Deciphering Trump’s Tariffs
On April 2nd (which President Trump denominated as “Liberation Day”), he presented an array of tariffs that he had been talking about since his inauguration. That presentation took place in the White House rose garden and the announced tariffs targeted all Imports from 75 nations. The President explained that his tariffs were being imposed in an effort to cause the affected nations to cease their unfair trade practices that are damaging the U.S. economy. To support this accusation, he presented a chart listing what he claimed are the tariffs on U.S. imports in effect in each of the targeted nations alongside of the level of retaliatory tariffs (dubbed “reciprocal” by Trump) he is imposing on their exports to the U.S. What factors actually motivated the President to take these unprecedented seemingly illogical and highly dangerous actions; and what will be their ensuing results?
What immediately seemed strange about the President’s presentation was that the tariffs purportedly being charged by the targeted countries were surprisingly high. What also seemed particularly unusual was that his chart listed the tariff rates being imposed by each foreign country as a single rate for all imported U.S. merchandize. Historically, tariffs are imposed on a single class of imported merchandize, rather than a single rate for all classes of imported merchandize. That’s because tariffs have always been employed as a tool to protect specific industries, not to punish the economies of the affected countries. Even the conservative Cato Institute expressed the view the tariff rates the President ascribed to our trading partners bear no resemblance to reality.
As it turns out, those figures were “generated” by the Trump administration, not based on the actual tariff rates being imposed or even on the basis of a weighted average of the actual tariff rates, but rather on the basis of the balance of trade between the U.S. and each of the targeted countries. Even that explanation doesn’t fully hold up as pointed out by Ian Bremmer. The best estimate is that Trump’s chart appears to simply assume that the trade imbalance (expressed as the percentage of a targeted country’s total exports to the U.S. in excess of its total imports of U.S goods) is wholly the result of the tariffs imposed on its imports from the U.S. This is an assumption that no self-respecting economist would ever make for a number of reasons.
First, it ignores the fact that trade imbalances are primarily caused not by tariffs, but rather due to differences in production costs which are primarily a function of labor costs. Since labor costs in the vast majority of the U.S.’s trading partners are lower than in the U.S., those countries can usually manufacture goods for a lower cost unless the differential can be offset by U.S. companies employing more efficient manufacturing techniques. This explains why goods manufactured in foreign countries are more attractive to U.S. citizens than U.S. made goods. Correspondingly, the average citizen in virtually all of our trading partners earns less than half of what the average American makes with the result that they cannot afford to buy products made in the U.S.
Secondly, the Trump administration’s computation assumes that all countries buy and sell the same products. Indeed, the natural resources of each country differ and the U.S. often imports chemicals and materials that are not even available (or at least abundant) within its borders. It also assumes that products (like automobiles) produced by each country are the same; stated another way, there is no difference between a Chevrolet and a Lamborghini.
Lastly, a substantial percentage (16.4%) of U.S. exports are in the form of services, not merchandize, which the Trump administration’s computation did not even consider. In short, the Trump administration’s computation of foreign tariffs on U.S. merchandize is a total fiction simply generated to justify an array of tariffs that the Trump administration is intent on imposing.
Perhaps in recognition of the questionable manner in which the Trump administration determined the level of tariffs being imposed on our exports, the “reciprocal” tariffs which it selected were arbitrarily set at 50% of the determined rate of tariffs imposed on U.S. goods. With respect to those countries with relatively small trade imbalances (or even a negative trade imbalance) the Trump administration simply chose to impose a 10% tariff on all of their imports. While consistency is often a cherished quality, it seems misplaced when it comes to international trade wherein countries tend to offer those products which are unique to their country or for which they have a production cost advantage. It also seemed odd that Trump was going to impose a minimum 10% rate on all countries purportedly charging “tariffs” on U.S. goods at less than 20%, irrespective of their actual tariff rates or their trade imbalance.
It's also worth noting that the 10% “reciprocal” tariffs were made immediately effective on all U.S. trading partners except Canada and Mexico. The remaining “reciprocal” tariffs on imports are scheduled to go into effect tomorrow. This distinction raises the question of whether the immediately effective 10% tariffs were intended to be non-negotiable and the delayed higher tariff rates were intended to be subject to negotiation?
