America’s new tariffs are broader and levied at higher levels than had been expected. The ensuing sharp sell-off in equities speaks to market concerns that tariffs will slow global growth. Everything now depends on whether the higher tariffs are here to stay.
The US administration had suggested any trade measures would be reciprocal, meaning they would be based on barriers to trade, such as the tariffs, taxes and import quotas faced by each type of US export. In the event, the formula is straightforward and based solely on trade in goods.
Tariff rates are calculated as the ratio of a country’s goods trade balance with the US to the value of the country’s exports to the US, divided by two. (So the EU’s trade surplus with the US of £235bn divided by total US imports from, the EU gives a ratio of 39% which, halved and rounded, comes to 20% tariffs on EU imports of goods into the US.)
An important caveat is that a minimum tariff of 10% applies, even to countries, including the UK, Australia and the UAE, which run deficits on goods trade with the US. Last week’s measures will affect virtually all countries’ exports to the US, not just those from countries that run persistent trade surpluses with the US. Russia, Cuba, Belarus and North Korea are not subject to tariffs, either because of existing sanctions or current high tariff rates.
Tariff rates rise for countries running trade surpluses with the US – 20% for the EU, 24% for Japan and 34% for China which, together with an existing 20% tariff, means Chinese imports into the US will be subject to a 54% tariff. Canada and Mexico, which already face 25% tariffs on goods not covered by the existing trade deal, the 2019 USMCA, will see no further increase in tariff rates.
A number of products, including pharmaceuticals, semiconductors, timber and some minerals, are exempt and countries that export these products to the US will, so long as the exemption remains, face an effective tariff rate that is lower than the published rate. The Financial Times, for instance, estimates that Ireland, which is a major exporter of pharmaceuticals, will face an effective tariff rate of 5% rather than the EU-wide headline rate of 20%.
The wider Asian region faces particularly high tariffs. Exports from the region to the US, some of them from Chinese-owned factories, have increased rapidly in recent years. Countries with large surpluses with the US face correspondingly high tariffs, in the case of Vietnam, levied at 46%. A number of low-income countries including Lesotho, Laos, Madagascar and Myanmar also face tariffs of well over 40%. Most Latin American countries will face the minimum 10% rate.
Since the Second World War, many developed countries have applied tariffs or other trade restrictions as a way of protecting an industry or extracting concessions from a trading partner. But no country has applied such broad tariffs on virtually all its trading partners as the US plans to do.
This is a historic change in US policy, one that will see the US levying the highest import tariffs in well over 100 years. The average tariff rate on US imports, as measured by tariff revenue as a percentage of total import value, is set to rise from 2.5% to 22%, the highest level since 1910, according to Fitch.
This eclipses even the tariffs imposed under the Smoot-Hawley Act of 1930. Trade plays a far bigger role in the global economy today. Trade openness, measured as a ratio of world exports and imports to world GDP, has risen from around 14% in 1930 to just under 60% today. The Smoot-Hawley Act, albeit under very different conditions from today, is generally thought to have exacerbated the Great Depression.
Global equity markets sold off on last week’s news. US equities fell 9.1%, the largest one-week decline since the pandemic, with many other markets off sharply, though some have proved relatively resilient. (In China, which faces the highest cumulative tariff rate, equities fell just 5% last week and are up by almost 11% since the start of the year. US equities have fallen 14% this year.)
Within the US equity market, technology, oil and gas and financials saw the biggest declines reflecting concerns that tariffs will weaken US growth. Conversely, the price of US government bonds rose, with investors assuming that, despite the prospect of a tariff-driven rise in inflation, the Federal Reserve will cut interest rates more aggressively this year to support growth. Commodity markets have also priced in weaker activity, with industrial metal prices falling 9% last week and Brent crude oil down to $66/barrel on Friday, the lowest level in four years. The dollar weakened last week, contradicting the received wisdom that tariffs tend to support the currency of the country that applies them. The theme for currency markets, as for equities, US Treasuries and commodities, is that sharply higher US tariffs spell weaker growth and more rapid reductions in interest rates.
Sentiment data and economic forecasts point in a similar direction. The University of Michigan’s closely watched consumer sentiment survey shows two-thirds of US households expect unemployment to rise in the next 12 months, the highest reading since 2009. Households’ longer-term expectations for inflation have spiked to their highest level since the 1990s. The expectations component of the Conference Board’s consumer confidence indicator has dropped to the lowest level since 2013. All these readings predate last week’s announcement on tariffs.
Last week, the chairman of the Federal Reserve, Jay Powell said that tariffs meant, “higher inflation and slower growth”. Goldman Sachs estimates that the tariffs could raise US inflation by almost 2% and reduce US growth by 1%-3%. Last week, JP Morgan raised the probability it assigns to a global recession from 40% to 60% and forecast that the US would fall into recession in the fourth quarter. The World Trade Organisation has cut its forecast for global trade this year from growth of 3.0% to a contraction of 1.0%.
As well as tending to slow growth, tariffs have important distributional effects. Tariffs tend to be regressive, with lower-income households spending more of their income on goods, which face tariffs (food, clothing etc), while higher-income households spend more on services (entertainment, travel etc) which are tariff-free.
