The Day After Tomorrow
April 2, 2025, will be “Liberation Day”, when US President Donald Trump has promised to impose reciprocal, sectoral, and now secondary tariffs on a range of US imports. But what happens on April 3? What does this mean for the US economy, other countries, and global markets?
What Happens on April 2?
The president and his team have made expansive, contradictory statements around the reasons for their use of tariffs since January 20. Tariffs are a tax applied to imports entering the United States and paid for by the importer. Rebalancing global trade, reshoring US manufacturing, generating revenue for the US Treasury, creating leverage in geopolitical negotiations, and supporting innovation have been justifications.
The April 2 “reciprocal” tariffs are being used to rebalance global trade by counteracting perceived unfair trade practices that negatively impacted US exports. Reciprocal tariffs would require the United States to match the tariff level of a trading partner, for example if Brazil were to charge 9% for coffee, the United States would charge 9% on any imports of coffee from Brazil. Reciprocal tariffs would be incredibly complex to calculate and administer, so a country-specific, single tariff for all goods may be applied. As with past announcements, President Trump may decide to blunt the effects or waive the tariffs entirely at the last minute. Recent statements by officials indicate that the tariffs may be more focused on major trading partners.
The reciprocal tariffs could be implemented immediately, implying that the International Economic Emergency Powers Act (IEEPA) will be used. This would be the first time the United States used IEEPA to place tariffs on a range of allies and trading partners. IEEPA can be invoked in cases of national emergency, but the legality of this use has been questioned.
In addition, the president promised action against specific products. A 25% tariff on all automobiles, light trucks, and some auto parts was announced, effective April 3. Additional tariffs on other products, including semiconductors, pharmaceuticals, lumber, and copper, are likely to be announced on April 2. The government may launch unfair trade investigations using existing trade authority (Section 301 of the Trade Act) or national security reviews (Section 232 of the Trade Act of 1962) that would take several months to complete. “Secondary tariffs” announced on March 24 use tariffs in a new, innovative fashion, for example by applying 25% tariffs on goods from any country that buys Venezuelan oil.
Effective dates and means of implementation and enforcement are unknown and remain open questions. Previous tariff announcements have suffered due to a lack of time to update systems as well as a lack of answers to technical questions. Rolling out a new “external revenue service” will also take time, as existing customs agents are refocused on revenue collection, and computer systems in the government as well as among importers and companies must be updated.
But What Happens Next?
Once announcements are public, reactions will be immediate. And a tariff-induced “nuclear winter” could begin.
In the United States, tariff announcements are most immediately felt in the stock market, sending prices down for companies exposed to the tariffs, and up for companies that may benefit from the tariffs. Price increases and surcharges to cover the cost of any imported inputs will cause consumer prices to rise. Employment in tariff-protected sectors may rise, but many more jobs could be lost in downstream manufacturing industries or in export-dependent sectors such as agriculture. Doubts around the dollar as a global reserve currency, as well as any vulnerabilities in the global financial system, could also have dramatic impacts on the United States.
Politically, while tariffs are not widely popular, the president’s overall approval ratings are at their highest levels. Politicians who support tariffs enjoy higher approval ratings and have been reelected at higher rates. Congress, which has delegated its tariff authority to the president, may seek alternative ways to help constituents negatively impacted by asking for exemptions or special treatment (such as cash payments to farmers). However, Congress is unlikely to reassert its tariff authority with Republicans in control of the House and Senate.
Impacted countries will consider retaliating against the United States by placing tariffs on an equal amount of US imports. In most cases, this may be delayed by a few weeks due to domestic policies requiring due process and public consultation. Retaliation may take forms other than tariffs, such as investigations or audits of US companies as well as limiting access to government contracts and procurements. The Council on Foreign Relations has compiled a summary of various retaliations, and these countermeasures will impact the United States, its companies, its farmers, and its citizens through lost sales and employment.
Export-driven economies will look to divert products to other markets, and redirected exports could cause spiraling tariff wars. If Chinese products face prohibitively high tariffs in the US market, China may try to send more exports to Europe. Europe may then need to consider measures against China to protect its markets from a flood of dumped imports negatively impacting its own domestic companies.
