Last week, the market took a significant drop in response to the tariff announcement, and it has kept dropping so far this week as I write this on Monday, April 7. The extent of the tariffs exceeded market expectations and retaliatory tariffs from China raised uncertainty on the global economic outlook.
The tariff announcement, particularly the “reciprocal tariffs,” were much higher than expected by investors, causing markets to panic and sell off the last few days. Reciprocal tariffs are in quotes above because the imposed tariffs don’t fit the typical definition of reciprocal tariffs.[1] Reciprocal tariffs would typically mean that the tariffs imposed on imports would look to match the tariffs imposed on their exports from the target country. However, the tariffs that were imposed were based on perceived unfairness reflected in trade deficits, rather than any matching of tariff levels.[2]
I wrote in an earlier article on tariffs on the tradeoffs of imposing tariffs. Benefits can include increased government revenue and protecting domestic industry. That said, bilateral trade imbalances aren’t necessarily a terrible thing or something that indicates massive trade barriers. For example, Lesotho (a country I was ignorant of until a few days ago), exports textiles to the United States and has a trade surplus with the USA.[3] This is because we can afford to import goods from them, but with a GDP of about $2 billion, they are unlikely to be able to afford many goods or services from the US. The trade disparity likely has much more to do with the GDP per capita ($916 for Lesotho as of 2023[4] compared with $82,769 in the US[5]) than it does with trade barriers imposed by Lesotho on US goods. The low demand and capacity for US goods in Lesotho is likely the primary driver of the bilateral trade imbalance.
Nations with which the US has a trade surplus or were below the 20% mark in the “Tariffs charged in the USA” category of the Liberation Day charts were slapped with a flat 10% rate. One reason for this and the earlier Lesotho may to just close loopholes for larger trading partners that we could feel taken advantage by.
What do I expect to happen? I don’t know. Things are uncertain, which is likely why the markets have reacted the way they have, on top of the creative and unexpected definition of reciprocal tariffs. I don’t know whether this is a self-imposed penalty that is meant in incentivizing domestic companies to increase manufacturing capacity in the US, or if this is an opening negotiation tactic to get more favorable trade terms. My guess would be the latter with the expectation that these are temporary measures. That said, the White House has at least publicly stood by the tariffs as being the way things are going forward. By the time this is published we will likely know more.
[1] https://www.wsj.com/economy/trade/trump-says-tariffs-are-reciprocal-they-arent-fa80d94e
[2] https://www.pbs.org/newshour/politics/how-the-white-house-calculated-trumps-sweeping-new-tariffs
[3] https://www.cbsnews.com/news/trump-tariffs-biggest-lesotho-what-to-know-tiny-african-kingdom/
[4] https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=LS
[5] https://data.worldbank.org/indicator/NY.GDP.PCAP.CD?locations=US
