Only days away, Trump’s tariffs still raise more questions than answers

President Donald Trump’s long awaited “Liberation Day” tariff announcement on April 2 already has received considerable attention from investors, as key elements of the plan have been leaked to the media, such as a 25 percent tariff on imported cars. 

However, recent developments indicate that no one can be sure what the final announcement will be and whether the message will change over time. 

Treasury Secretary Scott Bessent has indicated that the new measures will target the so-called “dirty 15”  countries with the largest bilateral trade surpluses with the U.S. If so, more than two-thirds of U.S. imports could be affected. Moreover, this tally does not include pending tariffs on select products such as autos, semiconductor chips and pharmaceuticals.  

Not only would these proposals be global in reach, they would also represent by far the largest trade restrictions of the post-World War II era. The impact of the measures will be difficult to analyze with confidence, given the complexity of the proposals and the inevitable retaliation by U.S. trading partners. 

In February, President Trump signed a presidential memorandum that ordered a comprehensive plan for restoring fairness in U.S. trade relationships based on the principle of reciprocal tariffs. 

He stated that the concept is straightforward. Namely, the United States will impose the same tariffs on trading partners that they impose on U.S. goods and services — “No more, no less.”   

The actual proposals, however, will be far from straightforward. In addition to mimicking tariffs applied to U.S. products, the measures also will reflect “unfair” taxes on U.S. businesses and consumers, as well as costs to U.S. businesses from non tariff barriers, policies that distort exchange rates and other practices that impose unequal market access to U.S. products and services in comparison to that country’s access to U.S. markets. 

But even a straightforward approach has its critics. For example, Professor Douglas Irwin of Dartmouth — a renowned expert on U.S. trade policy — has called reciprocal tariffs a “terrible idea.” He points out that it is tantamount to outsourcing U.S. trade policies to other countries, whether or not they are beneficial to the U.S.  

Reciprocal tariffs also would be difficult to handle if applied literally, as the Harmonized Tariff Schedule of the U.S. contains about 13,000 line items and covers 200 countries. To circumvent the gigantic administrative burden, Bessent has indicated that instead, “Each country will receive a number that we believe represents their tariffs.” Some could be quite low, while others could be quite high.

What seems clear is that the White House’s calculations will not be based solely on tariffs. 

The European Union, for example, has tariffs close to those of the U.S. Therefore, to justify tariffs of as much as 25 percent on European goods, the Trump administration is claiming the EU’s value-added tax is discriminatory, even though it applies to all goods, irrespective of whether they are produced in Europe or elsewhere.  

More broadly, the concept of “non-tariff barriers” is amorphous, and there is no internationally agreed-upon definition. A policy of reciprocal tariffs also would conflict directly with the internationally agreed standard of most favored nation treatment of trading partners. 

This treatment was at the heart of the post-World War II effort to expand global economic growth by expanding international trade through a reduction in the high trade barriers inherited from both the Great Depression and the Second World War. 

The principle of most favored nation is that if a member of the World Trade Organization grants a tariff reduction on a specific product imported from an individual WTO member, that rate also must be applied to the affected product from all WTO members. 

The goal is to ensure a trading system that is both global and non-discriminatory. It should be noted that the WTO allows deviations from most favored nation treatment under certain circumstances. For example, the U.S.-Mexico-Canada agreement completed during the first Trump administration was exempt from most favored nation treatment under WTO principles. 

Despite recent difficulties and criticism of the post-World War II trading system, one should not lose the forest for the trees. The adoption of the General Agreement on Tariffs and Trade and most favored nation succeeded in reducing the average tariff for the major participants from about 22 percent in 1947 to around 5 percent or less following the Uruguay Round of Trade negotiations in 1993, when the WTO replaced the agreement. 

 As tariff and other trade barriers have fallen over the past 75 years, the volume of world trade has expanded by 44 times the level recorded in 1950, while the U.S. and global economy experienced the strongest period of sustained economic growth ever recorded. 

Since the 2007 global financial crisis, however, increasing trade barriers have slowed international trade growth, while global economic growth has slowed, as well. Thus, trade protection has represented a drag on already-sluggish global growth.  

Looking ahead, the risk is that global trade could contract if President Trump follows through on his plans and is met by the expected round of retaliation by U.S. trading partners. 

One of the dangers is that Trump appears ready to implement reciprocal tariffs as a retaliatory instrument, raising the risk of a tit-for-tat upward spiral in new protection. For example, it has been reported that France has joined a small group of EU countries to discuss deploying an anti-coercion instrument that could be implemented if the U.S. bases tariff rates on its value added tax. 

An added element of uncertainty is the claim by Trump administration officials that increased protection will promote U.S. manufacturing. This claim undermines the previous policy stance that strived for U.S. trading partners to reduce their protection and lower their barriers to trade.  

It also flies in the face of a well-established finding that tariffs represent a tax on the implementing country’s exports. For example, experience with U.S. tariffs on imported steel showed that the resulting price increases benefited producers of the affected products but punished the users.  

In sum, it remains uncertain what specific measures U.S. authorities are going to announce on April 2. However, it is clear that prospects of new protectionist measures are reducing both consumer and investor confidence in the United States. 

The Conference Board’s index of consumer confidence plummeted to its lowest level in four years in March, with the threat of tariffs being cited by respondents as a key consideration.  

Austan Goolsbee, president of the Chicago Federal Reserve, says that it is hard to clearly discern current economic and financial trends because “there’s a lot of dust in the air.” The announcements on April 2 threaten to make it more like a sandstorm, but one without clear precedents. 

John Lipsky, Ph.D., is a senior fellow of the Foreign Policy Institute of Johns Hopkins University’s School of Advanced International Studies. Nicholas Sargen, Ph.D., is an economic consultant and has authored three books, including “Investing in the Trump Era: How Economic Policies Impact Financial Markets.”