- On April 2nd, the U.S. administration announced broad reciprocal tariffs, targeting all trading partners, and not just the countries that run large trade surpluses with the U.S. The tariffs will be implemented under the International Emergency Economic Powers Act (IEEPA) of 1977.
- Using IIEPA authority, the U.S. will impose a 10% tariff on all countries, effective April 5th, 2025. However, the administration also imposed higher tariff rates on countries with the largest trade deficits, which takes effect April 9th.
- Based on this announcement, we estimate that the U.S. effective tariff rate will jump to over 20%, the highest level since the 1940's and a larger increase than what occurred under the Smoot-Hawley legislation during the early 1930s.
- Relative to our baseline assumptions, the tariff rates for non-USMCA (United States-Mexico-Canada Agreement) countries are a step higher. For the E.U. the 20% rate announced is in line with what we had assumed. However, this is not true for all others. China will be more heavily hit than our baseline assumption of 30%. Likewise, on other trading partners, we had assumed a blanket 5% rate which is now a minimum of 10%, with many countries higher like Taiwan, South Korea and Vietnam at 32%, 25% and 46%, respectively.
Key Implications
- This announcement will raise the U.S. effective tariff rate to over 20%, the highest level since the early-1940's and notably above the 14% assumed in our most recent Quarterly Economic Forecast. At this point, the big unknown is duration. Our current forecast assumes that the peak tariff rate remains in-effect for just six-months, after which most countries/regions (except for China) see some reprieve. Should the tariffs remain elevated for longer, the odds of U.S. economic stagnation rises. Likewise, inflation is at risk of approaching 4% or more.
- Heightened trade uncertainty has already led consumers to tap the brakes, with households increasingly worried about inflation, employment, and income prospects. Consumer spending is tracking a paltry 0.5% in the first quarter, after expanding by a robust 3.6% annualized in the second half of 2024.
- The constant saber-rattling of tariff threats has also distorted trade flows, with imports surging in recent months as businesses try to front-run the tariffs. Net trade could shave several percentage points from Q1 GDP growth. Given the weak spending backdrop, the economy is at risk of contracting.
- Tariffs that remain in place indefinitely would force some reshoring of production, but this would be a multi-year process and would come at a cost. Assuming a permanent tariff rate close to the level proposed now, our model suggests that it could lift the level of employment by nearly 500,000 in the long-run, most of those jobs related to manufacturing. However, the tariffs would also raise the average household's cost of living by over $4,850 per year – equivalent to a tax hike of 2% of GDP – implying an associated cost of $1,250,000 for every job reshored.
- Reshoring jobs is just the first hurdle. The manufacturing sector faces significant headwinds with persistent skill and labor shortages. Job openings within the sector already sit at more than 450,000 positions. Adding another 500,000 positions over the coming years will be a challenge without significant investments in skills training and recruitment, particularly for software and technical skills. The manufacturing jobs of yesterday are not those of the future.
- The tariffs are likely to be viewed as helping to pay for proposed tax cuts. These include exempting Social Security payments, tip income, and overtime pay from taxation. Combined, these policy changes are estimated to cost north of $3.5 trillion over the next decade, in addition to the $4 trillion required to extend the 2017 Tax Cuts & Jobs Act (TCJA). If the announced tariffs become permanent, they could generate an estimated $6 trillion in revenue over the next decade, more than offsetting the cost to extend TCJA. Extending TCJA avoids fiscal tightening but does not provide an additional boost to momentum. The economic multiplier is zero.
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