Trump’s New Protectionist Age Blowing up the world trading system has consequences that the President isn’t advertising.
The WSJ Editorial Board
President Trump unveiled his new “liberation day” tariffs on Wednesday, and they are another large step toward a new old era of trade protectionism. Assuming the policy sticks—and we hope it doesn’t—the effort amounts to an attempt to remake the U.S. economy and the world trading system.
Mr. Trump’s tariffs look “reciprocal” in name only. First he’s hitting every nation in the world with a 10% “baseline” tariff to sell in the U.S. market. For those he calls “bad actors,” he’s adding up the country’s tariff rate on U.S. goods, plus an arbitrary estimate of the cost of its “currency manipulation” and non-tariff barriers. He then takes that total number and applies half of that in tariffs on the country’s exports to the U.S.
He’s hitting China with a 34% tariff, but our Japanese friends will pay nearly as much at 24%. The European Union gets whacked with 20%, India with 24%. We’ll assess the details further in coming days, but for today let’s consider some of the consequences already emerging in this new protectionist age:
• New economic risks and uncertainty. The overall economic impact of Mr. Trump’s tariff barrage is unknowable—not least because we don’t know how countries will react. If countries try to negotiate with the U.S. to reduce tariffs, the damage could be milder. But if the response is widespread retaliation, the result could be shrinking world trade and slower growth, recession, or worse.
There will certainly be higher costs for American consumers and businesses. Tariffs are taxes, and when you tax something you get less of it. Car prices will rise by thousands of dollars, including those made in America. Mr. Trump is making a deliberate decision to transfer wealth from consumers to businesses and workers protected from competition behind high tariff walls.
Over time this will mean the gradual erosion of U.S. competitiveness. Tariffs that blunt competition invite monopoly profits while reducing the need to innovate. This is the story of the American steel and car industries in the 1950s and 1960s before global competition exposed their deficiencies.
• Harm to American exports. One longtime U.S. trade goal has been to expand markets for American goods and services. Administrations of both parties pursued trade deals, bilateral and multilateral, to do so. Apollo Global Management says 41% of S&P 500 firms’ revenues come from abroad.
Mr. Trump’s unilateral tariffs blow up those arrangements and invite retaliation. U.S. exports will suffer directly from retaliatory tariffs. And they will suffer indirectly as other countries strike trade deals that give preferential treatment to non-U.S. firms. Think of Brazil’s soybean bonanza after Mr. Trump’s China tariffs in his first term.
• A bigger Washington swamp. Tariffs impose costs that businesses will want to avoid. They will thus be a windfall for Beltway lobbyists as companies and countries seek exemptions from this or that border tax.
Mr. Trump is saying there will be no tariff exemptions. But watch that promise vanish as politicians, including Mr. Trump, see exemptions as a way to leverage campaign contributions from business. Liberation Day is Buy Another Yacht Day for the swamp.
• The end of U.S. economic leadership. Britain played this role through World War I, but it was too weakened by war to continue. The U.S. didn’t take up the leadership mantle until after depression and World War II. U.S. leadership and the decision to spread free trade produced seven decades of mostly rising prosperity at home and abroad. The U.S. share of global GDP has been stable at about 25% for decades, even as industries rise and fall.
That era is now ending, as Mr. Trump adopts a more mercantile vision of trade and U.S. self-interest. The result is likely to be every nation for itself, as countries seek to carve up global markets based not on market efficiency but for political advantage. In the worst case, the world trading system could devolve into beggar-thy-neighbor policies as in the 1930s.
The cost in lost American influence will be considerable. Mr. Trump thinks the lure of the U.S. market and American military power are enough to bend countries to his will. But soft power also matters, and that includes being able to trust America’s word as a reliable ally and trading partner. Mr. Trump is shattering that trust as he punishes allies and blows up the USMCA that he negotiated in his first term.
• A major opportunity for China. The great irony of Mr. Trump’s tariffs is that he justifies them in part as a diplomatic tool against China. Yet in his first term Mr. Trump abandoned the Asia-Pacific trade deal that excluded China. Beijing has since struck its own deal with many of those countries.
