President Trump announced his new tariff regime today. Protectionism has long been a key part of his political program, although it was much more talk than action during his first term. (As I have said before, customs revenue was higher during Joe Biden’s administration than during Trump’s.) This time around, Trump appears to be serious, for better or worse.
The Wall Street Journal summarizes the high points:
* There’s a 10% baseline tariff. These are across-the-board levies on all imports, effective April 5.
* Other nations will be hit with what Trump called a “discounted reciprocal tariff.” The higher rates are for nations the White House considers bad actors on trade. For example, duties will be 24% on Japan and 20% on the E.U., in lieu of the universal 10% tariff, effective April 9.
* A new 34% tariff on China will add to previous duties, like the 20% tariff Trump imposed over fentanyl. The base tariff rate on Chinese imports will be 54%, before adding tariffs imposed during Joe Biden’s presidency or Trump’s first term.
* Canada and Mexico are excluded from the reciprocal tariff regime. They are still subject to plans to impose 25% tariffs on most imports to the U.S. for what Trump says is their role in fueling the fentanyl crisis and illegal immigration. An exemption for these levies on autos and many other goods was in place but due to expire on April 2.
* Auto tariffs will take effect tonight. Trump said he’s imposing 25% tariffs on all foreign-made autos as of midnight.
The financial markets thought the tariffs were worse than expected. Thus:
U.S. stock-index futures declined between 2% and 4.3% in postclose trading, reflecting fears that the tariffs will slow growth, boost inflation and further rattle global markets when they reopen Thursday.
I suspect we will see further declines tomorrow. Here is more from the WSJ:
The new reciprocal tariffs announced by President Trump are relatively good news for Mexico and Canada and could result in the further expansion of the two countries into U.S. markets, said Luis de la Calle, an economic consultant in Mexico City.
The U.S.-Mexico-Canada trade-agreement partners are absent from the list of countries facing additional U.S. reciprocal tariffs announced on Wednesday.
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Economists at Piper Sandler, an investment bank, said that President Trump’s tariffs are more dramatic and darker for the U.S. economic outlook than they had expected. The firm’s Nancy Lazar and Jake Oubina expect that tariffs will add 2.6 percentage points to U.S. inflation, with a significant corresponding negative hit to economic growth.The firm said it now believes that the economy will shrink at an annualized pace of minus 1% over the next three months. “Given where the big tariff hikes are concentrated—China, Vietnam, Taiwan, etc.—the risks to consumer inflation are much higher than initially thought,” the firm wrote.
The good news is that oil prices have dropped sharply. But that is not necessarily something to cheer:
Oil, gasoline and diesel prices are dropping following President Trump’s unveiling of his tariff plan, reflecting energy traders’ concerns that fuel demand will decline as import taxes slow economic activity.
Recessions always bring down the price of gasoline.
So, how much revenue will the tariffs bring in? Trump likes to talk about the good old days when customs duties were the principal source of revenue for most governments:
Capital Economics estimated that the import taxes outlined by President Trump will generate roughly $700 billion a year in customs duties for the U.S. government.
The tariffs will raise a maximum of $835 billion, the firm’s economists calculate. But “assuming such high tariffs lead to a marked decline in imports, the increase in revenues will probably end up closer to $700 billion,” they wrote in a note to clients. That’s equivalent to 2.3% of the country’s gross domestic product, they wrote.
That is quite a bit of money, raised, as most economists believe, at a price of a higher cost of living and less economic activity.
I watched some of President Trump’s speech today. It included at least one howler: he blamed the Great Depression on a lack of tariffs. This was simply bizarre. Most economists say that the Smoot-Hawley Tariff Act of 1930, which drastically increased tariffs, was one of the principal causes of the Depression in the U.S. Does Trump actually have an alternative theory, or is this just gross historical ignorance? Presumably the latter, since whatever afflicted the early 1930s, it certainly was not a lack of tariffs.
Protectionism has never been unpopular. A number of members of the United Auto Workers attended today’s announcement, and one of them spoke. They are excited about the prospect of more auto manufacturing jobs in the U.S. Are they crazy? I don’t think so. I think there will be a considerable number of auto manufacturing jobs created in the next few years. But how the new tariff regime nets out for American workers and consumers remains to be seen.
