America's decision to tax trade

India was a major grains deficit country until the green revolution allowed it to become a net grains exporter. Climate change is making it possible for Japan to export rice and grow it on the northern island of Hokkaido. Robotics made Japan a major producer of internal combustion engine automobiles. Industrial policy made China the leading global producer of steel, electric vehicles, wind turbines, and solar panels. Artificial intelligence (AI) is likely to make some countries excel in the output of numerous kinds of services and goods. In each of these cases, engaging in world trade was—or will be—an important factor in success. President Donald Trump’s extensive use of tariffs is going to change global trade patterns, reducing America’s participation in world trade. The degree to which this occurs is yet to be determined.

The US administration's “Liberation Day” consisted of the April 2nd announcement of a multitude of tariffs on all imports from nearly all sources. The full economic impact so far has been short-lived. The April 9th imposition of the April 2nd tariffs and US-China tariffs imposed at embargo levels (well over 100 percent) proved to be unsustainable. The financial markets would not tolerate wildly high tariffs. Most of the new tariffs, those above an additional 10 percent, remain suspended. The US government says negotiations are underway with perhaps as many as 70 countries to set new tariff levels.

Where the process seems to be netting out is suggested by the early results from US talks with the UK, heralded as America’s best friend and ally. These consist of a few undertakings on beef and steel and the promise of further preferential treatment to the UK sometime later for pharmaceuticals. For other countries, as with the UK, it is likely that there will be at least an additional 10 percent tariff. The principal exceptions at present are: (1) zero tariffs for Canada and Mexico for goods compliant with the United States-Mexico-Canada Agreement (USMCA), and (2) a 49 percent tariff on Chinese goods (derived from the 19 percent tariff level left over from the first Trump administration plus a 30 percent temporary tariff, consisting of the 10 percent base and 20 percent now tied to fentanyl imports, a subject which is pending further negotiation).[1]

The 10 percent additional base tariff is applied on top of the 2 to 3 percent average most favored nation (MFN) tariff that existed prior to January 20, 2025. The new total minimum tariff would thus be around 12.5 percent, a level applied by the US 85 years ago, in 1940. It would be seriously damaging to the world economy were other major trading countries to emulate the US and revert to early post–World War II tariff levels. Fortunately, other countries are not doing so. Other countries account for 87 percent of world imports and are at present keeping to tariff rates they committed to under the rules of the General Agreement on Tariffs and Trade (GATT) and the World Trade Organization (WTO). Under a regime of lower tariffs and agreed trade rules, during 1950–2024 global trade volume increased by 45 times and global trade value increased by 385 times.

The Trump administration's tariff increases may be an attempt to end America’s role as the world’s consumer of last resort. The US, unlike most of its trading partners, does not tax consumption. Now, it has taken the politically expedient step, in violation of its international trade commitments, to tax imports but not domestic production. US-based industries will have to pay for more expensive imported inputs. Individual consumers will see increased price tags in stores and online. Another factor, uncertainty, will continue to dog those seeking supplies for the US market from abroad. US trade negotiators have a challenging task ahead, as it is not clear that they can promise the stability that trade agreements normally bring.

Higher tariffs may not visibly change global trade patterns immediately. The US may still show a seemingly insatiable thirst for the world’s goods. The US still has a GDP that is dramatically greater than that of any other country, $28 trillion. The runner up, China, is at $18 trillion. While there would be some pressure for appreciation of the dollar if imports did decline, this may be masked by other factors. As economist Kenneth Rogoff explains, the Trump administration is pursuing policies that are diminishing the international role of the dollar. Inflation and a cooling of the US economy due to tariff policy may also affect demand, trade flows, and the dollar’s exchange rate.

Where this all nets out is difficult to predict. A foundation of American economic success, unequaled by any other economy by many measures, has been stability of trade policy, reliability of the rule of law, broad adherence to international agreements, and finding benefit for the US in contributing to improvements in the economic well-being of other countries. Now, US policy is reducing its participation in the world economy through applying new tariffs while others are not doing so. Economic distancing versus continued deeper global economic integration are opposite policies. One will be successful, the other will not. The choice will be consequential. It deserves careful consideration.

Note

1. Not taken into account here are additional tariffs applied selectively. Uncertainty remains over what US tariffs will actually be imposed for any given product from any given country a year or even a few months from now, particularly where trade remedy cases have been announced or have already been concluded, for steel, aluminum, autos, copper, lumber, semiconductors, consumer electrics, critical minerals, pharmaceuticals, aircraft, and movies. This list can be expected to grow.