Mr. Trump’s new tariff onslaught is giving China another opening to use its large market to court American allies. South Korea and Japan are the first targets, but Europe is on China’s list. Closer trade ties with China, amid doubts about access to the U.S. market, will make these countries less likely to join the U.S. to impose export controls on technology to China or to ban the next Huawei.
This is far from a comprehensive list, but we offer them as food for thought as Mr. Trump builds his new protectionist world. Remaking the world economy has large consequences, and they may not all add up to what Mr. Trump advertises as a new “golden age.”
The FT asks:
As the White House appears to lurch towards some form of new American autarky, a crucial question is whether Trump will be able to sustain these aggressive trade policies for an extended period or will eventually reverse them under the weight of economic, market, political and even legal pressure. S&P 500 futures were down 3 per cent after Trump’s announcement.
- Trump has also appeared to be less disturbed by market turmoil and the potential for economic pain than he has in the past, which may mean he will stick with the tariffs for longer.
- The Trump administration said the tariffs could be reduced if trading partners took “significant steps” to change their policies, but also that they could increase if trading partners retaliated.
- “I hope that [Trump] will roll some of this back, because I think it combines an economic policy that is not productive with a foreign policy that is not productive,”
What’s the formula for calculating reciprocal tariffs?
We’ve invested considerable effort into dissecting the methodology Washington uses to calculate so-called reciprocal tariff equivalents. Surprisingly—or perhaps alarmingly—the formula is incredibly basic: simply divide the U.S. trade deficit with a given country by the total value of U.S. imports from that country. That’s it.
In essence, the formula treats any trade deficit as evidence of unfair treatment or protectionism by the partner country—without accounting for legitimate economic realities such as comparative advantage, integrated supply chains, or structural trade patterns.
Despite Washington’s claims, we found no evidence that the so-called ‘effective tariff’ the U.S. is supposedly facing actually accounts for currency manipulation or non-tariff barriers.
Also, if the U.S. runs a trade surplus with a country, that country is still hit with a 10% tariff—which appears to serve as a new baseline charge for access to the U.S. market.
At least for now, Canada and Mexico remain exceptions, thanks to their status under the USMCA.
- Reciprocal tariffs: you won’t believe how they came up with the numbers There is some method to the madness — it’s just a nonsensical method
(…) Let’s look at Bangladesh as an example. The US imported $8.4bn of goods from Bangladesh in 2024, giving it a $6.2bn trade deficit with the country. 6.2 divided by 8.4 is 0.738. And what do you know? The White House says that the country has “charged” 74 per cent “tariffs” against the US, “including currency manipulation and trade barriers”. Trying to assign a macro narrative to this calculation method is enough to make even a hack strategist’s blood run cold.
Is the US . . . implying that all trade deficits are the result of unfair practices or currency manipulation? What about comparative advantage? David Ricardo is surely spinning in his grave. What about bananas? They don’t grow in the US! Is it worrying that some posters got this method when they asked major LLMs about easy ways to impose tariffs? This is bananas. (…)
This does not bode well for fans of coffee or bananas or other produce that doesn’t grow in the US. (…)
As John McEnroe once said to a Wimbledon umpire: “You can NOT be serious!”
(…) Tariffs at these levels would turn America into its own economic island, trading only with itself. Horizontal links with the rest of the world are out. (…)
Sonola described the announcement as a “game changer” for the US and the rest of the world: “Many countries will likely end up in a recession. You can throw most forecasts out the door, if this tariff rate stays on for an extended period of time.” (…)
“Trump said he wanted $600 billion and he got it. This represents 2.2% of GDP and twice the size of the largest tax increase in modern US history.” Recall that three months ago, everyone was looking forward to tax cuts. (…)
This is not a serious way to proceed, and it’s insulting to put such huge restraints on allies’ trade with such weak explanation — particularly in a speech that accuses the rest of the world of “raping and pillaging” the US. Under the common understanding of reciprocity, trade negotiators would go through product by product (involving many difficult definitions), and make sure that each individual tariff is balanced. That would have been very difficult, but would appear fair. This appears arbitrary, because it is. Presenting it as “kind” adds salt to the wound.
