Donald Trump has expressed that “tariffs” is the most beautiful word in the English language.
The US president is anticipated to unveil his latest round of these border taxes on Wednesday at 4 PM ET (9 PM BST). In what he is calling “liberation day,” Trump has contended that this measure is necessary to generate revenue and boost domestic manufacturing. However, it is also causing unrest in the global economy.
What is a tariff?
Tariffs are taxes implemented on the import of goods from abroad. Importers are required to pay these taxes upon arrival at the customs office of the country or trade bloc that enforces them.
Typically, these taxes are calculated as a percentage of the product’s value. For instance, a 10% tariff on a £100 item would result in a £10 charge when it enters the country.
Tariffs apply not only to finished goods but also to components and raw materials, significantly increasing costs for manufacturers—especially in a context of complex supply chains that often cross borders multiple times. According to the Center for Strategic and International Studies, components like engines, transmissions, and other car parts can cross the US-Canada and US-Mexico borders as many as seven or eight times.
Acting as obstacles to trade, tariffs elevate the price of imported goods for both businesses and consumers. JP Morgan has projected that 25% tariffs could raise the price of new cars by $4,000 (£3,092).
They encourage purchasing a domestic equivalent that is free from tariffs whenever possible. Additionally, countries may impose non-tariff barriers to trade, including import quotas, licenses, regulations, safety standards, and border inspections.
The implementation of tariffs by one country often leads to retaliatory measures or even a full-scale trade war. They are frequently utilized in conjunction with other policy tools as a means of negotiation among nations, affecting outcomes that extend beyond just economic consequences.
What is Trump’s strategy?
The US ranks as the largest importer of goods worldwide, acquiring products valued at $3 trillion in 2023. It also holds the most considerable trade deficit – when imports surpass exports – estimated at $1 trillion.
Trump has often criticized the deficit as a reflection of “unfair” practices by US trading partners, viewing it as an indicator of fragility in the US economy due to decades of manufacturing jobs moving overseas. He has wielded tariffs as a negotiation tactic to secure concessions from trading partners.
The president is also evaluating the potential revenue that tariffs could contribute to the federal budget, which is crucial for counterbalancing the effects of his tax cuts. However, both cannot coexist. For tariffs to reliably generate revenue, they must be established as permanent measures, rather than tools used for negotiation.
What could the impact be?
The additional costs incurred from tariffs are generally passed down to the end consumer, suggesting that Trump’s plans are likely to escalate living costs in the US. The principal concern is that obstructing trade could hinder global economic growth and ignite inflation.
Even prior to the enactment of new US tariffs, their potential has unsettled global financial markets and diminished both business and consumer confidence, negatively affecting household expenditure and corporate investment.
Rising borrowing costs have significantly affected governments worldwide. For nations already burdened with substantial debt following a series of shocks since the 2008 financial crisis, this has compounded pressures to achieve fiscal balance and prompted political challenges.
The Organisation for Economic Co-operation and Development (OECD) cautioned last month that if the US and its trading partners were to permanently increase tariff rates by an additional 10 percentage points, global output could decline by approximately 0.3% by the third year post-enactment. Furthermore, the OECD indicated that global inflation could see an average increase of 0.4 percentage points per annum over the initial three years.
Is this a new tactic?
Trade barriers, taxes, and tariffs have been integral to the global economy for centuries, sometimes acting as catalysts for wars and revolutions, like the Boston Tea Party and the Second World War. Over the past few decades, these barriers have been gradually dismantled amidst rising globalization. Trump, who also enacted tariffs during his first presidential term, is not the first US president to disrupt trade relations with the UK.
Most economists concur that trade liberalization has contributed to lifting over a billion people out of poverty globally, while enhancing living standards in wealthier nations. However, tensions do exist; issues range from the decline of manufacturing to environmental and social repercussions stemming from complex, resource-heavy, and occasionally exploitative global supply chains.
Which countries could be hit hardest?
The US may face a “significant hit,” with an anticipated 0.7% decline in output. The US’s closest trading partners, Canada and Mexico, are also expected to be severely impacted.
Washington has a particular issue with what US Treasury Secretary Scott Bessent has termed the “Dirty 15” countries, which are responsible for approximately three-quarters of the US trade deficit.
The largest trade deficit the US has with a single country is with China, totaling $295 billion in 2024, followed closely by the EU at $235 billion.
Trump seeks to ensure that tariffs are “fair and reciprocal” to address what he perceives as enduring imbalances in international trade due to non-tariff barriers and taxes implemented by other nations. This includes value-added taxes (VAT), particularly in many European countries.
The president regards VAT as problematic since it is charged to customers of US-manufactured products, whereas Washington does not impose a similar federal tax on imports from abroad. Nevertheless, many experts argue that VAT applies to both domestically produced and imported goods.
