Tailspin in Markets Causes Retreat in Tariff Scheme

In its early April announcement of new tariffs to cover all goods imported to the US, the administration imposed several new rules on global trade:

• Blanket import tariffs of 10% on all goods
• Additional “individualized reciprocal higher tariffs” on goods originating from countries the administration identifies as having the largest trade deficits with the US
• Exemptions for certain goods, including pharmaceuticals, “energy,” bullion, lumber, and semi-conductors
• Reservation of the right to modify the tariff scheme “if this action is not effective” and specifically “should any trading partner of the United States retaliate”

The blanket and "reciprocal" tariff scheme left intact the tariffs already announced on cars, steel, and goods originating from Canada and Mexico.  After announcing the tariffs and reiterating their importance, the administration significantly retrenched following several days of market turmoil, steep sell-off of US bonds, and announcements of retaliatory tariffs by US trading partners.  As of April 9, the administration says global tariffs of 10% will remain in place but that most country-specific tariffs will not go into force.  China will face tariffs of 125% on its exports, however.  

WHY IT MATTERS

The “reciprocal tariff” scheme is on pause for 90 days; it has not been rescinded.  A blanket tariff combined with country-specific assessments would mean that, if the tariffs stay in place, global supply chains are likely to experience disruption and confusion.  Many of the countries targeted with the highest individualized rates are southeast Asian countries that have become fast-growing alternatives to Chinese manufacturing, for example.  The multiple layers of tariffs also make it increasingly difficult to look for alternate supply arrangements as a means to work around or minimize tariff burdens.  This is especially true when coupled with the explicit threat to continue increasing tariffs if the administration is not satisfied with the effects of these.  

It is not clear whether any trade partners will challenge tariffs in court, restrict market access for US firms, or take other actions – any of which could increase the volatility of the current moment.  It is clear that trade partners including the EU and China are willing to announce new tariffs on US goods as one way to thwart the administration's moves.  

All of these realities mean adapting business practices and risk allocation in ways that account for continued uncertainty.  Whether global tariffs or country-by-country tariffs are here to stay is an unknown.  It is clear that the specter of significant tariffs can create volatility even if they are ultimately not enacted.  It is also clear that China and the US will continue to lock horns in ways that are likely to create pressure for US businesses.