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If it endures, Donald Trump’s decision on April 2 2025 to enact sweeping “reciprocal” tariffs on US trade partners will go down as one of the greatest acts of self-harm in American economic history. They will wreak untold damage on households, businesses and financial markets across the world, upending a global economic order that America benefited from and helped to create.
The president spoke brazenly from the Rose Garden at the White House on Wednesday, delivering a protectionist agenda well beyond most analysts’ worst-case scenarios. Within a week, the US will be enclosed by a minimum 10 per cent tariff wall on all imports, reinforced by hefty individualised duties on nations with sizeable US trade deficits. These build on levies already announced by the administration, including on China, Mexico, Canada and the auto industry. The combined effect will lift America’s effective tariff rate to its highest in over a century.
Trump’s justification hinges on a naive belief that treats trade imbalances as if they were the profit and loss account of a business, and not the culmination of highly specialised supply chains. He also considers factory work to be the fount of economic development, ignoring how decades of free trade has enabled America to rise up the industrial value chain and become a global leader in services and innovation.
His “reciprocal” levies amount to a back-of-the-envelope calculation. They take trade partners’ US trade deficit in goods as a share of imports from that country, and then divide it by two. This is not a calibrated attempt to equalise tariff and non-tariff barriers facing US exporters, perceived or otherwise. It is, however, a reckless repudiation of all trade agreements the US has signed, as well as a deeply flawed plan to attract foreign manufacturing investment.
For the US economy, the most immediate effects of Trump’s actions will be to raise inflation and slow economic activity. Capital Economics reckons Trump’s tariff blitz could push US annual inflation above 4 per cent by the end of the year, heaping further pain on households that have suffered from a 20 per cent rise in prices since the pandemic. Interest rates may now stay higher for longer.
American businesses should be shell-shocked. They face the costly and complex task of finding domestic suppliers. The prospect of sectoral tariffs and retaliatory measures, alongside the administration’s slapdash approach to policymaking, will hinder investment plans and any chance of sparking a manufacturing renaissance. Financial markets are volatile too. The S&P 500 and the US dollar plunged in early trading on Thursday. Confidence in US economic exceptionalism continues to evaporate.
As for those most reliant on selling goods into the US, the economic downsides of Trump’s tariffs will be substantial. Decades of progress in poverty reduction across south-east Asia, in particular, is now at risk. Sluggish growth in major economies, including the EU, Japan and China, will be compounded.
The temptation to retaliate will be strong. But this moment calls for cooler heads. Trump has promised to fight fire with fire. Policymakers must carefully weigh their next moves. Instead, America’s now shut-out trade partners ought to focus on expediting free trade initiatives among themselves. After all, the US accounts for just 13 per cent of global goods imports, and with the exception of those in the White House, the economic imperative of comparative advantage continues to be widely understood.
This was no “liberation day” for America. If Trump gets his way, the US economy will be isolated from the very system that has powered its century-long rise. The whole world will suffer, but it need not follow America’s path.
