Will Mr. Trump’s Tariffs Bring a Trade War or America’s Golden Age?
On April 2, 2025, President Trump made good on his promise to initiate a massive round of tariff increases to be immediately imposed by the United States on nations worldwide. The new tariffs carry a 10% baseline to be charged all countries and higher tariffs based on 50% of what other countries impose on the United States. Some view Trump’s move as the start of a serious trade war. Others see the action as the first step in a long overdue negotiating process. In any case, the action is already painful. In response the next day, more than $2 trillion in value was erased in U.S. financial markets.
Could this be the beginning or the end of America’s golden age? Only time will tell. For now, it’s safe to say negotiations have just begun.
Though not described this way, the new Trump tariffs say that if any country chooses to tax its consumers on goods from the United States, the United States will tax its consumers by half that amount on goods purchased from that country. Put another way, if China chooses to shoot itself in the foot by taxing consumers, the U.S. will just shoot one toe. Might it not be better just to end all the shooting?
But Trump wants revenue. He indicated the tariffs would generate trillions in additional tax dollars. However, after citing the difficulty in making a forecast, Capital Economics estimated the new tariffs may generate annually some $700 billion. This is close to the estimate for total corporate income taxes to be paid in 2025. But since the president made no mention of offsetting the tariff gains by reducing or eliminating income taxes we may hope that he has just started to negotiate. Indeed,this is just what Treasury Secretary Bessent has suggested. Otherwise, the United States is headed toward becoming the world’s most heavily taxed major nation.
With some exceptions, Tariff Man Trump, as he likes to characterize himself, set a minimum tariff of 10% on goods imported to America from any country, this after imposing 25% tariffs on foreign produced automobiles. Canada and Mexico were notably not included in the mix, since they are already subject to tariffs on autos and metals and earlier treaties. The new tariffs vary significantly on a country-by-country basis. For example, tariffs on China are set at 34%, on the EU, 20%, 46% for Vietnam, and 34% for Taiwan.
Because the reactions of trading partners are yet to be seen, the effects of the new effects are simply unknowable. Yet to call the Trump initiative disruptive is a severe understatement. Will this bring on a recession? One can only speculate. The drama has just begun to unfold. But for the United States to avoid encountering a serious economic slowdown, it would be helpful if the economy were flourishing. Unfortunately, the Trump tariff announcements came on the heels of a string of unhappy economic news.
In recent days, reports have shown that consumer confidence has fallen to the lowest level in 12 years, that the University of Michigan’s consumer sentiment index has dropped 12% since February, and the Federal Reserve Bank of Philadelphia’s services economy new orders index has fallen to the lowest level since April 2023. New data from the Bureau of Labor Statistics reported 7.57 million jobs were open at the end of February, a small decrease from the 7.76 million seen in January. And the Federal Reserve Bank of Atlanta’s GDPNow estimate for first quarter GDP growth fell into negative territory. However, it should be noted that GDPNow is a rolling estimate that is constantly updated as new ingredient data become available. This said, I do not know of any forecaster now calling for a 2025 recession, meaning two consecutive quarters of negative GDP growth. But as mentioned earlier, it is too early in the unfolding drama to draw any meaningful conclusions.
One thing is certain. The world is now undergoing a massive fruit basket turnover. And the piano is still playing.
