The Trump administration has declared a 90-day halt on its initiative to implement so-called “reciprocal” tariffs on nearly all imports to the US. However, this pause does not apply to China, where import duties will escalate to approximately 125%.
This step indicates a partial backtrack from what was evolving into an expansive and intense trade conflict. For the majority of countries, the US will now set a 10% baseline tariff for the upcoming three months. Nevertheless, the White House has made it clear that tariffs on Chinese imports will stay unchanged.
Why has President Trump retreated from the broader tariff campaign? The reason is straightforward: the economic impact on the US was deemed too severe.
Our economic model reveals the repercussions, even following the ‘pause’
Utilizing a global economic model, we have been evaluating the macroeconomic implications of the tariff strategies proposed by the Trump administration as they evolved.
The subsequent table illustrates two perspectives on the economic repercussions of the tariff plan:
- “pre-pause” – the situation as it stood right before the 90-day pause was announced, assuming all countries retaliate except for Australia, Japan, and South Korea (which indicated they would not retaliate).
- “post-pause” – the scenario following the withdrawal of reciprocal tariffs.
It is evident that the US would have suffered significant and immediate losses in employment, investment, growth, and, most importantly, real consumption, which is the most accurate indicator of household living standards.
Significant costs of the tariff conflict
Under the pre-pause scenario, real consumption in the US would have dropped by 2.4% by 2025. Real gross domestic product (GDP) was projected to decrease by 2.6%, while employment would decline by 2.7%, and real investment (after adjusting for inflation) would plummet by 6.6%.
These are not minor adjustments. They signify considerable contractions that would affect everyday life, leading to job losses, price hikes, and diminished household purchasing power. Given the current US unemployment rate of 4.2%, these outcomes suggest that for every three Americans currently unemployed, two more would potentially join their ranks.
Our modeling indicates that the adverse effects would transcend the short term. Throughout the 2025–2040 projection window, losses in US real consumption would average 1.2%, alongside persistent investment weaknesses and a long-term decline in real GDP.
Richard Drew/AP
It appears likely that internal economic advisements mirrored this perspective. The decision to suspend most of the tariff increases may indeed indicate an acknowledgment that the policy was economically untenable and would lead to a long-term reduction in the US’s global economic influence. Financial markets were also unsettled.
The revised strategy: still confrontational towards China
The new plan, announced on April 9, reduces the elevated tariff regime to a flat 10% for approximately 70 countries, while maintaining the high tariffs on Chinese products at around 125%. Tariffs on imports from Canada and Mexico stay set at 25%.
In reaction, China has introduced an 84% tariff on US goods.
The table’s “post-pause” column outlines the outcomes of the scaled-back plan if the pause is made permanent. For consistency, we assume all nations, aside from Australia, Japan, and Korea, retaliate with tariffs equivalent to those imposed by the US.
As evident from the “post-pause” outcomes, lower US tariffs, complemented by reduced retaliatory tariffs, result in less damage for the US economy.
Uniformly applied tariffs are less distortionary, and substantial retaliation from just one major partner (China) is simpler to manage than a widespread global response.
However, the costs will remain significant. The US is expected to see a 1.9% decrease in real consumption by 2025, largely driven by reduced employment and decreased production efficiency. Real investment is anticipated to drop by 4.8%, with employment declining by 2.1%.
Perhaps we should not be surprised that the costs remain so elevated. In 2022, China, Canada, and Mexico represented almost 45% of all US goods imports, with many nations already facing 10% reciprocal tariffs in the “pre-pause” scenario. Trump’s tariff pause has not altered duty rates for these countries.
Implications for Australia
A considerable amount of discussion in Australia has centered on the potential for collateral damage stemming from a US-China trade conflict. Given Australia’s economic connections to both nations, this concern is justified.
However, our modeling suggests that Australia may experience modest benefits. In both scenarios, real consumption in Australia is projected to increase slightly, driven by stronger investment, improved trade terms (a measure of our export prices relative to import prices), and shifts in trade flows.
One method is what economists term trade diversion: if Chinese or European exporters perceive the US market as less appealing, they may redirect goods to Australia and other accessible markets.
Additionally, diminished global demand for capital, particularly in the US and China, leads to lower global interest rates. This stimulates investment in other regions, including Australia. In our model, Australian real investment sees an uptick in both scenarios, resulting in slight but sustained gains in GDP and household consumption.
These findings imply that, under the current policy landscape, Australia is unlikely to face significant immediate impacts from the tariff increases.
Nonetheless, growing investor uncertainty poses a risk for both global and Australian economies, which is not accounted for in our modeling. In just one week, the Trump administration has swung global investor confidence through three major tariff announcements.
A temporary delay
Tariffs seem to be a cornerstone of the administration’s economic agenda. Thus, Trump’s choice to pause his broader tariff strategy may not indicate a change in philosophy, but rather a tactical step back.
The revised approach, imposing high tariffs on China while lowering them elsewhere, may reflect an effort to concentrate on what the administration perceives as its primary strategic concern, while dodging unnecessary backlash from allies and neutral parties.
Whether this more focused strategy proves sustainable remains to be seen. The most severe economic repercussions have been postponed. The likelihood of their return hinges on how the upcoming 90 days unfold.
