The measures, once implemented, would take the US effective tariff rate to about 23% from about 2.5% in January, which “surprised significantly to the upside of most expectations”.
“This would be about three percentage points higher than what was seen during the Great Depression in 1930,” notes the BMI team in its April 3 report.
“Assuming the costs are passed through to the US consumer, this would act as a tax of about 2.0% - 2.5% of GDP, which would be incredibly difficult to digest, and could sink both the US and the global economy into recession,” it adds.
Calling the move a “very aggressive starting point”, the team feels that the rates “do not seem to make a lot of sense”.
See also: Global outlook: What are we missing?
“The administration appears to have divided the bilateral trade deficit the US runs with each of its trading partners by that country’s exports to the US to determine the tariff rate nominally applied by that country to its imports from the US,” it writes.
As a result, the newly-announced measures will impact Asian economies the most, given that they tend to run large surpluses with the US. To be sure, China was slapped with a 34-percentage point tariff hike, bringing it to a final rate of 64%, or 54 percentage points higher. The figure includes the 20-percentage point hike in March.
On the other hand, India, which is one of the most protectionist economies in the world but runs a smaller trade deficit, will see lower tariffs compared to Indonesia.
See also: Apple production hubs hit by tariffs, sending shares plummeting
“Interestingly, large tariffs were implemented on key strategic allies like Japan and South Korea, yet none were levied on Russia,” the BMI team notes.
Yet, US Treasury Secretary Scott Bessent has suggested that these rates are a starting point for negotiations and as such, will probably be watered down.
Assuming that markets will not retaliate with their own set of measures, the BMI team suggests that many economies could lower their own trade barriers and increase their purchases of US energy and defence exports in an effort to rebalance trade.
However, the team adds that it is unsure of what the US will do in the event of economies retaliating, although it notes that the administration is still looking to implement tariffs on copper and pharmaceutical imports and may do so.
“Moreover, given that the US Senate passed legislation to curb the tariffs on Canadian exports (it would still need to be passed in the House), it is unclear whether Congress will also move to mitigate some of these tariff measures,” the team writes.
“Even if most of the US’s key allies (EU, South Korea and Japan) were able to negotiate down the tariff hikes by half, it would only shave off about three to five percentage points from the overall US tariff rate, meaning that it would still remain close to the 20% level,” it adds. “For a more significant reduction in the average tariff rate, we would need to see a much lower tariff rate on Mexican, Canadian, European, Japanese, Vietnamese, Korean and Chinese goods as they account for a large portion of US imports.”
The team has retained its forecasts for now, although it remains watchful of any changes.
“Even in an environment in which the average effective tariff rate on the US imports falls back to 15%, we believe that recession risks would be very elevated as we outlined in our scenarios analysis.”
