National Interest

by Desmond Lachman

    While the announcement comes as a relief, it still signals that Trump envisions a world of high tariff barriers even with close allies.

    Today’s announcement of a Japanese trade deal offers some good news and some bad news. The good news is that trade deals are finally being struck with a small number of our major trade partners. The Japanese deal will prevent Trump from carrying out his threat to impose a 25 percent tariff on Japan and will likely spare Japan from a recession.

    The bad news is that the deal was still struck with a high basic tariff level of 15 percent. That can leave little doubt that Trump intends to maintain the highest average import tariff level since the Second World War. This will not be good for the US inflation and economic growth outlook. And it will certainly not be good for the rest of the world’s economic outlook and especially for export-intensive economies like Japan.

    On April 2, when Trump threatened reciprocal import tariffs on all of our trade partners, he indicated that this threat would force our trade partners to the negotiating table and soon result in 200 completed trade deals. Almost four months later, Trump has managed to finalize only five trade deals, with many of their details still to be negotiated. Those trade deals include pacts with the United Kingdom, Japan, Indonesia, the Philippines and Vietnam. Trump has indicated that if trade deals are not negotiated with the rest of our trade partners by August 1, he will unilaterally announce punitive import tariffs on those countries.

    By now, it should be clear that Trump is taking us to a permanent state of damagingly high import tariff levels. The many countries that do not have trade deals by August 1 will face the high sort of tariff levels that were threatened by Trump in his early April “liberation day” tariff announcement. The European Union, for instance, is being threatened with a 30 percent across-the-board tariff if it does not come to a trade deal.

    However, judging by the trade deals struck to date, even if those remaining countries secure trade deals, the tariffs they will face will likely remain at a relatively high level. The Japan trade deal has a basic tariff of 15 percent. Indonesia and the Philippines have basic tariffs of 19 percent. Vietnam, on the other hand, has been subject to import basic tariffs ranging from 20 to 40 percent.

    There are additional reasons to believe that the average US tariff level will remain historically high. China is currently subject to a 55 percent import tariff and there is little sign of progress in its trade negotiations with the United States. Meanwhile, there are a whole slew of sectoral tariffs at very high levels. All steel, aluminum and copper imports are subject to a 50 percent tariff, while automobiles and automobile parts face a 25 percent tariff. In addition, studies are presently underway for pharmaceuticals, digital services, foreign films and toys that could all be subject to punitively high tariff levels.

    Even before the latest tariff announcements, the Yale Budget Lab estimated that the average US import tariff level had increased to roughly 20 percent. In their view, such a tariff level would add 1.7 percentage points to inflation and would subtract around .4 percent from economic growth over the long term and .8 percent in 2025. With the latest further increase in tariff rates, it appears that the negative impact on the price level and the growth outlook could be higher than the Yale Budget Lab estimates. This would seem to be especially the case, considering that since the start of the year, the dollar has depreciated by over 10 percent. If that depreciation is sustained, it will amplify the inflationary effect of the tariffs.

    The sad thing about these tariffs is that they will add to inflation and slow economic growth at the same time that little progress will be made in reducing the trade deficit. Indeed, there is every prospect that the trade deficit will widen over the next year. It will do so mainly as a result of Trump’s Big Beautiful Bill. That bill is expected to widen the country’s budget deficit and incentivize investment. In turn, this will exacerbate the country’s savings-investment imbalance, which is the primary driver of the trade deficit.

    The last experiment with very high tariffs was the 1930 Smoot-Hawley Act which is generally considered to have prolonged the Great Depression. While the jury is still out, it is all too likely that history also will not judge Trump’s tariff policy kindly.