World leaders will have to keep their cool better than McEnroe did. But taken together, this isn’t the action of serious people, even though its consequences could be very serious indeed. (…)
The obvious intention is to spark a negotiation. But it’s politically difficult for foreign leaders to negotiate with a US president who has just insulted their country, while the obscure math makes it difficult even to start a discussion. “I don’t see how many leaders could pick up the phone to negotiate after this,” commented Tchir. (…)
Tina Fordham of Fordham Global Foresight argues that an important unintended consequence of the trade rhetoric to date has been “the fomenting of a growing anti-US alliance, including between such strange geopolitical bedfellows as China, Japan and South Korea — historically bitter rivals” who had already indicated a joint response to US tariffs. Europe’s sudden moves toward coordinating investment for defense are another example. (…)
Trump might just badger the rest of the world to find new trading partners, and to borrow money to create their own growth. That would be much better for the global economy. It wouldn’t bring back US manufacturing jobs.
J.P. Morgan’s initial assessment:
The resulting hit to purchasing power could take real disposable personal income growth in 2Q-3Q into negative territory, and with it the risk that real consumer spending could also contract in those quarters.
This impact alone could take the economy perilously close to slipping into recession.
And this is before accounting for the additional hits to gross exports and to investment spending. Headlines about retaliatory measures by US trading partners are already coming out, and we expect to learn more in coming days.
The somewhat confusing nature of today’s news, coupled with uncertainty over how long these tariffs will remain in place, should make for an even less friendly environment for investment spending (though that is one way to narrow the saving — investment imbalance and hence narrow the current account deficit).
So, the “in-depth assessment of bilateral trade relationships” originally announced is in fact a weird combo of incomplete facts (bananas, “services” anybody?) “adjusted” by spurious subjective factors (non-tariff barriers, currency “manipulation”, etc.).
The only constant is that every country is equally treated as an enemy, some getting the additional label of “bad actors”.
Analysts and strategists will be scrambling to face the new reality that few thought possible only yesterday.
The formula is:
- % increase in inflation x
- % decrease in demand x
- % decline in margins =
- % impact on profits x
- % decline in P/E multiple to account for additional uncertainty + lost credibility =
- % decrease in equity allocations by Americans +
- % decline in USD x
- % increase in U.S. equity selling by foreigners
Can we “hope” that:
- Trump will soon begin to negotiate country by country into a swampy global trade deal based on what his electoral base seems capable of accepting as wins, however small they can be;
- Trump will begin to understand that his place in history may not be on the best side of the ledger and find a way to tell us that someone(s) at the WH went haywire;
- The Fed will try to be the adult in the backroom and find a magical way to deal us out of this “golden age”.
Daydreams and nightmares!
This was before yesterday:
J.P. Morgan: The probability of a recession now stands at 40%
In light of heightened trade policy uncertainty, J.P. Morgan Research has raised the probability of a global recession taking hold in 2025 to 40% — up from 30% at the start of the year. (…)
A new slate of tariffs is set to be announced in early April, which will likely move the effective U.S. tariff rate above 10% and result in a 0.5 percentage point drag on 2025 U.S. and global GDP. “Even after accounting for retaliatory actions, this drag is not large enough to threaten an expansion that stands on fundamentally solid ground. Our concern, however, is that three related impulses magnify the size of this drag,” Kasman observed.
Firstly, the new set of tariffs could undermine the view that the Trump administration will maintain a business-supportive policy stance, creating a large shock to business sentiment. Key sectors of the North American economy could also be disrupted as the administration moves to restrict trade and immigration. Finally, there could be less room for pre-emptive Fed policy to cushion these magnifying effects if near-term inflation expectations move higher.
J.P. Morgan’s global manufacturing expectations index (MEI) fell sharply during the 2018–2019 trade war but has, somewhat counterintuitively, moved higher in recent months. “We attribute this lift to the front-loaded pickup in global industry that is offsetting a potential drag from rising trade war concern. Although this will likely prove transitory, it may be serving to delay a brewing sentiment shock,” Kasman said. On the other hand, the Fed’s recent regional surveys showed a stepdown in U.S. capex spending intentions, indicating that business sentiment has taken a hit.
