US/Global: ‘Liberation Day’ sees Trump impose substantial tariffs on the rest of the world

US President Trump announced his ‘Liberation Day’ tariffs. There were both reciprocal and universal tariffs announced.On top of a ‘baseline’ universal 10%, most countries are facing additional ‘reciprocal’ tariffs.

These include very high tariffs for some emerging market economies. The base tariff on Chinese imports will now be more than 50%. Canada and Mexico were excluded, but many of their exports are still subject to the earlier announced 25% tariffs. Given the scale and widespread nature of the tariffs announced yesterday, the implications for US inflation will likely be stronger than many will have factored into their central cases. The question now (or one of them) is, how long will they stay in place?

What was missing? Notably, Trump did not announce any new product tariffs. That does not mean, however, that nothing will be announced. The 25% tariff on autos came into place overnight. Trump has previously promised tariffs on pharmaceuticals, copper and semiconductors for example. For now, so-called Section 232 products (including those under investigation) are exempt from the reciprocal tariffs–these include autos, steel, aluminium, copper, lumber, semiconductors, pharmaceuticals – and it seems also gold, energy and some minerals.

What’s next? The April 2nd announcements are highly unlikely to be the last word on tariffs. Tariffs on further product categories seem likely at this stage. There are risks that tariffs rise from here on countries that retaliate. Treasury Secretary Scott Bessent yesterday indicated that tariffs could actually rise further from here if countries retaliated: “I wouldn’t try to retaliate…As long as you don’t retaliate, this is the high end of the number.” Tariffs may also fall for countries that please Trump. In his announcement yesterday, Trump did indicate some room for negotiation with his comment about if others get rid of their tariffs and barriers then the US rates will come down. However, many of the tariffs announced do not match trade barriers as such, but rather reflect a country’s goods trade balance with the US. It is presumably also possible, though, that more exemptions may emerge, partly to limit implications for consumer prices. There may also, I’d assume, be political and legal challenges to some of these tariffs.

Some suggest too that we should think about product and country tariffs differently–that product tariffs are intended to be permanent and fuel the reshoring/bringing manufacturing jobs home agenda. Country tariffs meanwhile may be seen as more of a basis for negotiation. If that was the case, then some of the worst potential inflationary impacts might be mitigated, though they would be unlikely to raise as much revenue for the government either (which presumably is another key aim here).

Inflation ahead: All these tariffs are likely to add substantially to US inflation this year into next year. Bloomberg notes that these are the steepest American tariffs in a century. Inevitably though, there will be plenty of uncertainty around any estimates of impact, from to what degree all the various tariff announcements are ‘stackable’, to how long they are likely to be sustained at these levels, to how much will get passed onto consumers, to how big will any drag on US activity be from tariffs of this magnitude.

A rate hike cannot be ruled out this year for the Fed, and neither can a recession. Recession risks have risen on the back of the announcements.

US rate cut? Rate hike? From a central bank perspective, especially one with a dual mandate like the Federal Reserve, the implication of tariff increases for interest rates is not totally straightforward. While tariffs will boost US inflation they may (or may not) prove transitory. In the meantime, they could lead to significantly less hiring as US activity is likely hit in the near term. There’s a good chance, in other words, that the two parts of the Fed’s mandate (price stability and full employment) move in ways that put opposing pressure on Fed policy over the next year or so, especially if the Fed feel unable to downplay the tariffs as entirely transitory. In the last Fed press conference, Chair Powell said that in the scenario where the Fed’s two goals were in tension, they will look at how far each measure is from its goal and how long it will take to get back.  I continue to have two 25bps rate cuts in my 2025 forecasts for the Fed but, given uncertainty around the economic outlook, I do not think even a rate hike can be ruled out this year for the Fed, and neither can a recession. Recession risks have risen on the back of the announcements.

Euro area hit: The EU was a target for 20% tariff increases yesterday. Quantifying the likely impact on the EU economy is difficult ahead of knowing how strong EU retaliation will be and how long tariffs from either side will last. Currency adjustments also matter. To give a sense of vulnerability though, euro area goods exports to the US are a bit more than 3% of euro area GDP (goods exports overall all are around 19% GDP). ECB President Lagarde has flagged ECB analysis suggesting that a 25% tariff imposed by the US could lower euro area GDP growth by around 0.3 percentage points in the first year. EU retaliation would then worsen that estimate. The total 20% tariff on the EU was likely within expectations, but European Commission President von der Leyen said the EU are planning fresh countermeasures “if negotiations fail”.

UK flying under the radar? The UK seems to be flying under Trump’s radar. Or rather, arguably, the US runs a goods trade surplus with the UK (on US figures) so the UK does not appear to have been targeted. The UK has nevertheless been caught up in Trump’s latest announcements with the 10% baseline tariff.

Tariffs are not good news: At a global level, tariffs are likely to damage global growth. The uncertainty created by Trump’s tariff–and broader policy–agenda has been substantial, whether looking at news-based measures or measures of uncertainty from sentiment surveys like the NFIB small business survey. Uncertainty itself should be negative for growth, leading to investment decisions being delayed for example.

I could see two potential silver linings from the announcement, but I am reluctant to (yet) believe either applies:

1. If these tariffs mark the level from which Trump intends to negotiate down– i.e. yesterday’s announcements somehow represent ‘peak tariffs’;
2. If tariffs are now ‘done with’, then uncertainty around tariffs should fall from here and with it probably overall economic policy uncertainty.

However, at this stage it feels a little early to be taking an optimistic slant on recent developments.

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