Trump Tariffs: Liberation Day or Obliteration Day?

Most market and political analysts are negative on the next round of US tariffs coming April 2, but are still grossly underestimating their potential magnitude and impact.

The new global tariff could be as high as 25 to 35 percent, multiples higher than current expectations.

As one bearish expectation, Goldman Sachs sees the average US tariff rate rising 10 percentage points this year, up from a 4 point rise forecast only a month ago.

Stock markets have responded to such views (and volatile White House tariff announcements) with a seven percent drop in prices from the recent peak, but this has merely reversed the post-November election market euphoria.

The question is whether these predictions and market responses are negative enough for when the real news arrives in early April.

My answer is emphatically not — there is much more potential damage to come.

Taking the US administration at its words, we can see that the tariffs will be substantial and permanent. Contrary to received opinion, they are not a temporary bargaining tool meant to eventually lower tariffs in the US and abroad.

Vice President Vance describes them as a “tariff wall” to bring back jobs to America.

Commerce Secretary Lutnick harkens back to the period from 1880 to World War I when “America was built on tariffs”. The average US import tariff for those years was 25 percent versus 1.5 percent today.

President Trump refers to April 2 as “Liberation Day” and sees tariffs as a way to restructure trade, raise tax revenues, reduce the trade deficit, and increase investment at home.

The approach may well be a flawed economic theory, but the only way to make it truly effective is if tariffs are significant and last for years.

There is a guide to see how high the tariffs may rise: Trumps’ Reciprocal Trade and Tariffs Memorandum that was released on February 13.

That document gives five reasons for using tariffs to fix “unfair and unbalanced” trade. They are 1) foreign tariffs, 2) foreign taxes, 3) non-tariff barriers, 4) mercantilist policies, and 5) unfair competition.

Let’s calculate a potential tariff rate based on these five elements.

Regarding relative tariffs, the US trade-weighted average import tariff rate was 1.5 percent in 2022. The trade-weighted average rate on US imports in the rest of the world was 2.5 percent. So, that adds one percentage point to the coming average global tariff set by the US.

Looking at relative taxes on trade, the Memorandum says that value-added taxes (VAT) are a hidden foreign advantage, presumable because US exporters cannot net the tax against their income.

This is a very dodgy claim since VATs are taxes on consumption and not trade but, hey, who plays fair in a Trump trade war? The US has no VAT and the median rate in the rest of the world is 17 percent. So, add seventeen points to the average global tariff.

Next up are non-tariff measures, predominantly sanitary measures and local product regulations. The United Nations has quantified these trade barriers in a tariff equivalent form. The latest US rate is 8 percent and the rate from the rest of the world on US imports is 13 percent. So, add five more points to the average global tariff.

Mercantilist policies include exchange rate manipulations and wage suppression. Only seven countries are currently being monitored by the US for their currency practices and none are accused of manipulation. The wage suppression claim is commonplace, that unfair trade puts downward pressure on American wages, but it is fairly nebulous and has traditionally been a left-wing critique.

Let’s score this category as at least one more point on the average global tariff, since it is hard to identify but is one of the justifications.

Fifth and finally, unfair competition is a “judgement” about whether there exist unfair limitations on US firms accessing foreign markets. You could drive a truck through this element, which might cover everything from social media regulations to government procurement rules to labour market restrictions. Let’s add at least one more point to the average global tariff, knowing full well that the likely number is considerably higher.

Adding across the five elements, the potential global tariff totals 25 percent (and is likely higher).

An unfair US assessment (quite possible in the hardball politics Trump era), where only the foreign elements are considered, brings the potential tariff to at least 35 percent.

These numbers are well above most analyses of the trade conflict and are not presently discounted into financial market prices.

How does Canada fare on this calculation?

Our average trade-weighted tariff on US imports is 1.1 percent, one point higher than the US tariff on our imports. The median provincial GST/HST (a type of VAT) is 12 percent versus zero in the US. Canada’s non-tariff measures rate is 30 percent (!) on US imports versus 8 percent from the US on our products.

That already totals 35 percent on a potential tariff, without considering all of the Canadian market entry barriers in energy, dairy, mining, finance, telecom, transportation, education, health, and culture. Non-tariff barriers capture the extent to which goods trade is protected in these sectors, but most of them are domestic-oriented services and restrict American and other foreign competitors. So, we could easily see a new US tariff rate at 40 percent.

Like the rest of the world, Canadians may therefore awaken on April 2 with a profound sense of anger towards the US administration. The new trade regime is harsh and painful and it will immensely raise the stakes in the ongoing federal election campaign.

We need a careful and serious debate about the best way forward, in order to unleash the potential of our economy that is so dearly needed now. An election campaign is probably not the best time for that but President Trump will at least have concentrated our minds.