In addition, consumer confidence is souring in the U.S., slumping to a three-year low in March, according to a recent survey by the University of Michigan. “The linkage between consumer confidence and spending has been weak during this expansion and we would not expect a sentiment-driven pullback in spending, absent a compression in real income. Here, the main near-term risk is the threat of an inflation-driven squeeze on purchasing power,” Kasman noted.
A slowdown in U.S. growth could in turn spill over to the rest of the world. Analysis by J.P. Morgan Research indicates that the typical beta of a U.S. GDP shock to the world is around 1-for-1. “A U.S.-led recession would likely have a nonlinear impact working through financial conditions that would weigh heavily on Economic and Monetary Union (EMU) growth. While this outturn would likely unwind U.S. outperformance, a global recession would be no reason to view the resulting growth rotation positively,” Kasman added. (…)
The 60% “Resilience” probability rests on U.S. animal spirits, exceptionalism and 20% odds of Goldilocks where everything gets to normal.
What follows is from The Yale Budget Lab and takes into account “Liberation Day” stuff:
The Fiscal, Economic, and Distributional Effects of All U.S. Tariffs Enacted in 2025 Through April 2
- The April 2nd action is the equivalent of a rise in the effective US tariff rate of 11 ½ percentage points. The average effective US tariff rate after incorporating all 2025 tariffs is now 22 ½%, the highest since 1909.
- The price level from all 2025 tariffs rises by 2.3% in the short-run, the equivalent of an average per household consumer loss of $3,800 in 2024$. Annual losses for households at the bottom of the income distribution are $1,700 (apparel prices rising 17% under all tariffs).
- US real GDP growth is -0.5pp lower in 2025 from the April 2nd announcement and -0.9pp lower from all 2025 tariffs. In the long-run, the US economy is persistently -0.4 and -0.6% smaller respectively, the equivalent of $100 billion and $180 billion annually in 2024$.
- Food prices are also disproportionately affected, rising 1.6% from the April 2nd policy (roughly equivalent to the last year’s worth of grocery inflation in CPI) and 2.8% from all 2025 tariff actions. Fresh produce rises 2.2% and 4.0%, respectively.
- Motor vehicle prices are largely untouched by the April 2nd announcement but rise by 8.4% under all tariff action to date, the equivalent of an additional $4,000 to the price of an average 2024 new car.
But no account is taken of likely forthcoming retaliations. After all, these are reciprocal, right?
Also before yesterday:
Warning signals flash for U.S. economy
The March University of Michigan Sentiment Survey recorded the most negative balance of opinion on purchasing power improvement in its history—surpassing even the lows seen during the high-inflation era of the 1980s.
The combination of elevated inflation and declining purchasing power—hallmarks of stagflation—paints a troubling picture for the U.S. economy and future volume sales for American corporations. According to the Atlanta Fed’s GDPNow estimate, as of March 28, the economy is on track for an annualized contraction of 2.8% in Q1 2025. With one month remaining before the first official GDP release—and potential upward revisions still possible—this marks the weakest growth estimate in GDPNow’s history since its 2011 launch, excluding the COVID recession.
A clear economic slowdown—let alone an outright contraction—stands in stark contrast to the current consensus, which still anticipates 11% EPS growth in 2025. This forecast includes positive contributions from all major sectors except Real Estate and Energy. In our view, there remains considerable room for downward earnings revisions in the months ahead.
From Mauldin Economics:
If a recession is coming, many families will focus on their ability to pay the bills. The mortgage payment is often the largest single expense. How much is it? This chart shows those who bought homes in the last three years are paying $2,000 per month or more.
The lines present mortgage payments for someone who bought a median-priced home at the then-prevailing mortgage rate. Barring a sharp drop in those rates, most would see little benefit from refinancing. This means a job loss or other financial stress could put many families in distress.
The good news is that lenders have become more adept at assessing repayment ability, so systemic problems seem unlikely. But the pain may be significant for some homeowners.
This chart shows where the US federal debt may be going, though with many assumptions.
The “current policy” line assumes the 2017 tax cuts are extended. “Current law” assumes they will expire as scheduled at the end of this year. “Balanced budget” is the result if we somehow balance the budget now and keep it that way.
