A Pause in the Battle
US President Donald Trump posted on social media on April 9 that he would be suspending certain tariffs for 90 days. Markets soared.
The higher tariffs (known as the "reciprocal" tariffs) went into effect just 13 hours before the president’s announcement, which covered the 57 countries that have trade deficits with the United States. At the same time, however, Trump upped tariffs on China to 125% while leaving the rate for the rest of the world at 10%. Goods from Canada and Mexico that are not North American-made under the provisions of the United States-Canada-Mexico Agreement (USMCA) are also subject to 25% levies, while sectoral tariffs on steel, iron, aluminum, and autos are at 25%. If a product contains more than 20% US content by value, the tariffs are assessed only on non-US content.
What does Trump’s announcement mean?
- For US imports from China, the reciprocal tariff rate is now 125%. That is on top of the existing 20% tariffs enacted under the previous executive order (concerning fentanyl), Section 301 tariffs from Trump’s first term, and sectoral tariffs on steel, iron, aluminum, autos, and other preexisting tariffs.
- The weighted average US tariff rate remains above 20%, the highest in a century. It also is in line with the president's campaign talk of a 60% tariff for China and a 10% tariff for rest of world.
- Uncertainty will remain high, but markets are now pricing in negotiations that will lower certain countries’ rates and blunt the tariffs’ impact. However:
- Ninety days is not much time to negotiate agreements with 57 countries. Talks with India and the United Kingdom have been going for more than a month already, and no agreement has been announced. Deadlines could be extended past 90 days if countries make efforts to negotiate.
- Uncertainty about next steps will continue to make companies reluctant to make investments or other significant decisions during the 90-day suspension.
- A mercurial president could also decide to reimpose tariffs in the intervening period against countries or industries that displease him.
- US companies will still need to account for increased costs as a consequence of the 125% tariffs on China, 10% tariffs on the rest of world, and the 25% sectoral-specific tariffs. There will be impacts on cash flows due to the gap in time between paying the tariffs and receiving customer payments.
- The United States and China are now engaged in a series of escalating threats that will spill over to other parts of the economy. The current tariff rates are so high that additional levies will not have additional impact. Further retaliation is likely to take other, non-tariff forms.
Despite limited additional information on Trump's motives, it remains unclear if the White House has a strong, coherent economic or geopolitical policy or objective. The president is believed to have considered the spike in interest rates in the US bond markets before announcing the tariff suspension. If that is true, it indicates that Trump's “instincts” are driving policymaking. At the same time, the president and his team cite a variety of contradictory reasons for the tariff suspension. These include rebalancing the global economy and the US trade deficit, reshoring manufacturing, revenue, leverage, spurring innovation, and lowering interest rates.
Another important factor is the involvement of advisers in key discussions and decisions. Commerce Secretary Howard Lutnick and Treasury Secretary Scott Bessent were present when the president typed his social media post announcing the pause. Other advisers who have supported the president’s hard line on tariffs are not known to have joined them. This reinforces that who is in the room with the president can impact policy outcomes at critical moments.
Avoiding a ratcheting of tariffs is a positive first step in deescalating the trade wars. But companies and countries will have to navigate continued uncertainty and high tariffs despite the reprieve from "reciprocal" levies. This means caution will continue to be the watchword as decisions on reengineering supply chains and hoarding cash are weighed.