TaPP Insight: Trump and Tariffs – Rapid Response Discussion

It’s been hard keeping up with the Trump administration’s trade policies. Since his second term began, ever-changing policy intentions and announcements – extreme in rhetoric and substance – have left businesses and international policymakers scrambling to a slew of tariff propositions, most significantly on Mexico, Canada, and China, as well as Europe.

The radical and uncertain nature of the past few weeks has made it difficult to assess policies’ long-term effects, but past experiences can offer some clues for economic models. They paint a bleak picture. Previous simulations of earlier tariff scenarios—assuming levies of 60% on Chinese imports and 20% on the rest of the world—suggested a sharp decline in U.S. economic welfare, with real income per capita falling by as much as $2,000 per year. Virtually all serious studies1 reach the same conclusion: tariffs are costly, and the US will bear a significant share of that burden.

A useful case study lies in Trump’s own record. The tariffs imposed in 2018 shared striking similarities with those now being proposed: last-minute announcements, selective targeting of specific countries and products, and an air of unpredictability. The response of US imports to those measures was stark – modelling shows that, in terms of the elasticity of imports to increase in tariff (% change in imports given a 1% change in tariff), a 10% increase in tariffs led to a 33% decline in aggregate imports over three years. The full response of production inputs to the imposition of a tariff is quick – drops were especially rapid for the agrifood sector and textiles and clothing sectors, for which a 1% tariff reduced imports by 5% or more within 6 months. But even in other sectors, the full response is felt in 18 months, and exhibits persistent reduced import levels, with up to 3.5%-4.5% drops in a sector’s2 imports per 1% tariff hike over 36 months later. These reactions are sobering, given that Trump’s tariffs on neighbours are set to be introduced at 25%, potentially halving imports from Canada and Mexico.

Beyond the tariffs themselves, the broader uncertainty surrounding U.S. trade policy exerts its own chilling effect. Trump’s erratic approach—announcing, pausing, and re-announcing tariffs—has sown deep unease among businesses. Caldara et al. (2020)’s monthly index of Trade Policy Uncertainty (TPU index) reached unprecedented levels beginning after the Trump’s first election in 2016 – reaching the level of 250 —well above the historical maximum of 100 of the past five decades. But now, only a few weeks into his second term, that figure has already surged to over 350.

Trade uncertainty has consequences. Nicolo Tamberi’s preliminary research on the NAFTA negotiation seems to offer a case in point. The mere prospect of withdrawal led to rising uncertainty from 2016 onward, which reduced US imports from Canada and Mexico.

Tariffs are not just taxes; they are signals. And the signal being sent by Trump’s new wave of protectionism is one of volatility. Businesses may brace for impact, but the ultimate casualty will be America’s own economic dynamism.

How can a government raise revenue while maintaining low taxes on the wealthy, in an economy with declining manufacturing and investment? Donald Trump seems to have chosen an answer – tariffs.

Trump’s return to tariff brinkmanship is now taking shape. So far, the only major new tariff formally implemented is a 10% duty on $400-500 billion worth of Chinese exports to the U.S.  True, that his administration removed Chinese exports from the de minimis tariff exemption—waiving duties on goods valued below $800— but only to reinstate it days later when customs officials warned they could not handle the flood of parcels.

Yet, if we take Trump’s word, this is just the beginning. Steel and aluminium tariffs, of 25% and 10% respectively, are supposedly coming for (and arrived later) for every country. This defies conventional wisdom. Although 2018 tariffs on steel and aluminium of the same magnitude were a precursor, since then until now, thousands of product-specific exceptions were requested and granted for a product which could not be made in the US (no steel industry makes all type of steel products). These will be cancelled on 1 March. To “protect” an American steel workforce of only 85,000 (out of more than 150 million), American steel-using industries will now also justify tariffs on downstream steel products. But the evidence is not in favour of such a move: not only did steel industries see job-losses when hit by tariffs on steel inputs in 2018, but the tariffs introduced by Trump 2018 on and continued by Biden accompanied by increased prices from local producers, and apparently led to a 10 % decline in US consumption of steel and aluminium, presumably by moving steel-using production out of the US.

High and essentially indiscriminate tariffs are also coming for the US’s neighbours, Canada and Mexico. For the last 20 years, under NAFTA and then CUSMA,  99% of trade between Canada, Mexico and the US was tariff-free, allowing the ever closer industrial integration of the three countries.  Under the new Trumpian regime of 25% tariffs on everything that meets USMCA origin rules from Canada and Mexico, all three economies would grind to a halt.

For the rest of the world – including Europe and other WTO members, the Trump administration plans to demand new tariffs on everything. Certain sectors face threats of targeted higher tariffs. In particular, Trump rails against Europe’s 10% tariff on American-made cars, compared to America’s current 2.5% tariff on most European cars – yet most US -produced “cars” are in fact SUVs,  for which European manufacturers would face a 25% tariff when exporting to the US. Would Trump, in the name of “reciprocity,” lower duties on SUV imports to 10%? It seems unlikely.

