As in other parts of his agenda, President Donald Trump has wasted no time pursuing his goal to rebalance trading relationships and revitalize US manufacturing by imposing tariffs on imports. Also, like other parts of his agenda, the tariff rollout has been chaotic, with some new measures announced, then delayed, and later reimposed.
Despite the concerns of business leaders and investors about the economic impact of these measures – which have prompted a stock market sell-off – Trump remains committed to his approach. He argues that any short-term pain will translate into long-term gain as businesses move their operations to the US and plans to announce a sweeping new round of tariffs on April 2. We asked Eurasia Group expert Nancy Wei what to expect from what Trump is billing as a “Liberation Day” from an unfair global trading system.
What measures would you highlight?
We are expecting reciprocal tariffs on countries around the world and announcements of new probes that lead to tariffs on specific product categories. Reciprocal tariffs are set in response to other countries’ trade barriers, including tariffs, taxes, and different types of non-tariff trade barriers. Another important criterion is the existence of a trade surplus with the US, seen by the Trump administration as evidence of unfair trade practices. Reciprocal tariffs apply to all goods a country exports to the US.
Which countries do you expect to be targeted?
There are three groups. The first includes trading partners with large trade surpluses with the US or that Trump has threatened to tariff for other reasons. China, Mexico, Canada, the EU, India, Vietnam, Japan, South Korea, Brazil, Malaysia, Thailand, and Indonesia all have large trade surpluses with the US. Denmark has drawn threats of tariffs for its unwillingness to discuss transferring control of Greenland to the US, while the EU has drawn Trump’s ire for its low defense spending. We expect Trump to use the International Emergency Economic Powers Act to apply tariffs on these countries immediately. After imposing 25% tariffs on Mexico and Canada on Feb. 1, Trump agreed to pause them a few days later. We expect the 25% tariff to fully take effect soon after April 2 (with a 10% carveout for Canadian energy products).
Countries in the second group (which have lower trade deficits) and in the third group (the rest of the world) will remain vulnerable to reciprocal tariffs later in the year. The risks for those in the third group will rise over time as countries in the first two groups (especially China) seek to route shipments to the US via those in the third group to avoid tariffs.
It sounds like US consumers should brace for higher prices on products from about a dozen countries after April 2. Can you give us a sense of what they export to the US?
Yes. The products affected will include autos from the EU, Mexico, Japan, and South Korea; electronics from China, Mexico, the EU, India, Vietnam, Japan, and South Korea; and consumer goods from China, Mexico, the EU, and Vietnam. That’s just a small sample.
What sort of retaliation should we expect from these countries?
Most countries in the crosshairs of Trump’s trade policies have signaled cautious responses and will seek to either negotiate concessions from the US administration or respond with carefully calibrated measures of their own. China, for example, has already responded to a first round of 10% US tariffs with retaliatory tariffs on liquefied natural gas, coal, farm machinery, and other US products. It has signaled it will respond against any additional US measures as they take effect. Mexico has indicated it will respond with measures targeted at US agricultural goods from Republican-leaning states with the aim of causing pain for producers there that will force the US to the negotiating table. The EU has said it is prepared to respond with proportionate counter-tariffs on US goods but will initially seek a negotiated settlement with Trump.
What product-specific tariffs are expected?
Trump has already announced 25% tariffs on imported automobiles, steel, and aluminum. His administration has announced a probe into trading conditions in the copper sector that is expected to result in tariffs. On April 2, he is expected to launch similar probes for several other sectors – including semiconductors, agriculture, and pharmaceuticals – that would result in tariffs by the end of this year or early next year. Trump has indicated he would like to protect the US agricultural industry from the expected retaliatory measures from US trade partners.
What will be the short- to medium-term impact of these policies?
We are projecting that average US tariff levels will probably rise this year to levels not seen since the 1940s. The resulting price increases for consumers, retaliatory measures against US firms, and general climate of uncertainty are likely to reduce the level of US economic output by 1.5% over the next year or two and cause a 1.5 percentage point increase in inflation. However, economic models are not well-equipped to estimate the impact of mass tariff hikes. We think it could be much greater in an extreme scenario, on the order of a 3% reduction in economic output and a 3 percentage point increase in inflation.
Edited by Jonathan House, Senior Editor at Eurasia Group.
