Trump’s ‘Liberation Day’ brings even bigger tariffs than expected

"Foreign countries have looted, pillaged, and raped" America by imposing unfair trade practices, Trump said. "This is one of the most important days in American history. It is the declaration of American independence," Trump added. "Jobs and factories will come roaring back, and America will be wealthy again."

The latest measures, which Trump presented as reciprocal tariffs against all trade partners ("in many cases, the friend is worse than the foe," Trump said), add another layer of import duties onto the more than $4tn worth of goods and services that the United States imports each year and come atop already announced duties on steel, aluminum, cars, Mexico, Canada, and China. More could also be coming: Trump has hinted at further "sectoral" tariffs that could jack up prices for particular imports, such as pharmaceuticals and chips.

The new tariffs seem to be even harsher than anticipated, with most market expectations previously looking at a flat rate of perhaps 15% on all US trading partners. Trump's proposal takes aim at both tariff barriers—that is the tariff rate that other countries levy on imports—but also harder-to-calculate measures such as currency manipulation, industrial subsidies, regulatory and phytosanitary standards, and even foreign domestic taxes. That will raise economists' eyebrows as well as almost inevitable challenges at the World Trade Organisation (WTO).

Trump showed a chart with some of the so-called reciprocal rates that he said would go into effect this month, including 34% on China, 20% on the European Union, 32% on Taiwan, 24% on Japan, 26% on India, 25% on South Korea, and 36% on Thailand. (All of those countries except China are formal or nominal US treaty allies or security partners.) The rates were calculated, Trump said, as half the rate set by other countries on US imports, though how he made the calculation wasn't immediately clear.

Trump's measures are all but certain to trigger painful countermeasures from Europe, with European Commission President Ursula von der Leyen warning on Tuesday that European leaders "have a strong plan to retaliate" and "will use it," if needed.

"Europe holds a lot of cards, from trade to technology to the size of our market," she said. "But this strength is also built on our readiness to take firm countermeasures if necessary. All instruments are on the table."

Even before Wednesday's announcement, Trump had ratcheted US average tariff rates to their highest level since the 1940s, when US officials helped build the global trading system with the goal of fostering freer trade and avoiding damaging trade wars (and real ones as well). The latest batch would push US tariffs up to levels last seen after the Hoover-era tariffs of the early 1930s, a tax hike and trade wallop that economists say exacerbated the Great Depression. Despite Trump's statements at his Rose Garden conference, the average trade-weighted tariff rate of all WTO members is about 3.8%.

Economists have been steadily ramping down their US and global growth outlooks as a result of Trump's escalating trade war, with some big investment banks now putting the chances of a recession at a 35% to 40% likelihood. By some measures, economic uncertainty in the United States is now higher than during the COVID-19 pandemic.

Inflation will rise, at least in the short term, due to the inability of many firms to source goods from anywhere other than overseas and a limited ability, in many industries, to absorb massive cost increases to their own inputs. Some economists expect unemployment to nearly double.

Markets have already lost all the post-election gains they had posted. Trump delayed his big announcement on Wednesday until US markets had closed. Asian markets will open just hours after his announcement.

One big difference between the latest batch of tariffs and all the previous rounds is that they really will affect almost everyone, not just particular sectors, such as steel and cars, although those industries will now face additional costs. Farmers will face higher prices for fertilizer just ahead of planting season, as well as the likely prospect that once massive export markets such as China will become no-go zones.

"Farmers on both sides of the Atlantic are feeling the stress and uncertainty from the threat of tariffs," warned Rob Larew, the president of National Farmers Union, the United States' second-largest general farm organisation, last month. "Trade tensions will raise costs, disrupt supply chains and restrict markets causing farmers, consumers and businesses alike to suffer."

Clothes, too, will get more expensive, since the $100bn-a-year of US apparel imports will now be subject to tariffs not just on goods from China but from all the countries that have sold textiles in China's stead, such as Vietnam.

Meanwhile, there is likely to be little short- to medium-term revival in US manufacturing because of the tariffs, which, if past is prologue, could be used as negotiating leverage and be removed at a White House whim. Many plants, such as those in the auto or aluminum industries, require multibillion-dollar investments and years of lead time; other industries don't have skilled workers or could only be competitive reshoring if they resort to even more automation, which could negate any blue-collar employment gains.

"For companies looking for clarity, they should assume this is the start of the process, not the end," said Ryan Petersen, the CEO of Flexport, a supply chain manager, who stressed that some of the tariffs could be bargaining chips, not absolute metrics. "Businesses are looking for clarity so they can make investment decisions on their supply chains ... and the reality is that they will likely have to wait for the process to play out before they can really understand the new landscape of global trade."

Wednesday's sweeping tariffs may not be the worst of it, with the novel idea of "secondary tariffs" suddenly all the rage in Washington. Trump has already threatened tariffs on any country that buys oil from Venezuela (that would affect US goods imports from China) and floated the idea of similar tariffs on Iranian crude exports. Legislation introduced in the Senate on Tuesday would levy 500% tariffs on any country that buys Russian gas or oil, which would put the EU, or at least some of its member states, under the threat of crushing financial penalties.

Trump ran on the idea of sharply increasing import taxes, and in a few short months in office, he has delivered far more than he did during his first term. He alluded on Wednesday to his promises to bring back a winning recipe for the US economy, which, until 2025, was the best-performing after COVID of all major economies in the world.