US rejig of tariffs makes little difference to the bottom line
Rejigged US "reciprocal" tariffs target China, where the increase in the US effective tariff rate is broadly unchanged from last week.
President Trump has temporarily modified last week’s “reciprocal” tariffs for 90 days, switching from a mix of punitive tariffs for select countries – where China was penalised the most – and a standard 10% tariff for everyone else, bar Canada, Mexico and a handful of non-democratic states, to a more punitive tariff for China and a 10% tariff for everyone else, still excluding Canada, Mexico and the non-democratic countries.
At first glance, the change makes it seems like the average tariff rate is lower, but the total estimated increase in the effective tariff rate is largely unchanged at about 18p, where all that has happened is that the burden of the “reciprocal” tariffs has shifted to China from other economies running large trade deficits with the US, most notably the European Union and Japan.
Importantly, there is still lingering uncertainty about how China will be treated under the new arrangement (there were also initially mistaken comments from Treasury Secretary Bessent on whether the 10% baseline tariff applied to Canada and Mexico, where the White House subsequently clarified that they remained exempt from these latest tariffs).
President Trump said he was raising the tariff on China to 125%, although it is not exactly clear from the phrasing of his Truth Social post whether that is the new total tariff on China or if it is the increase added to the c22% rate prior to the second Trump administration’s new tariffs (there has been no executive order yet).
Trump said he had singled out China because it had retaliated to higher US tariffs, ignoring the fact that the European Union and Canada have also announced retaliatory tariffs.
Other calculations circulating in the market reach much the same conclusion about the changed tariffs raising the effective tariff rate by broadly about the same amount as the original “reciprocal” tariffs, although they differ numerically according to how they were constructed and assumptions they make about partial exemptions.
In any event, keep in mind that effective tariff rates are unlikely to raise by as much as anyone is estimating because the demand for imports will slump, while exchange rate movements will also affect the value of imports.
More importantly, the sudden change in the structure of the “reciprocal” tariffs raises questions about whether the administration will make further changes to tariffs over coming weeks, where tariffs on pharmaceuticals, semiconductors, lumber, etc are still due.
If the new tariffs end up watered down in aggregate, then the federal budget deficit will be commensurately larger when tax cuts eventually kick in.
Separately, the Atlanta Fed revised up its ex-gold nowcast for GDP and is now forecasting a 0.3% contraction in Q1. Using pre-COVID forecast errors, the 50% confidence interval around this estimate is -1.1 to 0.5% and the 90% confidence interval is -2.4% to 1.8%.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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