Economy
‘Looted’ nation: The ultimate guide to decoding Trump’s Liberation Day tariffs
Summary
- In 1930, President Herbert Hoover signed the Smoot-Hawley Tariff Act, a protectionist trade measure that imposed 25% duty on all imports. Major trading partners Canada and Europe retaliated. What happened next has lessons for Trump, and his advisers.
Chennai: In 1947, the US led 23 nations into signing the General Agreement on Tariffs and Trade (GATT). The effort was to lower trade and tariff barriers among nations. Over the next 48 years, it took eight rounds of painstaking negotiations before GATT could evolve into the World Trade Organization (WTO) in 1995.
On 2 April, in a speech that lasted 48 minutes, US President Donald Trump effectively shredded this multilateral trading system and signalled a fundamental shift in US trade policy.
Speaking from the White House Rose Garden, Trump levied what he called reciprocal tariffs on all trading partners. The quantum of tariffs stunned the world. He announced a universal tariff of 10% on all imports. But countries which enjoyed a trade surplus with the US were hit with much higher tariffs. No trade partner, big or small, was spared. China was slapped with a 34% duty but if one added the 20% tariff imposed earlier, it totalled 54%. Vietnam got 46%; India 26% and the European Union 20%. These duties are over and above what various countries were charged earlier.
Even remote uninhabited islands such as Heard and McDonalds Islands, located 4,100km from Western Australia and home to penguins and seals, were hit with a 10% tariff. Australian territories such as Norfolk Island, Cocos Islands and Christmas Island with an aggregate population of 4,236 people were tariffed too. So was Diego Garcia, a British territory in the Indian Ocean with no permanent population. It just houses a joint UK-US military base.
A few countries did not feature in the 2 April list— Canada, Mexico, Russia, North Korea, Cuba and Belarus. Canada and Mexico were spared because Trump had already levied a 25% tariff on all imports from the two nations excluding those items that fall under the United States-Mexico-Canada Agreement (USMCA). Russia, Cuba, North Korea and Belarus were excluded as they are heavily sanctioned and have no ‘meaningful trade’ with the US.
These measures, including the 25% duty imposed earlier on all automobile and auto parts imports, take US’ weighted average tariffs to a staggering 24%. It was around 3% in December last year.
According to Fitch Ratings, this would be the highest tariff wall the US has erected since 1909. And Trump has just ignited a global trade war—China has retaliated by imposing a 34% tariff on American exports; other countries are weighing their options. Stock markets across the world have swooned since his announcement.
‘Looted, pillaged’
“My fellow Americans, this is liberation day. April 2, 2025, will be forever remembered as the day American industry was reborn, the day America’s destiny was reclaimed and the day we began to make America wealthy again," Trump said, explaining the rationale behind the tariffs.
Also read | The tariff timeline: How Trump 2.0 policy is reshaping global trade
“For decades, the US has been looted, pillaged, raped and plundered by nations near and far, both friend and foe alike...destroying the beautiful American dream," he added. “It will not happen anymore."
His anger was singularly directed at the large trade deficit the US shares with its trade partners. In 2024, it ran up to $1.2 trillion. For years, he has considered the trade deficit as the main cause of America’s decline.
He and his officials have conveniently ignored the fact that the US was the biggest beneficiary of the post-Second World War multilateral trading system, his critics have pointed out. It made America very rich and gave it the status of a superpower—economically and militarily.
Through higher tariffs, Trump hopes to not only erase the trade deficit but restore American manufacturing to its past glory. He has said that his tariff measures will increase foreign investments as more factories are built in the US. He also hopes to raise substantial resources through tariffs, estimated at $100 billion, to fund his proposed tax breaks.
Jobs gained, jobs lost
Few agree with his strategy. Writing in the newspaper The Hill, Macabe Keliher, associate professor at Southern Methodist University, Dallas, and an expert on East Asian economic development, argued that tariffs alone cannot rebuild American manufacturing. In 1940, iron ore and rubber entered one end of Ford’s River Rouge complex and completed cars rolled out of the other. Today, a vehicle crosses the US-Canada border multiple times during production to make the manufacturing process efficient. The supply chain that once existed, he wrote, is completely eroded.
In the 1950s, the share of manufacturing in US gross domestic product (GDP) was 25%. Today, it is 10%. Higher wages and production costs had moved manufacturing to low-cost economies like China first and then to countries such as Thailand, Mexico and India. According to data from the US Labour Department, factory jobs accounted for 33% of the total workforce in the 1950s. In 2024, it was just 8.4%.
Manufacturing left the US as the global supply chain brought in efficiencies by taking advantage of the lowest available cost across the world.
