Early modelling shows most economies lose – the US more than many
- Written by Niven Winchester, Professor of Economics, Auckland University of Technology
The global rollercoaster ride of United States trade tariffs has now entered its latest phase.
President Donald Trump’s April 2 “Liberation Day” announcement placed reciprocal tariffs on all countries. A week later, amid financial market turmoil, these tariffs were paused and replaced by a 10% baseline tariff on most goods.
On July 31, however, the Trump Administration reinstated and expanded the reciprocal tariff policy[1]. Most of these updated tariffs are scheduled to take effect on August 7.
To evaluate the impact of these latest tariffs, we also need to take into account recently negotiated free trade agreements (such as the US-European Union deal), the 50% tariffs imposed on steel and aluminium imports, and tariff exemptions for imports of smartphones, computers and other electronics.
For selected countries, the reciprocal tariffs announced on April 2 and the revised values of these tariffs are shown in the table below. The revised additional tariffs are highest for Brazil (50%) and Switzerland (39%), and lowest for Australia and the United Kingdom (10%).
For most countries, the revised tariffs are lower than the original ones. But Brazil, Switzerland and New Zealand are subject to higher tariffs than those announced in April.
In addition to the tariffs displayed above, Canadian and Mexican goods not registered as compliant with the US-Mexico-Canada Agreement[2] are subject to tariffs of 35% and 25% respectively.
Economic impacts
The economic impacts of the revised tariffs are examined using a global model of goods and services markets, covering production, trade and consumption.
A similar model was used to assess the impacts of the original reciprocal tariffs[3] and the outcome of a US-China trade war[4].
GDP impacts of the tariffs are displayed in the table below. The impacts of the additional tariffs are evaluated relative to trade measures in place before Trump’s second term. Retaliatory tariffs are not considered in the analysis.
An economic own goal
The tariffs reduce US annual GDP by 0.36%. This equates to US$108.2 billion or $861 per household per year (all amounts in this article are in US dollars).
The change in US GDP is an aggregate of impacts involving several factors.
The tariffs will compel foreign producers to lower their prices. But these price decreases only partially offset the cost of the tariffs, so US consumers pay higher prices.
Businesses also pay more for parts and materials. Ultimately, these higher prices hurt the US economy.
The tariffs decrease US merchandise imports by $486.7 billion. But as they drive up the cost of US supply chains and shift more workers and resources into industries that compete with imports, away from other parts of the economy, they also decrease US merchandise exports by $451.1 billion.
Global impacts
For most other countries, the additional tariffs reduce GDP. Switzerland’s GDP decreases by 0.47%, equivalent to $1,215 per household per year. Proportional GDP decreases are also relatively large for Thailand (0.44%) and Taiwan (0.38%).
In dollar terms, GDP decreases are relatively large for China ($66.9 billion) and the European Union ($26.6 billion).
Australia and the United Kingdom gain from the tariffs ($0.1 billion and $0.07 billion respectively), primarily due to the relatively low tariffs levied on these countries.
Despite facing relatively low additional tariffs, New Zealand’s GDP decreases by 0.15% ($204 per household) as many of its agricultural exports compete with Australian commodities, which are subject to an even lower tariff.
Although the revised reciprocal tariffs are, on average, lower than those announced on April 2, they are still a substantial shock to the global trading system.
Financial markets have been buoyant since Trump paused reciprocal tariffs on April 9, partly on the hope that the tariffs would never be imposed. US tariffs of at least 10% to 15% now appear to be the new norm.
As US warehouses run down inventories and stockpiles, there could be a rocky road ahead.
References
- ^ reinstated and expanded the reciprocal tariff policy (abcnews.go.com)
- ^ US-Mexico-Canada Agreement (ustr.gov)
- ^ original reciprocal tariffs (theconversation.com)
- ^ US-China trade war (theconversation.com)