Notably absent from the Trump administration’s list of countries to be the subject of its “reciprocal” tariffs were Russia, North Korea, Cuba and Belarus. According to Roge Karma writing in The Atlantic, the Trump administration simply explained that because of other pre-existing sanctions, there was “no meaningful trade” between the U.S. and those countries. This seems to be more of an excuse than an explanation because imports from Russia in 2024 were $3.5 billion giving it a $2.5 billion favorable trade imbalance and placing it as the U.S.’s 62nd largest source of imported goods. Conversely, included among the countries to be affected by the tariffs are a couple of islands located near Antarctica inhabited only by seals and penguins. It should also be noted that only recently President Trump threatened to impose tariffs on Russian imports in an effort to coerce Russia to agree to a cease-fire agreement with Ukraine. This seems to indicate that Trump’s “reciprocal” tariffs were not simply the product of economic considerations.
There has been no end of speculation as to why President Trump wanted to impose a broad array of tariffs or why he arrived at the conclusion that the U.S. is being “ripped off” to justify that action. The most likely explanation is that Trump wants the Congress to extend his 2017 tax cuts and he views the new tariffs as a means of generating revenues for the federal government to offset the estimated $5 trillion that those tax cuts will cost the federal government over the next 10 years. That’s because Republicans only enjoy slim margins in both houses of Congress and the anticipated revenues to be derived from the new tariffs will likely help encourage the handful of deficit hawks in the Congress to enact his planned extension of his 2017 tax cuts. This rationale certainly seems more in line with what has consistently been Trump’s primary objective.
It has also been speculated that Trump wants to return the U.S. to the Gilded Age when there was no income tax and tariffs were the principal source of revenues for our federal government. Not coincidentally, Trump has characterized his new tariffs as “a beautiful thing.” This may be because the financial burden associated with tariffs is largely imposed on the roughly 300 million working-class and retired Americans with only a minimum impact on the remaining 30+ million individuals situated in the top 10% of the nation’s income scale. Thus, the income emanating from tariffs will largely not be derived from the individuals most likely to be benefitted by his proposed tax cuts. This rationale certainly seems more in line with what has consistently been Trump’s primary objective.
Another possibility is that the U.S. government is also facing a rarely-mentioned deadline; namely, that it’s running up against the Congressionally-imposed debt ceiling. That ceiling currently stands at $36.1 trillion which was reached around the time of Trump’s inauguration and the federal government has been able to continue to function only by delaying certain expenditures. In the past, this delaying tactic has only been sustainable for approximately three months. Thus, the immediate imposition of the 10% tariffs may be intended to give Congress a little more time in which to muster the courage to extend the debt ceiling. This consideration may also explain why Trump has not spoken out against some of the outrageous cuts to the federal government’s payroll that Elon Musk has been initiating even though many of those job cuts (like those recently made to the federal governments public health agencies) may cause extensive and irreparable damage.
The “reciprocal” tariffs in excess of 10% were most likely intended to be a bargaining tool rather than to enable the creation or expansion of U.S. production of goods which the Trump administration has stated as the end-goal of his new tariffs. That’s because President Trump generally seeks immediate gratification from his actions and the development of additional production capacity is likely to take from two to four years. That time-frame could be even longer if businesses fear that Trump is only negotiating and that his tariffs may be withdrawn as quickly as they were imposed. This is especially true when you consider that Trump needs to act quickly before he loses control of the Congress which is likely to happen in the 2026 mid-term elections. Stated another way, he has a very short window in which to achieve his legislative agenda and both the voting public and Republican members of Congress are not likely to be willing to wait two to four years for economic conditions to improve.
As noted above, the announced purpose of these “reciprocal” tariffs is to coerce the affected countries to reduce their trade barriers adversely affecting the U.S. This purported rationale was underscored by Eric Trump’s effort to encourage the targeted countries to quickly negotiate with the Trump administration. Shortly after the President’s rose garden presentation, Eric announced that the governments of the countries affected by the tariffs are already rushing to meet with his father to negotiate the scope and level of the tariffs affecting their countries. He even went on to state that those who engage in such negotiations first will receive the best deals and those who linger may receive little or no relief from the tariffs. Similarly, Treasury Secretary Scott Bessent contended that many of the new tariffs won’t ever need to go into effect if the affected countries quickly comply with Trump’s demand that they end their harmful trade practices.
A major flaw in this proclaimed rationale is that removing existing tariffs and product subsidies will not necessarily eliminate trade surpluses. This can been seen from the fact that South Korea, Mexico, and Canada export more to the U.S. than they import despite imposing virtually no trade barriers. Similarly, as The New York Times reported, “Switzerland has an open trade policy and recently abolished all industrial tariffs, including on goods from the United States, which is also its largest export market.” This certainly seems to point to the fact that unfair trade practices are not really the principal focus of Trump’s new tariffs.