Replicating the supply chain in the US will be costly and inefficient. Experts are not sure how many companies will set up their manufacturing units fearing the tariffs. Setting up factories is expensive and most large players have invested in capacities in countries such as Vietnam, Mexico, India and elsewhere fairly recently—after the US-China trade war surfaced during Trump 1.0 and during the covid-19 pandemic.
Some companies such as Hyundai, Honda, Apple, Volvo, Audi and Mercedes-Benz have said they will increase production in the US. Even if they do, the production lines would be heavily automated. They are unlikely to create a huge number of jobs, as Trump expects.
Tariffs in the past have not revived factory jobs. According to a Federal Reserve study, when Trump imposed steel tariffs during his first term, the increase in jobs in the steel sector was far less than those lost elsewhere on account of higher prices the tariffs caused. A similar scenario is set to play out again, on a larger scale. It is expected that the tariffs will, at best, create 1.5 million manufacturing jobs. But according to Moody’s Analytics, the economy will lose 3.5 million jobs if the US heads into a recession because of the tariffs.
Recession is coming
In the middle of all this uncertainty, one thing is certain—an economic fallout.
Trump’s actions have further hit consumer sentiment. This will hold them back from spending. With 70% of US GDP growth dependent on consumer spending, such a scenario will cause growth to slow down. Moody’s Analytics expects GDP growth to reduce by 2% and the unemployment rate to increase to 7.5% from the current 4.1%. Worse, the risk of a recession has increased. JP Morgan, an investment bank, says the odds of a US recession by year-end has risen to 60%.
Inflation is also expected to rise. Jerome Powell, the Federal Reserve chairman, warned that the tariffs will accelerate inflation and dampen economic growth. “We are well positioned to wait for greater clarity before considering any adjustments to our policy stance," he said speaking to business journalists in Virginia on Friday. Consulting firm EY has said that consumer prices will increase by 1% by year-end, pushing inflation to 4% levels. It was 2.8% in February. The impact on low-income households will be $1,000 annually, it added.
Also read | Trump’s reciprocal tariffs: India braces for economic ripples
If the US, the world’s largest economy, slows down, global growth will be hit too. International Monetary Fund (IMF) chief Kristalina Georgieva warned that Trump’s tariffs pose a significant threat to the already sluggish global economy. The IMF, in January, projected the world economy to grow at 3.3%. Its next update may see a downward revision. The WTO has said that in 2025 global trade will contract by 1% due to the trade war.
Collateral damage
Trump’s tariffs, experts believe, will have less impact on India compared to its peers. This is because it has been slapped with a lower tariff relative to others. This should give India a competitive advantage when it comes to sectors such as textiles, leather and auto components. Also, its major export sectors, pharmaceuticals and information technology, have been spared, at least for now.
But India cannot completely escape the impact. As the US and global economy slow down, India’s exports will decline. Also, other countries that have been slapped with higher duties such as China and Vietnam will flood their goods at lower cost, potentially pricing Indian exporters out of many markets.
For 2025-26, the Reserve Bank of India has estimated GDP growth at 6.7%. This now appears challenging. Goldman Sachs has lowered the forecast by 20 basis points. Morgan Stanley has pegged a 30 to 60 basis points reduction in growth.
The biggest worry for India will be in protecting the domestic industry. Low- or predatorily priced imports are set to flood the country from China, which is sitting on excess capacity. China’s domestic demand is weak and the inability to export to the US worsens this situation. A price-conscious market such as India is a big opportunity for China. Data suggests that imports from China have already seen a sharp increase in recent times. Indian industry has been urging the government to tighten its defences.
The Indian government, meanwhile, is negotiating a bilateral trade agreement with the US. The two nations are looking to more than double their trade to $500 billion. The industry is hoping for a quick deal that could end the reciprocal tariffs.
Acute pain?
The biggest question in everyone’s mind is whether Trump will roll back the tariffs. In the last six months, the S&P 500, a gauge of large-cap US equities, has crashed nearly 12%. Investors in the US have lost as much as $9 trillion since Trump took office. Economists have warned of economic troubles ahead. The president has said that he is prepared to suffer ‘temporary’ pain.
Stock markets do not bother him as they did in his first term. He expects countries that depend on the US market to rush in and strike deals. Vietnam has already reached out. Others, he believes, will come too.
Nonetheless, Trump, and his advisers, may need to revisit history lessons. In 1930, President Herbert Hoover signed the Smoot-Hawley Tariff Act, a protectionist trade measure that imposed a 25% duty on all imports. Major trading partners Canada and Europe retaliated. US exports fell sharply, and the measure worsened the Great Depression. In 1934, President Franklin Roosevelt had to repeal the tariffs.
The world is ‘flatter’ now with countries more deeply coupled. In 1930, imports accounted for just 3% of US’ GDP. Today it is at 14%. The pain the country has to bear could be more acute.
