On April 2, the US government declared its own big tariff hike. If the final decision holds this line, it will bring the average tariff rate up to levels not seen since the early 20th century. As a result, economists and market analysts are surely spooked by this move. They caution that the new tariffs will almost certainly yield disproportionate harm to the U.S. economy and global trade.
This round of new tariffs will bring the U.S. average tariff rate above that of the notorious Smoot/Hawley tariffs in the 1930s. These tariffs are often cited as a cautionary tale in trade policy debates. This announcement has led to jubilant predictions from industry experts. They’re worried that the effective tariff rate on U.S. merchandise imports would then jump up to the 20-25% range, historic heights last seen in the early 1900s.
Even at this late date, analysts are warning that these tariffs would worsen an already dire economic state in the U.S., increasing the risk of recession. There is bipartisan fear that as tariffs rise, they will dent consumer confidence and cause further ruptures in supply chains.
Anthony Raza, Head of Multi-Asset Strategy at UOB Asset Management, stated, “Today’s announcement could potentially raise U.S. average tariff rates to levels not seen since the early 20th century. If these tariffs persist, they could materially impact inflation, as U.S. manufacturing struggles to ramp up capacity and supply chains pass on costs to consumers.”
As prices on imported goods, both the raw materials and the finished products, are about to sharply rise, U.S. consumers will spend less money. This reducing in consumer behavior could compound economic slowdowns. Raza noticed that businesses tend to postpone capital expenditures. They’re not sure what all the tariffs will actually do and how our trading partners might retaliate.
Likely as not, the tariffs are here to stay. Otherwise they risk spelling out a new era of bear market for the American economy itself. Tom Kenny, Senior International Economist at ANZ, expressed his concerns: “Today’s announced US reciprocal tariffs are worse than expected. The effective tariff rate on U.S. merchandise imports is about to increase. It is projected to hover around that 20-25% level, the highest it will have been since the early 1900s.
With Tai Hui, APAC Chief Market Strategist J.P. JPMorgan Asset Management Taiwan. He provided an important counterpoint to the prevailing wisdom on how these tariffs are distorting trade patterns. He continued, “There are no winners in a global trade war.” He implored folks to understand what’s really being said when they talk about consumers in the US not noticing any difference. It’s all going to end up being the overseas manufacturer. So cringe when I hear that, Me too. It demonstrates an utter ignorance to the realities of how trade actually is supposed to work. In reality, the importing business is the one that pays the tariff—with no cost to the exporting country.
U.S. manufacturing faces tremendous challenges to build outward capacity while dealing with headwinds. Allowing companies to pass on the added cost uplift from tariffs will only lead to greater inflationary pressures. Together, these tariffs could dramatically impede U.S. economic growth. Or they might simply cause global stagflation, leading to recessions in the U.S. and European Union alike.
Despite the economic impacts from these tariffs, the environment surrounding them is quite unstable. Many experts anticipate that their implementation will solidify existing trends towards reduced consumer spending and delayed business investment in capital projects.