Like Trump’s recent threats against law firms, school systems and government contractors, his tariffs seem to have the contours of a shake-down exercise. Roge Karma has suggested that a possible motive for the tariffs is to cause our trading partners to alter their laws (including tax laws) and regulations to make them more friendly to U.S. businesses. He contends that characterizing such laws and regulations as “trade barriers . . is nonsensical, because they apply equally to foreign and domestic goods.”
Another, and far more perilous, problem is that the “reciprocal” tariffs announced by Trump could trigger trade wars. This is particularly true with larger countries that are less likely to be bullied by the economic power of the U.S. Indeed, China has already announced that it is imposing a 34% tariffs on all imports from the U.S. In addition, both Canada and Mexico (the U.S.’s two largest trading partner), which have previously waivered between negotiation and retaliation, are quite likely to follow China’s lead particularly considering the “on-again, off again” manner in which Trump negotiates.
Another theory is that Trump is trying to use his imposition of tariffs as a means to achieve a global realignment of nations. To be sure, Trump has turned his back on our European allies as well as many of our East Asian allies. He has also embraced autocracy bringing the U.S. closer to other autocratic regimes like those governing Russia, Iran, Turkey, Hungary and North Korea. He has even spoken about the creation of three spheres of world influence: one controlled by the U.S., another controlled by China and a third controlled by Russia. To that end he may be trying to use the U.S.’s economic power to subjugate our allies into doing his bidding, just as he has used his power over MAGA voters to coerce Republican politicians to carry out his demands.
If this is what has motivated him to employ our nation’s economic strength to coerce our nation’s trading partners, his plan could backfire. That’s because it might lead our trading partners to conclude that dealing with him involves a level of uncertainty which they are not willing to tolerate. Instead they may find that building their economies around trading with China will prove to be more profitable and reliable. Indeed, China is likely to be the biggest beneficiary of Trump’s wide-spread imposition of tariffs as many nations may view China as a more suitable trading partner.
There is always the possibility that Trump’s tariffs are just another of his efforts to distract public attention from the dismantling of the federal government now being led by Elon Musk. These actions have certainly been the center of public focus and tariffs seem far less threatening to working-class Americans than cuts to Social Security, Medicare and Medicaid. Indeed, many labor unions view tariff increases positively. The problem is that the danger of starting a trade war is real and its ramifications are equally, if not more, serious. Still, Trump has a history of taking big risks, especially when the adverse consequences of his actions are likely to be visited upon persons other than himself. Accordingly, creating a public distraction may well have been one of the principal motivations underlying his imposition of new tariffs.
It also must be appreciated that trade wars not only may cause inflation; but if that inflation is not immediately checked it can continue to cause further inflation as businesses continue to raise their prices in anticipation of further inflation. This explains why Fed Chairman Powell raised interest rates in 2022 and is currently reticent to lower them now notwithstanding predictions of a recession before the end of this year have increased from 20% to 60%.
Although President Trump doesn’t like to back down in defeat, the pressure is quickly mounting for him to do so. In the four trading days since his announcement of his new tariffs, all three of the U.S’s leading stock markets have experienced declines of in excess of 10%. In addition, the Senate has passed a resolution to withdraw Trump’s single-handed ability to impose tariffs and only the refusal of House Speaker Johnson to allow such a resolution to be voted upon is keeping the House from doing likewise. This past weekend hundreds of rallies took place across the country voicing disapproval of the manner in which the Trump administration has been managing the nation’s economy. This type of popular reaction could cause House Speaker Johnson to change his position. Of course, it’s not in President’s Trump’s DNA to back down even when defeat seems inevitable. Quite to the contrary, his normal response is to acquiesce and declare that his actions have achieved their intended purpose.
In this case, I expect that Trump will not blink. He is very close to having the Congress pass legislation approving the extension of his 2017 tax legislation and increasing the debt ceiling. The Senate is already poised to vote on legislation that will achieve those goals and the House is slowly moving in that direction. Thus, there is a real possibility that he may be able to stay his course until both houses of Congress have acted. Although the popular backlash that is now rising may prompt the House to join the Senate in revoking Trump’s ability to single-handedly impose tariffs, it may not be sufficient to derail the budget legislation which appears to be Trump’s primary legislative objective.