Liberation and Its Discontents

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When future generations ask how the rules-based international economic order came to an end, I’ll tell them that it happened slowly and then all at once.

The final blow may have come this Wednesday, when, in the Rose Garden, against a backdrop of American flags, President Donald Trump proudly signed the “declaration of economic independence”—a presidential action that imposed a baseline tariff of 10 percent on nearly all countries and raised the United States’ overall average import tax to 22.5 percent, the highest level in 115 years.

For the president, Liberation Day was almost four decades in the making. It was in 1987, on Larry King Live, when Trump first identified the United States’ persistent trade deficit as an existential threat to American prosperity. And it is precisely this belief that trade deficits reflect economic warfare waged by other countries against the United States, that informed the President’s decision to declare a national state of emergency and levy steep tariffs on almost all of our top trading partners.

Forget the complex equation touted by the Office of the U.S. Trade Representative and Trump’s many references to reciprocal tariffs, currency manipulation, and non-tariff trade barriers—the new rules of the road are quite simple. Barring a few exceptions (e.g., United States-Mexico-Canada Agreement goods and Russia), it appears that all foreign countries are subject to new tariffs, in addition to existing duties, effectively equal to their bilateral trade deficit in goods as a share of their total exports to the United States, divided by two. According to this approach, a bilateral trade deficit is a catch-all quantitative measure of unfair trade practices, not a reflection of comparative advantage.

And if the United States happens to have a surplus in goods trade with a country, they will still be subject to tariffs—but “only” 10 percent which is about a 500 percent increase in the average applied U.S. tariff that Trump inherited.

Taken at face value, this policy is designed to achieve three objectives: spur the reindustrialization of the U.S. economy, raise revenues for the federal government, and create strategic leverage with countries around the world. 

Nevermind that these objectives are inherently at odds with each other: If the policy succeeds in driving production to the United States, we should see lower imports, which makes the estimated $6 trillion in tariff revenue unattainable. If we are collecting significant revenues from tariffs, then it means we are continuing to import a significant quantity of products from other countries vs. producing them in the United States.

The risk of Trump's autarkic grand experiment—earnest as it may be—is not that it won't succeed, but that it will backfire. The secondary and tertiary effects of the policy, not to mention the unintended consequences, could be even more significant than the short-term economic effects.

There are, of course, direct costs associated with the trade war, namely in the form of higher prices for imported goods, reduced productivity, slower growth—not to mention the impact on U.S. exports of likely retaliation. China announced this morning a 34 percent tariff on all U.S. products, restrictions on the export to the United States of certain critical minerals we are dependent on China to provide, and the listing of additional U.S. companies to the “unreliable entity” list.

But a larger, geopolitical risk is now in play as well. We have created a common antagonist for the international system: the United States. The broader implications of that for the role of the United States in the world is something that we see pan out only over the long run.

The economic approach of the last 80 years has had its limitations, including the failure to adequately address the costs faced by workers adversely affected by a rapidly changing economy, whether that change comes from trade and immigration or from technology—which accounts for most of it and which requires urgent attention, given the potential disruptive effect of artificial intelligence.  

But it is also important to remember that the approach adopted after World War II ushered in an era of unprecedented American economic prosperity and outperformance, which attracted foreign investment, spurred innovation, and helped create a durable network of allies and partners that enabled the United States to project immense power around the world. It is obviously still early days, but the question remains whether whatever alternative system is to be put into place now will produce similar benefits for the American people, let alone the rest of the world.

To make more sense of Liberation Day, I asked several of CFR’s leading authorities on all things trade and tariffs to weigh in:

Edward Alden, senior fellow, analyzed how these recent tariffs compare with past swings towards protectionism in U.S. history:

I don’t think there is any action by a U.S. president that is comparable to what Donald Trump has done. Past swings towards protectionism—in the 1890s, the 1920s, and early 1930s for example—were largely a result of lobbying pressures from U.S. interests and the particular political alignments of Congress. Tariff increases were enacted through specific bills passed by Congress, from the McKinley Tariff Act of 1890 to the Fordney-McCumber Tariff Act of 1922 to the Smoot-Hawley Tariff Act of 1930. We have never seen such dramatically steep, across-the-board tariff increases imposed unilaterally by a president, using congressional authorities that were never intended for such a purpose.

This could be both bad news and good news for the economic conflicts that are to follow. The bad news is that the effects will be immediate and dramatic. Congress moves more slowly and businesses, consumers, and foreign countries have time to prepare for the impacts and adjust accordingly. Trump’s tariffs, if carried out as announced, will be mostly implemented within a week and fully implemented within a month. The shock will be much larger and the adjustments more difficult. The good news is that when Congress passes tariff bills, they are hard to undo and the effects remain for many years. Trump’s tariffs could be undone quickly—if he changes his mind under the pressure of falling markets and retaliation from other countries, if the tariffs are rolled back by Congress, or if the courts intervene. So there is still some hope for a short, fierce economic skirmish rather than a prolonged and damaging trade war.

Brad Setser, Whitney Shepardson senior fellow, analyzed the economic implications for these steep duties on China and how Beijing will likely respond: 

Even with the tariffs from the first Trump trade war and Biden’s targeted tariffs on Chinese clean technology exports, U.S. imports from China totaled around $430 billion in 2024, roughly 1.5 percent of U.S. gross domestic product (GDP). That total, however, is an understatement. There are up to $100 billion in additional “de minimis” imports, which are worth less than $800, that aren’t included in that tally that now will be subject to tariffs.

