The actual economic impacts of these tariffs will take a while to clarify, partly because the administration has given itself some wriggle room to change them depending on how partners respond, and partly because that response may involve retaliation (in the first instance at least). 

The key thing to remember about tariffs are that they change relative prices. In this case, the relative prices for particular goods imported into the US will vary depending on their origin. So exporters of goods that face a lower tariff will be at a competitive advantage relative to those have a higher tariff (the UK for example, relative to the EU). Exporters that face higher tariffs in the US relative to competitors will look for markets elsewhere, while there will also be some measure of substitution in US consumption from foreign to domestic sources. 

Services imported to the US will become relatively cheaper compared to goods; so net services exporters will be at a relative advantage (the US being the largest importer of services). So if the tariffs are left as is, we can expect: trade diversion in goods i.e. the US sourcing imports from different sources and exporters finding different markets; and switching between goods and services exports in countries that produce both. 

The relative effects explain why the outcome for the UK overall, in particular, is probably as good as could have been hoped for, in the immediate at least. Indeed, the tariff structure as it stands could lead to a modest increase in overall exports to the tune of around 0.5 to 1%. This is because the UK faces lower tariffs on goods than partners that export similar products (such as the EU); and because services account for the majority of its exports. Moreover since a drop in US consumption of imports can reduce world prices in goods, the UK may also gain from lower-priced imports. However, it should be stressed that such upsides are extremely fragile. A greater degree of fragmentation brought about by trade wars will over time have a significant negative effects on medium-sized economies such as the UK.  

The relative effects of the US tariff structure have some notably regressive effects. For a start, some of the biggest increases fall on poorer and emerging countries in Asia that are heavily dependent on trade. Sri Lanka’s fragile recovery from an economic collapse is imperilled by 44% tariffs. Cambodia’s recent review of trade policies, held at the WTO, lauded the role trade had played in lifting it out of poverty and post-conflict distress. It now faces ones of the highest tariff rates (49%), which can significantly affect inward investment as well as exports. Vietnam and Laos are also badly hit. 

That south east Asia is particularly hit by tariffs is unsurprising given the US approach. It is a region that has relied particularly heavily on trade for growth. Moreover, in recent years, the region has become a magnet for investment by businesses looking to mitigate the risks associated with tariffs levied on China (a strategy labelled as China plus one). That now looks in jeopardy.  

The other group set to suffer regressive tariff effects are US consumers. Tariffs are likely to have inflationary effects, which hit poorer households harder. Various estimates suggest that effects could lie between 1 and 1.5% per year. In particular, many of the exporters from Asia that are hardest hit are significant suppliers of apparel, meaning that the costs of clothes and footwear for US consumers are particularly susceptible to rise. Rising costs of inputs (say machinery and vehicles) can flow through to food prices.   

The new tariff structure is also likely to be an administrative headache for the US. Consider that with such widely varying tariff structures, the task of verifying the actual origin of products (that will typically be manufactured across a number of countries) to determine the right tariff rate, will be challenging. So will clamping down on attempts to circumvent tariffs via countries that face lower tariffs. For all the administration’s emphasis on reducing the weight of bureaucracy, the new tariff regime looks like a recipe for red tape and inefficiency. 

HL Mencken famously observed that “For every complex problem, there is an answer that is clear, simple, and wrong”. Part of the challenge in designing these tariffs – whatever their impact – has been that they appear to seek to answer to not one but at least five different problems. These are: (i) trade deficits; (ii) revenue raising; (iii) reshoring production and related issues linked to income distribution; (iv) forcing countries to reduce their barriers and (v) using tariffs as part of wider geopolitical discussions. To the extent tariffs could address one (which is doubtful), they won’t address others. For example, if tariffs lead to reshoring production, they won’t raise revenues. To the extent that the plan is to reduce tariffs if partners reduce theirs, they won’t raise revenues or reshore production.  

Moreover, if the aim is to attract foreign investment, having a widely dispersed tariff structure that is difficult to interpret, let alone enforce, and that could be subject to unpredictable changes, is unlikely to be a fruitful approach. Policy certainty and transparency is one of the key things valued by investors, which is why countries that have adopted rules-based trade – including and especially ones that are targeted by the US - have been successful in attracting investment. Finally, if the aim is to reduce China’s influence, hitting south east Asian countries hard will likely strengthen their incentives to integrate more closely with China. 

Average US tariffs are now higher than the disastrous Smoot-Hawley tariffs of the 1930s. Moreover, in the build-up to the announcements, there had been some hope that what really mattered to the US were specific trade barriers in major trade partners, and that steps to address these would strengthen the free-traders within the administration. The actual approach to setting tariffs, however, suggests this is now far from being the case.  

While retaliation is something that will be mulled over by US’ commercial partners, the most appropriate response would be for them to deepen integration between themselves. The frameworks for this exist, notably the CPTPP (which the EU could negotiate with) and RCEP (bringing together China, Japan, South Korea the ASEAN countries, Australia and New Zealand). That will increase commercial opportunities, and moreover the reduction in trade costs integration creates will make partners more resilient to US-induced tariff shocks. The gains from trade do not cease to exist just because one partner, however large, ceases to believe in them.