The president’s highly anticipated tariff announcement this afternoon delivered at the very hawkish end of the range of expected outcomes. Details are still hazy, but we understand that starting April 5 there will be a 10% minimum tariff on all good imports, and on April 9 tariffs will go up further on countries with which the US has the largest trade deficits. For example, 20%-points on the EU, 24% on Japan, and 34% on China. For the latter, this would take the average tariff rate to 54%. The calculations behind these various numbers are unclear but may have something to do with the size of their bilateral imbalances, even though they were pitched as based on reciprocity. Canada and Mexico are exempt, for now, from any further tariffs than those already put in place by the administration. Other provisions and exemptions are in the executive order.
By our calculations this takes the average effective tariff rate from what had been prior to today’s announcement around 10% to just over 23% (chart below). The president mentioned that these tariff rates could be negotiated down if other countries lower their trade barriers to US products. On the other hand, a White House official mentioned that other section 232 tariffs (e.g. chips, pharma, critical minerals) are still in the works, so the average effective rate could go even higher. Moreover, the executive order states that retaliation by US trading partners could result in even higher US tariffs.
On a static basis, today’s announcement would raise just under $400 billion in revenue, or about 1.3% of GDP, which would be the largest tax increase since the Revenue Act of 1968. We estimate that today’s announced measures could boost PCE prices by 1-1.5% this year, and we believe the inflationary effects would mostly be realized in the middle quarters of the year. The resulting hit to purchasing power could take real disposable personal income growth in 2Q-3Q into negative territory, and with it the risk that real consumer spending could also contract in those quarters. This impact alone could take the economy perilously close to slipping into recession. And this is before accounting for the additional hits to gross exports and to investment spending. Headlines about retaliatory measures by US trading partners are already coming out, and we expect to learn more in coming days. The somewhat confusing nature of today’s news, coupled with uncertainty over how long these tariffs will remain in place, should make for an even less friendly environment for investment spending (though that is one way to narrow the saving – investment imbalance and hence narrow the current account deficit). We plan to revisit our forecast later this week.