The discouraging part is that even a consistently balanced budget will need a decade to return debt to where it was around 2015, which was bad. A recovery to the pre-2008 kind of debt burden looks decades away.
Wait, this was before Liberation Day. It omits any recession scenario…
Here and there:
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“This is not a negotiation,” a senior administration official told reporters. “This is a national emergency.”
-
“Any country that thinks that they can simply make an announcement promising to lower some tariffs is ignoring the big central problem of their massive non-tariff barriers,” the official said.
-
“I wouldn’t try to retaliate,” Scott Bessent told Bloomberg Television. “As long as you don’t retaliate, this is the high end of the number.”
-
Including tariffs imposed during Trump 1.0, the average U.S. tax on Chinese imports will be 76%, according to Chad Bown, a senior trade fellow at PIIE.
- Any manufacturers who shifted production to Vietnam to avoid China tariffs are out of luck: That country will now face a 46% tariff.
- Canada and Mexico received better treatment than we expected. The executive order continues to exempt USMCA-compliant imports from the 25% tariff on Canada and Mexico. We had expected at least an incremental tariff increase on both countries. The order states that if the exemption ends in the future, USMCA-compliant goods and energy products would receive duty-free treatment while non-compliant products would face a tariff rate of 12%, excluding energy and potash which would be duty-free. This 12% rate might signal the upper bound for tariff rates for Canada and Mexico. (GS)
- Other Asian exporters also face much higher tariff rates, including Vietnam (46%), Taiwan (36%), Thailand (36%), and Indonesia (32%), among others. This appears due to the simplified methodology the US Trade Representative’s office used, described above.
- De minimis treatment will remain in place except for China. The order temporarily preserves tariff-free treatment for personal shipments under $800 for countries subject to the reciprocal tariff until the Sec. of Commerce can certify that systems are in place to apply tariffs to these smaller shipments. A separate executive order President Trump signed today rescinds de minimis treatment for shipments from China in particular, which currently account for a substantial share of total de minimis volume.
Links to ING comments:
- ‘Beautiful’ tariffs risk turning the growth outlook ugly Trump’s tariffs mean a painful transition ahead
- Europe’s worst economic nightmare just came true Trump’s tariffs and what they mean for Europe
- Trump’s reciprocal tariff surprise will prompt stronger China response Trump’s higher-than-expected China tariffs could prompt bigger response
- Asia takes big tariffs hit: Vietnam, Thailand most affected, while exemptions ease impact for India, Singapore US tariffs increase downside risks to growth and inflation, possibly accelerating monetary policy easing
- Without domestic support, dollar is left a little naked Tariff blowback to the US keeps dollar offered against liquid defensive currencies
FYI: At 7:36 this a.m., I received a text message from a golf cart vendor in Florida warning of huge price increases due to tariffs on various golf cart imports (22 brands were actually listed).
The vendor went on to inform golfers that
Due to additional tariffs being implemented this week, Sunshine Golf Cart has received notices from several vendors regarding upcoming price increases on certain parts and accessories. This includes select EZGO accessories and products from other suppliers.
Additionally, Trojan lead-acid batteries will see a 5% price increase starting April 2nd.
Quick check: EZGO carts are manufactured in Augusta, Ga. and Trojan lead-acid batteries in Santa Fe Springs, Ca., Sandersville and Lithonia, Ga..
Finally,
Tuesday was no MAGA day:
- The conservative candidate in Wisconsin’s Supreme Court race lost by 10 points in a 50-50 state.
- While Republicans won two House special elections by about 15 points, those were drops from over 30-point margins in the same districts just last November.
1 thought on “YOUR DAILY EDGE: 3 April 2025: Downward Reciprocity”
Your EZGO comment is spot on with the Odd Lots newsletter from yesterday “We’ve talked in this space before about how ‘big disruptions’ can given companies an excuse to raise their prices without fear of competitors coming in to undercut them, or US consumers pushing back to much. After all, if you’re being hit every day with news stories about supply chain disruptions, or labor shortages, or bird flu, or tariffs, then you’re probably going to be more accepting of price increases.” https://www.bloomberg.com/news/newsletters/2025-04-02/how-companies-can-make-dollars-from-tariff-change