Trump readies the biggest blow in his trade war | Economy and Business

“The Big One” is a term used to describe a catastrophic earthquake that could strike California. It is also what Donald Trump has called the round of tariffs he plans to announce or impose on April 2. The largest wave of the trade war declared by the former U.S. president will shake the global economy like an earthquake of unknown magnitude and unforeseeable consequences. The entire world is anxiously awaiting his next move, particularly the United States’ main trading partners, including the European Union, Mexico, Canada, China, Japan, India, and South Korea.

Trump’s trade war threatens to dismantle the economic order established by the Bretton Woods agreements at the end of World War II. By upending the long-standing rules that have governed international trade, he is ushering in the most aggressive wave of protectionism since the policies that exacerbated the Great Depression in the 1930s. The likely retaliation from affected nations will not only slow economic growth and drive inflation but also heighten geopolitical tensions.

Trump has dubbed April 2 “Liberation Day.” In his misleading narrative, he argues that every country has been taking advantage of the United States, and it’s time for revenge. “For DECADES we have been ripped off and abused by every nation in the World, both friend and foe. Now it is finally time for the Good Ol’ USA to get some of that MONEY, and RESPECT, BACK,” he posted about his plans on his platform Truth Social.

Trump nostalgically recalls the 19th-century era of high tariffs in the United States, presenting it as the most prosperous time for the country. Determined to cement his legacy through protectionist policies — once declaring that “the most beautiful word in the dictionary is tariff” — he and some of his allies have even floated the idea of making April 2 a future holiday to commemorate this radical shift in economic and trade policy.

“Reciprocal tariffs”

The centerpiece of Wednesday’s economic agenda is what Trump calls “reciprocal” tariffs — though they are anything but. Perhaps sensing the market turbulence and economic uncertainty they’ve already sparked, he attempted to soften his stance last week.

“We’re going to make it very lenient,” Trump reporters Wednesday in the Oval Office. “I think people are going to be very surprised. It’ll be, in many cases, less than the tariff that they’ve been charging us for decades. We have not been treated nicely by other countries, but we’re going to be nice. So I think people will be pleasantly surprised,” he added.

On Sunday, he reiterated that message aboard Air Force One: “They will be kinder than those countries were to the United States of America over the decades. They ripped us apart, like no country has ever been ripped off in history. […] It’s substantial money for the country, nevertheless,” he said, noting that tariffs will be announced for virtually all countries.

It’s unclear whether there will be immediate implementation. “What’s going to happen on April 2 is that each country will receive a number that we believe represents their tariffs. So, for some countries, it could be quite low. For others, some countries it could be quite high,” Treasury Secretary Scott Bessent said this month on Fox. Bessent added that some tariffs “may not have to go on because a deal is pre-negotiated.” In other cases, it’s possible that once a country knows the tariffs it will face, “it may want to negotiate it down.”

For major trading partners — those with whom the U.S. runs its largest deficits and whom Washington accuses of unfair trade practices — swift implementation appears likely. “There’s what we would call kind of, ‘the dirty 15,’ and they have substantial tariffs,” Bessent said. “It’s 15% of the countries, but it’s a huge part of our trading volume,” he explained, arguing that these nations also have “non-tariff” barriers which are “just as important.”

China, the European Union, Mexico, Vietnam, Taiwan, Japan, South Korea, Canada, India, Thailand, Switzerland, and Malaysia are the nations and trade blocs with which the United States runs its largest trade deficits. Regardless of their existing tariffs on U.S. products, they appear to be the most at risk. Each is now preparing either a retaliation strategy or a negotiation approach.

At times, Trump has seemed to be bluffing, using the threat of tariffs as a tool for blackmail and pressure. However, his rhetoric increasingly suggests a commitment to building a lasting tariff wall.

Stephen Miran, chairman of the White House Council of Economic Advisers and a former strategist at Hudson Bay Capital, wrote A User’s Guide to Restructuring the Global Trading System, a text that has become essential reading within the administration. “We may be on the cusp of generational change in the international trade and financial systems,” he remarked. Among his core arguments is that the strength of the U.S. dollar has worsened the country’s trade deficit and eroded its industrial base. In his view, unilateral tariffs and trade wars could serve as tools to rebuild the system — potentially forcing dozens of countries to raise the value of their currencies.

