Trump’s Tariffs Send Deliberate Shock to Heart of Global Economy

As U.S. President Donald Trump laid out a wave of new tariffs that will take average levies to their highest in more than a century, he drew cheers and laughs from aides and supporters in the White House Rose Garden. For economists, markets and the rest of the world, there was very little to celebrate.

With new import taxes that Trump and his aides have explicitly billed as designed to redraw the global order, Trump is sending an historic shock into the world economy.

It’s an upheaval that will shake US allies and existential rivals such as China alike. And it will also test the resilience of a US economy for which the odds of recession or 1970s-like stagflation have just jolted higher. Unlike previous ructions such as the 2008 financial crisis, this one is wholly intentional.

“This strategy of Trump’s entails a negative external supply shock to induce a positive domestic supply shock,” wrote Stephen Jen, chief executive of Eurizon SLJ Capital. “While it won’t be as severe as the supply-chain shock experienced during Covid, this trade war will have similar effects.”

Trump has been clear from the time he first announced his run for president a decade ago that he wants to remake the global economy and rebalance US trade with the world to the advantage of American workers — who in his mind have for too long suffered the effects of an unfair system.

“This is one of the most important days in America’s history,” Trump told the gathered auto and steel workers who cheered him on. “It’s our declaration of economic independence.”

Trump’s vision — which dates back 40 years to “when I was very young, very handsome,” he said playfully — is for a return to a golden age for US manufacturing.

Based on the initial calculations from economists that emerged in the hours after the announcement, the new tariff wall around the world’s largest economy stands to be the highest since the early 20th century, and possibly deeper into history than that.

If implemented as announced, the new tariffs will increase the average U.S. rate by triple the 5% change the Smoot-Hawley duties of 1930 did, pushing them above 20%, according to Bloomberg Economics. Making the impact even more powerful: imports are now worth almost three times as much as a share of the US economy as back then.

Those 1930s tariffs, imposed as a reaction to the onset of the Great Depression, set off a trade war that led to longer and deeper economic shocks around the world and deepened the political turmoil of the era.

To Trump and his team, though, the new tariff wall is a point of pride, and represents the abandonment of decades of a mistaken US embrace of free trade. It will, they say, lead to a flurry of investment into US manufacturing and jobs, even if it means navigating a period of pain before that. It might also lead to other economies like China and the European Union lowering their own existing trade barriers to US exports.

‘Game Changer’

But the breadth and depth of the new tariffs shattered the assumptions of economists and many investors for the kind of policy Trump would implement and heightened the risk of both a U.S. and global recession — with little obvious signs of an off-ramp.

A 10% additional U.S. “baseline” tariff on all imports is due to take effect Saturday, with additional tailored “reciprocal” tariffs scheduled to go into place April 9. Many economists warned that, if left in place, the measures will strangle growth in both the U.S. and global economies and extend an already toxic period of uncertainty.

“This is a game changer,” Olu Sonola, head of US economic research at Fitch Ratings, wrote. “Not only for the US economy but for the global economy. Many countries will likely end up in a recession. You can throw most forecasts out the door, if this tariff rate stays on for an extended period of time.”

In the U.S., Michael Feroli, an economist at JPMorgan Chase, estimated the new import taxes would raise $400 billion in revenue annually, or about 1.3% of GDP.

Trump has hailed tariffs as a way to offset tax cuts from his first term that he wants Congress to extend in the coming months. But Feroli said the revenue haul he calculated — which most economists say will be borne by importers and eventually US consumers in the form of higher prices — would make the new duties the biggest tax increase since the Revenue Act of 1968.

The result for the U.S. would be a hit to purchasing power and a contraction in real disposable personal income. “This impact alone could take the economy perilously close to slipping into recession,” Feroli wrote, pointing that was before accounting for other impacts like a slowdown in investment.

In the lead-up to what Trump had billed “Liberation Day,” the hope for many CEOs and investors around the world was that the rollout would at least bring an end to the uncertainty that had already started to drag on consumer and business sentiment. The vast scope of the levies instead signaled more uncertainty to come.

Retaliation Threat

Likely to worsen the impact of Trump’s tariffs is the retaliation that is expected from trading partners including the European Union, which faces a 20% new rate on its exports to the US, and China, which has now seen tariffs on its U.S. exports rise by 54% in the past two months.

Treasury Secretary Scott Bessent urged other countries to avoid that path in an interview with Bloomberg Television. “I wouldn’t try to retaliate,” he said. “As long as you don’t retaliate, this is the high end of the number.”

But that fell on deaf ears. China vowed to hit back, with the Ministry of Commerce urging the US to “immediately cancel” tariffs and resolve trade differences through dialog. The EU also said it’s readying plans to retaliate. “We’re preparing for further countermeasures to protect our interests and businesses if negotiations fail,” European Commission President Ursula von der Leyen said in a video address.

“The stage is set for a pretty devastating trade war globally,” said Arthur Kroeber, a New York-based partner at Gavekal Dragonomics. The effect on China of the tariffs would likely be a 2% hit to GDP and a substantial contraction in its exports, he said.

1970s Parallel

Nomura Holdings Inc. chief economist Rob Subbaraman said US companies will struggle to source alternative imports while the rest of the world will feel a growth hit. “This is a large, negative, global cost-push shock, like the oil price shocks in the 1970s.”

Trump and his aides made clear Wednesday that while they would entertain offers from other countries and that the calls from foreign capitals had already started, they also were intent on maintaining tariffs that Trump invoked using emergency powers. This is not a negotiation, one senior administration official told reporters. It’s a national emergency, the official said.

Everett Eissenstat, who served as a senior adviser on international economics in Trump’s first term, said if the tariffs lead to talks and eventually the lowering of trade barriers around the world, as optimists hope, then it would be a welcome outcome. But he also warned any result or respite wouldn’t come quickly.

“We’re going to be living with tariffs for quite some time,” said Eissenstat, who is now a partner at law firm Squire Patton Boggs.

Legal Challenges

Ed Gresser, who led the US Trade Representative’s economic research work during the first Trump administration, said legal challenges were likely to what, for many experts, is an incredible power grab by Trump that challenges the constitutional division of powers. Under the U.S. Constitution, the Congress holds the power to impose duties and regulate foreign commerce.

“If it does survive a court challenge, America is going to feel a little poorer,” said Gresser, who is now at the Progressive Policy Institute, a think-tank. The new tariffs will raise the cost of all manner of imported consumer goods from clothes to cars, he said. “This is not a good day for American families, or for American industry.”

The counterpoint from those who support Trump’s move is that it was needed to redress the historical wrongs that led to the loss of millions of factory jobs and a hollowing out of an American middle class that once depended on them.

“The free-trade consensus was imposed on American workers by economists and policymakers who did not understand its long-term consequences,” said Oren Cass, chief economist at American Compass, which advocates for restrictions on both imports and immigration. “These policies were an abject failure, and have caused grievous harm to American families, communities and industry.”

Trump’s new policies will bring about the end of the World Trade Organization set up in the 1990s to oversee global trade, Cass said. They would also “lay the groundwork for a new set of arrangements in the international economy that prioritize the national interest and the flourishing of the nation’s working families.”

Top photo: President Donald Trump holds a reciprocal tariffs poster during a tariff announcement in the Rose Garden on April 2. Photographer: Kent Nishimura/Bloomberg.