TRUMP’S LIBERATION DAY

Samantha Amerasinghe assesses the implications of US tariffs on world trade

Ever since US President Donald Trump unveiled his Liberation Day tariffs on 2 April, the global economy has been thrown into chaos. His on again off again tariffs have led to nothing but uncertainty.

Policy uncertainty resulting from tariff threats on countries and targeted sectors is already depressing investment, hiring and consumption decisions across multiple economies.

Many countries have indicated that nothing is off the table in terms of potential responses to US tariffs, creating an environment where retaliatory cycles could further destabilise global markets and supply chains.

On Liberation Day, Trump announced a minimum 10 percent tariff on all US imports, effective 5 April; and higher tariffs on imports from 57 countries ranging from 11 to 50 percent were scheduled to take effect on 9 April.

But almost immediately, the tariffs were suspended for 90 days for all countries. However, the 10 percent baseline tariff and 25 percent sector specific tariffs remain in effect. As expected, the possibility of reciprocal tariffs prompted retaliation from trade partners and triggered a stock market crash.

This situation bears similarities to the protectionist policies of the early 20th century that had major economic consequences. The Smoot-Hawley Tariff Act of 1930 raised import duties by an average 20 percent, triggering retaliatory measures from European nations that caused US-Europe trade to plummet by two-thirds from US$ 1.3 billion in 1929 to 390 million dollars in 1932.

This historical parallel is relevant as today’s proposed tariff increases will push the average effective US tariff rate to over 23 percent – the highest since 1910.

Trump’s passion for tariffs stems from his strong belief that they will boost manufacturing and protect American jobs. In his first term, he imposed substantial tariffs on China, and they were retained and expanded by his successor. China responded with its own retaliatory tariffs on US products ranging from fruits to vehicle imports.

Together, they helped reduce US imports from China from 21 percent in 2016 to 13 percent in 2024. However, China still ships everything from iPhones to children’s toys to the United States.

His administration views trade deficits as inherently harmful. The US currently runs a sizable trade deficit with China; last year, the United States imported far more from China (US$ 440 billion) than Beijing imported from America (US$ 145 billion).

Therefore, it’s not surprising that Trump has taken aim at China again by raising baseline tariffs (which were recently paused) on Chinese imports to 145 percent, though smart­phones and computers have been exempted.

China retaliated by imposing a minimum 125 percent tariff on US goods and restricted exports of rare earths that are critical for high-tech industries. Trump thought that tariffs against China would result in an updated version of the US-China Phase One trade deal that he had sealed with President Xi Jinping in 2020.

But China has remained defiant and unwilling to succumb to the pressure. Over the past decade, Xi has worked to cushion the Chinese economy from external trade shocks through policies to expand domestic consumption, and tighten relationships with more reliable partners in Asia, Africa and Latin America.

Trump also initiated a trade war with Canada and Mexico by imposing a 25 percent tariff on most goods from both countries but later granted indefinite exemptions for goods compliant with the United States-Mexico-Canada Agreement (USMCA), which he negotiated during his first term.

He framed these actions as efforts to hold Canada and Mexico accountable for illegal drug trafficking and immigration. Trump subsequently added a 25 percent tariff on imported steel, aluminum and automobiles from all countries, and later dialed back on some.

Though he believes that tariffs will cause only short-term pain, historical evidence indicates that protectionist measures typically lead to broader economic harm including reduced trade volumes and exacerbated economic downturns.

The WTO forecasts a potential decline in global merchandise trade by 0.2 percent in 2025 with North America specifically expected to see a 12.6 percent drop in exports if current policies continue.

Meanwhile, the IMF has cut its global growth forecast because of the uncertainty caused by tariffs; it expects the US to be hit the hardest. It now expects the global economy to grow only by 2.8 percent in 2025, down from its previous estimate of 3.3 percent.

Growth in the United States is now projected at 1.8 percent for 2025, down from the 2.7 percent anticipated in January. However, China is expected to expand by four percent this year, down roughly half a point from the previous forecast. The global lender also believes that a US recession in 2025 is becoming more likely.

It remains to be seen if these tariffs will be long-lasting. Even if Trump doesn’t bow to economic and political pressure, it’s hard to imagine how any future administration can justify these policies that threaten to upend global trade.