff rates. Instead, the White House used a formula that divided the bilateral goods trade deficit by the value of Country X’s exports to the United States – divided by two. (The White House spokesperson also suggested that other factors were taken into account.) This rather arbitrary methodology appears to omit the value of services trade – where the United States has a surplus – and the size of Country X’s direct investment into the United States. The result is that a foreign trading partner subject to “reciprocal” tariffs will not know what concessions they would need to make to satisfy Washington. Furthermore, if a country reduces its tariff rate on U.S. products outside of a trade agreement, WTO rules oblige it to do the same for all countries (including China), which means the United States will not necessarily see any net gains. 

What happens next? The EU and China will retaliate, while other countries without sizeable economic leverage will try to adapt and pursue other markets. The White House will also need to manage domestic push back. On April 2, the Senate passed a resolution to end President Trump’s national emergency declaration under which he imposed 25% tariffs on Canadian imports. The following day, Senator Charles Grassley (R-IA) introduced legislation that would require Congressional notification and approval of new tariffs. Heritage Foundation senior policy analyst Andrew Hale told Bloomberg News on April 3, “these duties harm America’s global leadership… if these remain in place, we will get a recession and higher inflation… The President needs better advice.” Mayor of Columbia (S.C.) Daniel Rickenmann said on NPR that there were “deep concerns” in South Carolina – a major manufacturing and export hub - and that the tariffs could cost the state $3 billion per year. The President’s use of emergency law to impose tariffs could also be subject to court challenge. 

The President’s strategy will continue to foster domestic and international resentment from important stakeholders like the business community, states, and overseas allies and attract legal challenges. President Trump still has the option abandoning the pursuit of tariffs for tariffs sake, and instead, direct his Administration to pursue strategic measures to deepen critical supply chains with friendly countries while containing China’s worst trade abuses. By doing so, he could fulfill his promise to strengthen American manufacturing, with much less collateral damage to the economy and our relationships with likeminded trade and security partners.