What seems just as unlikely is the implementation of the declared intention to enact literally reciprocal tariffs – for each country (including individual European countries); i.e. charging a separate US tariff on the same item coming from different countries. These thousands of lines of new tariff policy would require constant updating, investigations (including murky questions of bound vs real tariffs), and are at best at odds with the priority of government efficiency and at worst, a totally unworkable and unrealisitc fantasy. This was so unmanageable that the Trump administration seem to be planning to announce April 2 country-specific tariffs at the same – fabricated – level for all products.

Meanwhile, Trump and his allies are actively undermining the analytical capacity of the U.S. government. Policymaking, which was already transactional during his first term, is set to become even more explicitly up for sale. The rule-based trading system is another casualty. The US, in practice, ceased acting as a proper WTO member during the Obama administration by disregarding certain tariff commitments and dispute rulings. Trump then took a sledgehammer to the WTO’s dispute settlement process, which was not reversed under Biden, but looks set to deteriorate further under Trump’s second term.

In summary, Trump’s latest tariff push follows a familiar pattern: protectionist rhetoric, unpredictable policymaking, and a disregard for economic consequences. These tariffs challenge other countries for countermeasures. For its part, China retaliated with tariffs added on $15 billion on US exports to China – however, this retaliation was done very carefully and selectively, on energy exports in particular. Most major exporters such as the EU say they will retaliate on equivalent amounts.   If his first term taught the world anything, it is that trade wars have no winners—least of all the United States. Canada has already retaliated against a large amount of imports from the US  with apparently more additions to the list. Interestingly, this has given a huge boost to the governing party, with a snap election called for April 28. Mexico has taken a more restrained approach to retaliation, as counties facing different factors choose different strategies  as large tariffs to be announced by Trump on April 2.

The degree to which retaliatory tariffs might be effective in reversing the importing country’s new tariffs would seem to be based on 2 questions:

• The extent to which politically sensitive exporting industries in the ‘tariffing’ country depend on exports for their profitability/survival. This is not always easy to discern–some industries may export only 10 percent of production  yet rely on those exports for its profits.
• Whether enough countries impose retaliatory tariffs on that product to reach that threshold. This would seem to require some degree of coordination by those countries, but the hard evidence for that is hard to see, without perhaps a perverse World Non-Trade Organization to coordinate.

April 2nd is shaping up to become a pivotal day in Trump trade policy. This is the day just after the deadline for several key trade investigations—known by their three-digit statutory section numbers—to deliver their findings. These will deliver findings across all different agencies, including the Commerce Department and the USTR. Trump has already signalled his intent to impose tariffs following these investigations, although we do not yet know what the findings will be. But tariffs are not the only weapon in the president’s arsenal. Some of these statutes are open-ended in permitting the president to use still other measures to address the harms identified by the agencies in their investigations.

A second dynamic to watch in the trade policy of the coming months is the reaction of corporate America. Despite commentators’ strong warnings about the coming effects on the economy and the upheaval for business and profits, companies that might have been expected to speak out against it have remained quiet. Why? Corporations have better understanding and opportunity to make the case and get listened to by the administration than consumers (who may only vaguely be made aware of the effects of tariffs by seeing rising prices at the store), farmers (among the most vocal victims of Trump’s previous tariff actions, who have already expressed concern) or unions (whose support was ultimately not needed to get elected). One answer is that some corporations are nervous at making a public show of their opposition to these reforms. Instead, they may be hoping to use other, more discreet means. A flurry of lawsuits from import-dependent businesses should be expected if tariffs materialize. The legal avenues are narrow; most cases brought during Trump’s first term were decided in the government’s favor—but that may not deter companies that are facing extinction from challenging the new measures. Exemptions and exclusions will once again become the preferred battleground, with well-connected firms engaging in quiet lobbying in the hope of securing carve-outs, as they did in 2018.

Beyond the courts, the practical challenges of implementing Trump’s tariff agenda are immense. US Customs is already understaffed, and managing an increasingly complex tariff schedule will be a bureaucratic challenge, especially given ongoing government efficiency cuts.

There are many questions around trade deals too. Canada and Mexico have already given concessions to Trump in return for temporary tariff relief. But these unprecedented tariff schedules have been delayed, not avoided. Which other countries will be next? And more importantly, will any agreements prove reliable?

Congress, in theory, could step in. Lawmakers have the power to challenge Trump’s tariff policy because Congress has the constitutional prerogative to regulate commerce with foreign nations. On Capitol Hill, bipartisan frustration with Trump’s tariffs is growing, but not enough yet to lead to a coordinated response. Lawmakers might try to steer Trump’s trade ambitions in a different direction but there are many ways this could play out in Washington. The only certainty is that uncertainty over tariffs is likely to keep businesses, consumers, and policymakers on edge.