Thanks to the initial trade war, it is easy to predict the effects of tariffs over 50 percent: they should bring U.S. imports closer to zero. Each percentage point increase in tariffs reduced bilateral imports in that category by around 2 percentage points. This means a 50 percent tariff implies a 100 percent fall in trade. While nothing quite goes to zero, needless to say, there clearly won’t be much trade. The short-run impact of raising tariffs by more than 50 percent on over $500 billion in imports is harder to estimate. Many goods now coming from China lack good substitutes. In the near term, importers will be paying very large tariffs. That includes large tariffs on consumer goods—be it high-end iPhones or low-end consumer goods—that avoided tariffs or avoided large tariffs in the initial trade war.

China’s retaliation options are also well known: China just imposed its own 34 percent tariff. One big unknown is whether China also lets its currency—which has been remarkably stable since the middle of November—depreciate. The yuan did slide down during the initial trade war, but it is already at long-term lows—so any further move would be significant. The other big unknown is what China will demand to “liberate” TikTok from Chinese ownership; China can always block a sale and under current legislation force TikTok to shut down.

Inu Manak, fellow for trade policy, explained the legal basis for Trump’s new tariffs and how it differs from the United States’ historical approach to implementing tariff and trade policy:

The announcement was much broader than most experts were expecting, and it is surprising that President Trump chose to weaponize the International Emergency Economic Powers Act (IEEPA) again, which he used earlier this year to impose tariffs on Canada, China, and Mexico. He stretched the law to argue that drugs and crime flowing across the border constituted a threat to national security that could be corrected with tariffs. The latest tariff hike using IEEPA takes things even further. The president claims that foreign trade barriers, measured by the U.S. trade deficit, “constitute an unusual and extraordinary threat to the national security.” It is false to suggest that the trade deficit is somehow reflective of trade barriers, and the administration’s cherry-picking of the data (which excludes services where the United States has a surplus) further points to the arbitrary nature of its claims. 

If the past is any guide, a challenge to IEEPA’s predecessor statute, the Trading with the Enemy Act, determined that there needs to be a causal link between the declared emergency and the subsequent action taken by the president. Given the frivolous way that the administration calculated foreign trade barriers, this latest action is ripe for litigation that could very well succeed at overturning the tariffs. Furthermore, Congress is beginning to show a willingness to take on the president’s abuse of his delegated authorities. In fact, while Trump was making his announcement, the Senate debated the IEEPA tariffs on Canada, and voted to end the national emergency associated with it, 51–48. Four Republicans were brave enough to join in support. If the tariffs continue, Trump not only opens himself up to multiple lawsuits, but faces defections from his own party. 

Benn Steil, senior fellow and director of international economics, argued that tariffs aren’t an effective mechanism to generate government revenues in the way that Trump hopes:

There are at least three obvious major problems with reliance on tariffs for government revenue.

The first major problem is that tariffs at these unprecedentedly high levels will likely push us beyond the apex of the tariff “Laffer Curve”—that is, the point at which tariffs bring in declining revenues owing to the steep fall in imports.

The second major problem is that to the extent that tariff revenue is substantial, they have failed in their supposed main aim: shifting business to American manufacturers. If tariff revenues are high, it’s only because Americans continue to import—rather than buy American.

The final major problem is that tariffs at these levels will inevitably push the United States into a deep recession—in which spending and investment plummet, and unemployment soars. This will not only slash government revenues from current sources, such as personal-income and corporate taxation, but will lower living standards across the income scale.

Rebecca Patterson, senior fellow, analyzed how markets here in the United States and around the world reacting to Trump’s new tariff policy:

I see two macro narratives reflected in financial markets the day after President Trump’s extraordinary tariffs. First, expectations for global growth are declining quickly. We see that in expectations for more central bank easing later this year, including three or four twenty-five-basis point rate cuts from the U.S. Federal Reserve, as well as lower long-term bond yields. We also see those shifting expectations in sharply falling equity prices as investor confidence in consumption and business activity diminishes.

The second narrative is much more surprising and is worth keeping a close eye on. The U.S. dollar is depreciating significantly. While that is partly in response to less attractive yields, it also reflects capital leaving U.S. markets. Historically, the dollar has benefited during trade wars, both from expectations of less dollar selling to acquire imports as well as from safe haven flows into U.S. assets. It’s obviously premature to suggest what’s happening now reflects shifting structural views about the dollar or U.S. exceptionalism. But a sustained dollar depreciation, while marginally helpful for the White House’s goal to support exports, could also reflect an evolving view on the broader attractiveness of the United States as a destination for global capital.

Matthew Goodman, director of the Greenberg Center for Geoeconomic Studies, leads RealEcon: Reimagining American Economic Leadership, a CFR initiative that explores the U.S. role in the international economy. He noted the implications of the sweeping tariff agenda for American economic leadership more broadly:

For most of the postwar period, the United States led the global economy with more carrots than sticks—access to the U.S. market being the biggest carrot of all. To be sure, coercive tools—sanctions, tariffs, export controls, investment restrictions—have become a more prominent feature of U.S. international economic policy over the past two decades, but the sweeping April 2 tariffs represent a major break, in that they suggest that open trade and investment are no longer the norm and restrictions the exception, but the reverse. 

The Trump administration’s international economic policies will be judged substantively by whether they promote U.S. growth with maximum employment and stable prices, as well as a global environment conducive to U.S. economic and national security interests. Those policies will also need to win the broad support of the American people—arguably something that many policies of the past two to three decades did not have. There are many reasons to be concerned that Trump’s April 2 actions will fail these tests, by slowing growth, raising prices, enabling China’s preferred rules, fueling global instability, and harming the interests of Americans both as consumers and workers. 

Throughout its history, the Council has informed the U.S. role in the world through independent expertise and research. You can find more on trade, tariffs, and Trumponomics from CFR’s full bench of trade and economic experts here.