The US administration’s hope is that much of the cost of tariffs will be borne by foreigners. This rests partly on exporters absorbing the cost of tariffs rather than passing them onto US businesses and consumers. It also requires tariffs to lead to a stronger dollar, so reducing the dollar cost of imports. Given the breadth and level of tariffs, it seems inevitable that much of the burden will be passed on in the form of higher prices and costs. And, rather than strengthening, the dollar has fallen, raising the dollar price of imports.
The administration plans to use revenues from tariffs to finance tax cuts. Its other principal aim is to encourage foreign firms to set up in the US and to stimulate domestic manufacturing output. On this front, the administration can point to some early successes. Apple, Hyundai, Johnson & Johnson and Siemens have announced plans to expand operations in the US in recent weeks. But bringing back manufacturing – and high-paid jobs – in scale to the US will be difficult. The costs of setting up new facilities are considerable. Companies could find that at some stage the tariffs that caused them to expand in America have been negotiated away. The fact that the Stanford University measure of trade policy uncertainty, based on analysis of US news reports, is at record levels testifies to the risks.
According to the National Association of Manufacturers, the average US manufacturing employee earns just over $100,000 including pay and benefits. Workers in China earn about 25% of this amount, in South Korea around 40% and, even in Germany, less than 75% of the US total. American labour costs mean that reshoring is only likely to work for products that require high skills and/or high levels of automation – or where consumers will pay more for an American-made product. High levels of automation would, of course, spell fewer jobs. Many US imports, such as textiles, footwear, toys or furniture, are low value added and use low-skilled workers. These are not the industries of the future and not the types of products most high-income countries aspire to produce in volume.
After last week’s announcement, US treasury secretary Scott Bessent urged other countries not to retaliate saying: “My advice to every country right now is do not retaliate. Sit back, take it in, let’s see how it goes. Because if you retaliate, there will be escalation. If you don’t retaliate, this is the high-water mark.”
China chose not to follow Bessent’s advice and announced the imposition of 34% tariffs on all imports from the US from 10 April. Canada’s prime minister, Mark Carney, has said “it is essential to act with purpose and force” in response to US tariffs. By contrast the UK is taking what business and trade secretary Jonathan Reynolds describes as a “cool-headed, pragmatic approach” and is seeking talks with the US.
European Commission president Ursula von der Leyen said that the EU is ready to respond, insisting: “We are… finalising a first package of countermeasures in response to tariffs on steel. We are now preparing for further countermeasures, to protect our interests and our businesses if negotiations fail… all instruments are on the table”. The EU could target selected US products, as happened after the US administration applied tariffs to steel and aluminium imports in March. A more aggressive approach would be to deploy broader based, proportionate tariffs. Extending tariffs to services trade, where the US runs a consistent trade surplus with the EU in sectors such as financial services, technology and entertainment, would up the ante still further.
Retaliatory action could lead to negotiations, or cause a further response from the US, risking an upward spiral in tariffs and protectionism. Over the weekend, White House adviser Kevin Hassett said that more than 50 countries have approached the administration to initiate trade negotiations. The central question is whether US tariffs are designed to extract concessions from trading partners or whether they will become permanent.
As my colleague, and Deloitte’s global economist, Ira Kalish has observed, Trump has, “hinted that there might be room to ease tariffs if other countries reduce their tariffs, stop currency manipulation, eliminate non-tariff barriers, and purchase more goods from the United States”. In the past three months, the administration has backtracked on some tariff proposals and reversed course on others. Investors and business leaders have become cautious about decisions based on current tariff policy.
US tariffs represent a renunciation of the free trade order of the last 80 years. Yesterday UK treasury minister Darren Jones said that the shift in US policy marks the end of an era of globalisation. Yet globalisation has been under pressure for more than 15 years. The early 2000s were the glory days of global integration. The financial crisis of 2008–09 brought that to a stop, with banks pulling back on foreign operations, a sharp reduction in cross-border capital flows and new regulations weighing on international financial activity. Rising protectionism since then, and heightened geopolitical tensions, have further weakened globalisation. The scale and breadth of US tariffs is new, but businesses have been managing a more fragmented, contested and uncertain global order for a decade and a half.
For now the focus is on how the burden of US tariffs will fall and the scope for negotiation. But if America’s tariffs hold the second and third round effects, on trade, the location of economic activity and trading relations, will move to the fore.
Yesterday, Britain’s prime minister Keir Starmer wrote that the UK would move to protect its companies from US tariffs – others seem likely to follow. US tariffs will cause a redirection of trade with, for instance, Chinese exports to lower-tariff areas such as Europe likely to rise. Tariffs spell new costs and greater uncertainties, conditions that are likely to see businesses doubling down on costs. Businesses will need to reorient supply chains and shift patterns of sales and production balancing the opportunities in the US market against the costs and risks. US protectionism could act as a catalyst for other regions – notably the EU – to boost cooperation to raise trade and growth.
The end of one era spells the start of another. The global economy would look very different in a world of permanently high US tariffs.
A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. To subscribe and/or view previous editions of the Deloitte Monday Briefing here.