The Tariffs

As part of this new policy, a universal 10% tariff on all countries will take effect on April 5. Additional, reciprocal tariffs will be implemented on April 9. These are a purported response to tariffs imposed on the US by other nations. The Trump administration asserts that these tariffs are only half of what other countries impose on the US and positions this halving as a kindness on the part of the US. 

There are a few particularly notable aspects of the new policies. First, the tariff rate for China appears to be stacking, meaning that while the new, reciprocal tariff is 34%, the effective rate is 54% given the 20% already imposed earlier this year. It also ends duty-free de-minimis treatment for covered goods (previously, imported goods valued at or under $800 were duty-free). Next, the administration mentioned exemptions to future Section 232 tariffs, applied to gold, autos, and energy/critical materials. Investigations into pharma and semiconductors are expected, as well. Finally, on a relative basis, Canada and Mexico will continue to receive no tariffs on US-Mexico-Canada (USMCA)-compliant goods, a 25% tariff on non-USMCA compliant goods, and a 10% tariff on non-USMCA-compliant energy and potash. 

Let’s turn our attention to timing. In theory, because the reciprocal tariffs are meant to be enacted a week after the announcement, there’s room for negotiation. In my view, the administration is likely calculating that using an aggressive starting point increases the probability that other countries make concessions, which the US could accept before or immediately following implementation. I suspect the administration would view such concessions as both a testament to US strength and a means of retaining some revenue from a fiscal perspective. The latter point is important—a reconciliation process may lead to higher debt levels over the medium term, with a current policy baseline and the addition of further tax cuts beyond the extension of the Tax Cuts and Jobs Act. 

As part of this conversation, it’s worth noting the April 2 judicial election results revealed that voters are souring on the Trump administration. This type of feedback can be a disciplinarian, but Trump is steadfast in his conviction in the efficacy of tariffs, which he seems to view as a solution to structural issues around labor share of income and income inequality. It remains to be seen whether they will achieve the desired outcome over time. 

The Economic Implications

The magnitude of the tariffs could erode, if not destroy, trust among US allies. A loss of trust may make allies less likely to engage in negotiations than the administration bargains on—a dynamic that may become more clear in the coming days. What’s more, a decline in institutional integrity undermines the status of the US dollar (USD) as reserve currency. This risk has now accelerated, and even if the administration walks the tariffs back before implementation, this is unlikely to dissipate. In the short and medium term, I believe these actions:

• Increase the probability of a more sustained rise in inflation volatility; 
• Bode poorly for short- and medium-term growth prospects;
• Heighten the probability of the business/economic cycle engaging with negative signals from policy uncertainty; and 
• Raise the likelihood of economic nationalism and repatriation.

That said, I’ll be surprised if all these tariffs go into effect as announced, which makes analysis of the situation difficult. Uncertainty multiplier effects can be significant—especially when bilateral negotiations with 60 countries may be looming large and potential shifts in tariff rates by the day/week are likely.