Trump has set conflicting goals for his tariffs. On one hand, he hopes to generate massive revenue — his ultimate dream is for tariffs to replace income taxes, a notion that seems unrealistic despite his adviser Peter Navarro’s claim this weekend that they will bring in $600 billion annually. On the other hand, he wants tariffs to stimulate domestic production. Meanwhile, he downplays the resulting price increases. However, for tariffs to incentivize import substitution, prices must rise. And if domestic production surges while imports decline, the expected revenue from tariffs will shrink. Moreover, for companies to make long-term investment decisions, tariffs must be perceived as permanent.

“Given the costs of moving production to the U.S. — construction and workforce predominantly — it may be that many manufacturers decide that it is cheaper to keep production facilities where they are and just absorb the tariff within operating costs,” said James Knightley, chief international economist at ING in New York. “Furthermore, some manufacturers may take the view that in time, there is scope for deals to be reached between the U.S. and trade partners, with a chance that tariffs are scaled back. Others may make a bolder call and believe that when President Trump’s term ends in just under four years, a new president may take a different view on the effectiveness of trade tariffs and they are scrapped.” Knightley concludes that relocations will focus on high-value-added sectors, which account for 10% to 15% of U.S. imports.

This week is also critical for other tariffs. In theory, new tariffs of 25% on imports from Mexico and Canada (with a 10% rate for Canadian energy products) are set to take effect on April 2. Additionally, as of that date, Secretary of State Marco Rubio will have the authority to impose 25% tariffs at his discretion on countries purchasing oil from Venezuela, including Spain. On April 3, Trump’s recently announced 25% tariffs on light passenger vehicles — including cars, minivans, crossovers, and cargo vans — as well as their components, such as engines, transmissions, and electrical parts, will also take effect. However, with Trump, there’s always room for surprises and twists.

Trump has already imposed 20% tariffs on Chinese goods, though he was forced to reverse much of the decision due to logistical challenges in processing shipments. He has also placed 25% tariffs on certain imports from Mexico and Canada that do not comply with the current free trade agreement. Additionally, 25% tariffs are in place on aluminum and steel from around the world, as well as on pharmaceuticals, microprocessors, lumber, and copper. But it is unclear to what extent these tariffs overlap.

Economic impact

The Federal Reserve has underscored the growing uncertainty surrounding the U.S. economy. Its members have lowered growth forecasts and raised inflation projections, partly as a result of the tariffs. Trump’s erratic announcements have already weakened the U.S. economy. Last week, the Federal Reserve Bank of Atlanta projected a possible severe economic contraction in the first quarter of the year.

Most analysts do not expect an economic contraction in the first quarter, but they have drastically revised their growth forecasts downward. The latest Bloomberg survey of economists, released on Friday, lowers the first-quarter growth projection by one percentage point, from 2.2% to just 1.2%. For 2025 as a whole, the average forecast has fallen from 2.3% to 2%.

“The main channel from trade policy uncertainty to GDP is via business investment. Under higher trade policy uncertainty, future revenue streams of an investment become more uncertain, raising the option value of delaying investment decisions until the situation is clearer,” said Michael Pearce, deputy chief U.S. economist at Oxford Economics.

The latest data released on Friday was the University of Michigan’s consumer sentiment index, which has plummeted to its lowest level since November 2022. A year ago, it stood at 79.4 points; a month ago, it was 64.7 points; and in March, it fell to 57 points. Meanwhile, the expectations index plummeted 18%, meaning it has already lost more than 30% since November 2024. Trump’s measures are contributing to this pessimism, although their true impact on the economy is yet to come.

“Tariffs will begin to take a heavier toll in the coming months, but the current batch of survey data is overstating the damage, in our view. Our baseline scenario already includes the assumption that the average effective tariff rate is rising above 10%, the highest since World War II. New tariffs on autos would raise it above 12%, but we will reevaluate our assumptions following this week’s announcements,” said Pearce.

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