President Trump announced Wednesday what was one of the most dramatic economic policy changes in decades. He replaced the long-standing system of taxing imports with a new tariff system of his own devised.
The president said tariffs reversed decades of unfair treatment by other parts of the world, and returned factories and jobs to the United States.
“The market is going to be booming,” and “the country is booming,” Trump said Thursday that global financial markets had been struggling with the biggest defeat in years. He added that other countries have “used us for many years.”
Economists’ estimates have been far more severe as they almost predict that the president’s drastic tariffs and retaliation will slow US economic growth, boost consumer costs, and make life difficult for businesses that rely on international supply chains.
The president’s actions are consequential and complicated. This is what you need to know.
What did the president do?
Trump has announced two major tariff plans that will apply to most of the world. One component is a 10% “baseline” tariff, widely applied to almost all US imports, except for products from Canada and Mexico.
The second measure is what the president calls “mutual” tariffs. The levy applies to 57 countries that Trump says he has high tariffs and other unfair economic practices that have hurt American exporters. He said this was a mutual tariff as it coincides with the way other countries handle the US.
However, the tariffs announced by Trump are not actually based on tariffs in other countries or other economic barriers to US trade. This number is calculated based on the US trade deficit. This is a measure of the difference between what the US sells to a country and what it buys from.
Mutual tariffs range from 1% to 40% and are added to the 10% baseline tariff.
The 10% tariff will take effect on Saturday and mutual fees will come into effect next Wednesday.
Which countries have been most targeted by tariffs?
Tariffs place a major burden on some of the largest US trading partners, including China, Japan, Germany, India, South Korea, Taiwan and Vietnam.
In particular, Canada and Mexico were not included. Trump hit these countries last month with a 25% tariff on many exports, but also provided an exception to products that qualify for the US-Canada agreement, a trade agreement he signed in 2020. The country also faces the tariffs Trump has applied globally to automobiles, iron and aluminum, and the administration appears to have determined that America’s closest neighbors do not need further tariffs.
However, the new tariffs will strike other allies with substantial taxation. European goods face 20% tariffs, Japanese goods face 24% and Korean goods face 26%.
Asian countries that send many exports to the US, but don’t buy much in return, due to the way customs duties are calculated, will see some of the best prices.
China’s exports face an extra 34% tariff. This is on top of the 20% tariffs Trump has filed in recent months and other taxes from his first term. As a result, some products from China face 79% tariffs.
Vietnam, where many companies moved their factories after Trump placed tariffs on China in his first term, now faces 46% tariffs on exports, while Cambodia’s exports are taxed at 49%.
The White House also did not apply tariffs to Russia, North Korea, Cuba or Belarus. They claim that these countries are already subject to severe sanctions. However, US imports from Russia amounted to $3 billion last year. It is smaller than many countries, but much larger than smaller countries such as Lesotho and the Falkland Islands.
What is the president’s goal?
The president and his advisors say their goal is to make tariffs extremely painful and to force businesses to make products in the US. They argue that this will create more American jobs and boost wages.
“If you want to keep your tariffs zero,” Trump said outside the White House on Wednesday.
One of the biggest questions is whether the president is willing to view these tariffs as negotiation tactics and remove them in exchange for concessions from other countries.
The administration gave a mixed signal to the forefront. It appears unlikely that the president would remove the 10% baseline fees globally issued. And if the administration really wants us to eliminate the trade deficit with other countries, that may be difficult, if not impossible.
However, in an executive order he signed, the president said mutual tariffs could be rewind if the country eliminates unfair trade practices or if the trade deficit with the US is abolished.
Commerce Secretary Howard Lutnick described the trade barriers in other countries as “monsters that need to be killed.”
“Our team is talking to all of our great trading partners today,” Rutnick told Bloomberg Television Thursday. “It’s time for them to treat us poorly and find a deep soul in how to make it right.”
How did they come up with the numbers?
Trump said on Wednesday that country’s tariff rates will be calculated based on “total tax rates for all tariffs, non-financial barriers and other fraudulent activities.” However, their methodology turned out to revolve around simpler ones. It is the gap between what the US exports and imports to the country.
The White House came up with a complicated look equation, but summed up in a simple ratio. Countries that send more goods to the US than they buy will be considered “unbalanced” trade and will face higher tariffs.
This formula doesn’t take into account the comparative advantage, or the idea that a country trades goods, as it is better at producing some products than other products. Instead, the administration’s perspective is that the trade deficit is bad, and tariffs appear to be applied until excluded.
How do tariffs work?
Once they come into effect over the next week, tariffs will immediately increase the cost of importers bringing goods into the country. These importers are typically US companies.
For example, if Walmart brings in $10 shoes from Vietnam, which is facing a 46% tariff, Walmart borrows $4.60 from the US government with additional tariffs.
It’s not so clear what will happen next. Walmart can try to force Vietnamese shoe manufacturers to cost by telling Walmart that they will pay less for their products. Walmart was able to reduce its own profit margins and absorb the costs of tariffs. Alternatively, you can increase the price of selling shoes in stores to make up for the costs.
The economist discovered that when Trump placed tariffs on China in his first term, most of the costs were handed over to consumers. However, economic research shows that tariffs on steel are slightly different. Only about half of these costs were handed over to the client.
Estimates vary, but given the size of Trump’s new tariffs, American households can see additional costs of thousands of dollars each year. Estimates released by research group Yale Budget Lab found that American households pay on average $2,100 for the April 2nd announcement.
The particularly high tariffs that the Trump administration has applied to many Asian countries means that the prices of many consumer items, such as shoes, clothing and electronics, are likely to increase.
The government will earn more from the tariffs the Trump administration has promised to lead to tax cuts. The tariffs valued on all goods imported by the US last year was $78 billion. New tariffs announced Wednesday will surge that figure to more than $1 trillion, according to an analysis by Washington-based research firm Worldwide.
What happens next in the economy?
The tariff announcement has caused a global meltdown in the stock market, indicating that investors consider it extremely harmful to listed companies.
It is not yet clear whether or how other countries will retaliate. But if they impose their own tariffs on US products, it could possibly hurt US exporters and cause an escalation of the trade war.
Many analysts have said that it will quickly downgrade economic growth forecasts and that tariffs will boost consumer prices and business costs, slowing demand and economic activity.
Piper Sandler’s Chief Global Economist Nancy Lazar estimated that the US economy could potentially sign a 1% contract in the second quarter. She had previously expected a flat quarter. “It was an instant hit with the economy,” she said.
A Fitch Rating economist said in a memo Thursday that tariffs have significantly increased the risk of a US recession. He said tariffs will result in a rise in consumer prices, which narrows down actual wages and weighs consumer spending.
Tariffs also lead to lower profits for businesses, dragging US business investments in addition to policy uncertainty. Overall, the effect is likely to outweigh the benefits that US companies will benefit from increased protection against foreign competition,” said Fitch Economist.
Lazaro Gamio and Colby Smith contributed their report.