Countries will try to mitigate tariffs by entering negotiations with the United States. In the short term, trading partners will want to negotiate tariff levels down to preserve market share. In the medium to longer term, partners will consider how they can de-risk from the US market to prevent future economic coercion from Washington. While the purchasing power of the US market is a key draw, other business considerations may rise in importance.
Given Washington’s focus on trade deficits, reciprocal tariffs, and non-tariff barriers, countries will need to consider approaching the United States with a comprehensive package of measures for negotiation. Such packages could include proposals to match tariffs on specific products, efforts to address specific non-tariff barriers such as technology, climate change, or agriculture-related regulations, and agreements to purchase US products such as liquefied natural gas and agricultural and other products. Alongside these government negotiations, the Trump administration is also hoping to attract additional commercial investments in the United States.
Trading partners will need to rethink how they negotiate and enforce trade agreements with the United States. Trust underpins international trade, but the president’s unilateral actions to upend or renegotiate agreements have eroded confidence that Washington will uphold its obligations.
The limited dispute-settlement options in multilateral organizations will require countries to reconsider existing enforcement mechanisms in trade agreements. Even if countries want to de-risk from the United States and focus on more stable trading partners, investment ties, as well as the size and scope of the US market, will force countries to deal with American demands in the short term. As a result, countries should bring fresh thinking on how to make trade agreements mutually reinforcing and more durable.
In the longer term, countries will continue to reshape their economic partnerships without the United States, heading off future economic coercion. New alliances could be formed, as countries band together to mute US impacts. Future investments could be focused on serving the US market only but not using the United States as a base for exports to the broader North American market or globally.
Services are the workhorses of the global economy, and the United States enjoys a surplus in cross-border services. In past negotiations, Washington has negotiated tariff rates on goods as well as greater access to overseas markets for services. US technology, financial services, media, and other services have increased, creating millions of US jobs due to access to foreign markets. The application of traditional trade tools such as tariffs on services is currently limited, so negotiations have focused on opening local markets via lower local regulatory requirements or other barriers to entry.
Service-sector jobs are more mobile than capital-intensive industries, and technology is allowing more of these jobs to be performed outside the United States. Countries such as India are moving up the value chain to provide engineering, design, and innovation services, and US companies continue to hire aggressively in India. Shaping the future of globally traded services will impact millions of high-paying service jobs. As the United States attempts a reorientation to increase the number of manufacturing jobs, there is a risk that some steps may damage the healthy surplus in services the United States enjoys. Government policy should consider the significance of services as equally important in terms of economic and job impacts.
US actions will also provide new impetus for reforms to the WTO and the global trading rules. The WTO has been on life support for years, with attempts to negotiate new trade agreements hamstrung by differences of opinion and rules requiring unanimity. The dispute-settlement process shut down due to US concerns about specific rulings, which prevented appointments of new appellate body members.
But US movements on reciprocal tariffs challenge a core WTO principle of nondiscrimination, known as most-favored nation status, which requires that WTO members treat all members the same and charge each member the same tariff rate. This principle promotes fairness and equal treatment while allowing countries to charge different tariffs in specific circumstances. Reciprocal tariffs will be applied using IEEPA, an unproven national security exemption that violates this principle and undermines the nondiscrimination benefits. It also allows any country to claim “national security” concerns on any trade action they take, placing pressure on an already weak WTO.
The global rules desperately need reforms to make them more functional, but these unilateral moves by the United States could create chaotic changes in the global system that impact all trading nations.
April 2 is the end of the beginning, and the next phase in the global trade wars begins on April 3. The unilateral US actions to reshape the global economy using tariffs and other economic coercion will lead to negotiation and retaliation. Anyone who imports products for use or consumption will face higher prices or surcharges. Longer-term impacts of remaking the global system using a “shock-and-awe” approach will become clear over time, but will involve a painful transition. The ultimate success or failure of this attempt to reform the global world economic order will be among the most significant policies of the second Trump administration.