Whiplash after Trump imposes and then pauses new tariffs

Whiplash after Trump imposes, and then pauses, new tariffs

The last two weeks have been a wild ride for the world economy. On April 2, Donald Trump gave a speech in the Rose Garden, outside the White House. In that speech, he held up a chart showing the tariffs that he would impose on America’s trading partners—pretty much every country in the world except Russia and North Korea.

A tariff is a tax on imports. So the new tariffs would immediately make goods imported to the United States more expensive. And it would mean a dramatic scrambling of global trade in physical goods.

Tariffs were imposed on imports from 200 economies. Most got a flat ten percent rate. But some got much higher tariffs. In his speech, Trump called the tariffs “reciprocal.” The implication was that other countries were cheating America and that tariffs were needed to level the playing field. He said that for too long, other countries have “looted, pillaged…and plundered” the United States, and that now, finally, it was America’s “turn to prosper.”

I’ll pause for a moment to let you stop laughing. The U.S. has a per capita income of about $82,000 U.S. dollars; it imposed “reciprocal” tariffs on Bangladesh (per capita income $9,000) and on Madagascar, with a per-capita income of $1,800.

In fact, observers quickly concluded that Trump’s tariff rates were not based on unfair trade practices, but on individual countries’ trade deficits with the United States. The U.S. has a trade deficit when American companies buy more from one country than they sell into that country.

So let’s take a simple example. American companies and consumers buy a lot of products from Vietnam—clothing and shoes, for example—but Vietnamese companies don’t buy a lot from the United States. That means the U.S. has a trade deficit with Vietnam.

This makes sense: Americans buy a lot of t-shirts from Vietnam, but Vietnamese understandably don’t buy a lot of Teslas from America. There is nothing nefarious about it. It doesn’t mean Vietnam is taking advantage of the U.S. On the contrary, Americans would much prefer cheaper clothing from Vietnam than expensive clothing made at home. Nevertheless, Trump put a 46 percent tariff on goods coming in from Vietnam.

Although Trump had been transparent about his desire to raise tariffs, the specific levels took almost everyone by surprise, as did their arbitrariness. The reaction was immediate and swift. Global stock markets fell sharply; most main indices lost about fifteen percent of value in just a few days. This was the biggest drop since the COVID-19 pandemic.

Large companies, investors, and consumers were not happy. They recognized that these new tariffs are really just a large tax increase on trade in physical goods. They feared that if trade slows down, then all the benefits of specialization and supply chains that have accumulated over the many decades might be at risk. Economists and business leaders openly speculated that a global recession, or even a depression, could result from this new American policy.

One reason is that other countries would respond with their own tariffs on American exports. American companies have a lot to lose if other countries impose tariffs on them in retaliation. American companies sell food, medicine, medical devices, electronics, cars and car parts, oil, gas, and more. They would be hurt by an ever-escalating trade war between the US and the rest of the world.

Consumers in America rushed to buy imported goods like electronics and clothing, hoping to grab them before the tariffs made everything more expensive.

Just when global inflation seemed to be settling down, Trump came out with a sweeping policy that was sure to raise prices everywhere.

Trump held firm for several days, saying he wouldn’t back down. These new tariffs were for real, he insisted, and were not up for negotiation. But there were cracks in the system. Fellow Republicans in Congress started to publicly doubt the wisdom of these tariffs. Elon Musk, one of Trump’s biggest and most public supporters, said the tariffs were a bad idea. Influential business leaders went on cable television to express their concerns.

And then—without warning—Trump walked his tariffs back. On April 10, the same day the new tariffs took effect, he paused the highest rates for 90 days.

Businesses and investors were relieved, to a certain extent. Stock markets bounced back a bit. The most self-destructive features of Trump’s new tariff policy were paused. But most investors, businesses, consumers, and political leaders remain in shock. Trump didn’t pause tariffs against China, so the world’s two largest economies appear to be fighting each otherwith taxes. That’s not going to be good for anyone. Even after the pause, American tariffs are higher than they have been in over a century.

Trump’s impulsive and erratic policymaking has shaken the world’s confidence. Since the second World War, the United States has worked painstakingly and in detail with other countries to lower tariffs and stabilize global trade. This has led to unprecedented benefits. But now, the world knows the whole thing can be undone by an impulsive and erratic speech by one person.

Jeff’s take

The chart Trump held up in his Rose Garden speech is, if nothing else, a good geography lesson. For example, the chart made sure to call out new tariffs on the Territory of Heard and the McDonald Islands. I am pretty good at finding things on a map, but even I didn’t know about the Territory of Heard Island and the McDonald Islands. It turns out that these islands are a territory of Australia, about 4,000 kilometers away from the nearest city, Perth. They are almost in Antarctica.

I was worried about the poor people in the Territory of Heard Island the McDonald Islands. I mean, it’s bad enough to live a two-week boat ride from the nearest city; now they have to pay a 10 percent tariff! It’s right there on the chart Trump held up in the Rose Garden.

But then, to my relief, I learned that these islands are uninhabited. That’s right: nobody lives there. Trump made a special point to impose a tariff on islands full of penguins and seals.