UJ
—
The much-discussed “Liberation Day” has passed, marked by President Donald Trump’s aggressive new tariffs that have hit the markets hard, disrupted the global economic framework, and forced businesses and individuals to rethink their financial decisions.
And the situation is far from settled.
The immediate consequences: Trump’s decisions, which are backed by economically dubious calculations, have led to retaliatory tariffs, ignited trade disputes, and increased fears of a potential recession.
Immediate, medium, and long-term threats loom large: The toxic combination of anxiety, unpredictability, loss of investment, and abrupt cost increases threatens to spill over into the broader economy, leading to genuine and enduring hardship for citizens.
Moreover, it seems likely that additional tariffs are on the horizon: Key materials such as copper, computer chips, lumber, pharmaceuticals, and vital minerals were left out of the latest tariff measures. However, officials from the Trump administration have hinted that these items might face tariffs in the future.
There’s also uncertainty about whether Canada and Mexico, two of the main targets for Trump’s inconsistent tariffs, will remain mostly exempt.
“This list doesn’t seem to represent a negotiating stance at this point,” remarked Tyler Schipper, an associate professor of economics at the University of St. Thomas in St. Paul, Minnesota. “There’s hope that some of these tariffs could be reduced, but the list is extensive and affects numerous sectors.”
“This indicates more of a trend toward building barriers rather than negotiating to remove them,” he added.
Trump’s dual tariff announcement last week involved a base 10% tariff on all imports to the US, followed by elevated “reciprocal” tariffs directed at a multitude of countries that the White House labeled as the “worst offenders” for imposing high tariffs and non-tariff trade restrictions.
The first of these tariffs was implemented on April 5, while the latter came into effect this Wednesday.
However, the “reciprocal” tariffs were anything but reciprocal, complicating the situation and possibly intensifying the detrimental effects of Trump’s policies. The additional tariffs, which sometimes exceed 45%, were derived from a formula involving bilateral goods trade deficits and goods trade exports.
Trade deficits aren’t inherently negative.
“This is misinformed economics; deficits with some countries and surpluses with others are a natural occurrence,” stated economist Marcus Noland, executive vice president and director of studies at the Peterson Institute for International Economics. “Attempting to enforce a policy for balanced trade with all countries undermines comparative advantage and specialization.”
Additionally, the billed tariffs should be approximately a quarter lower than projected, as the Trump administration miscalculated the impact of duties on item prices, economists from the American Enterprise Institute have noted. They pointed out that the formula used had “no grounding in economic principles or trade laws,” and incorrectly factored in the price elasticity for retail items.
Currently, the Trump administration’s extensive and severe tariff measures have ignited a volatile reaction in the global economy, heightening recession predictions.
On the domestic front, the tariffs could lead to immediate detrimental outcomes, warned Jamie Dimon, CEO of JPMorgan.
“In the short term, we’re likely to experience inflationary pressures, not just on imported goods but also on domestic prices, as input costs rise and demand surges for local products,” he mentioned in his annual shareholder letter. “The outcome on various products will depend on their substitutability and price elasticity. Whether the tariff situation leads to a recession remains uncertain, but it will undoubtedly decelerate growth.”
Potential Near- and Long-Term Risks
Numerous uncertainties persist, Dimon noted, including the scale of retaliatory actions and their impact on market confidence, investment levels, capital movement, corporate earnings, and the strength of the dollar.
“The sooner this situation is resolved, the better, as cumulative negative effects will intensify over time and could become challenging to reverse,” he wrote.
The sharp decline in financial markets indicates a developing crisis of confidence in the US dollar, commented Joe Brusuelas, chief economist at RSM US.
“We can no longer overlook the discussion regarding the devaluation of the dollar and its status as a reserve currency,” Brusuelas expressed to UJ.
In terms of economic implications, even a best-case scenario suggests accelerated inflation along with reductions in real GDP growth and rises in unemployment, according to Sung Won Sohn, finance and economics professor at Loyola Marymount University and president of SS Economics, who outlined the economic consequences for the US in a recent note.
The most optimistic projection for the next 12 months: real GDP contracts by 0.2 percentage points, employment declines by 0.1%, and inflation rises by 0.2 percentage points.
The direst scenario: economic activity shrinks by 1.3 percentage points (real GDP was up 2.4% at the end of 2024), the US economy loses 1.3 million jobs, and inflation increases by 1.3 percentage points, he noted.
Sohn, who presents a “base case” scenario that is somewhere in between, remains hopeful that the US economy can withstand the pressures and avoid entering a recession.
Several factors influenced his assessment: The US economy is primarily driven by services, providing some protection; tariffs represent a one-time adjustment and should not escalate underlying inflation pressures; proposed policies like tax reductions and deregulation could boost demand; and with the announcements made, it may reduce uncertainty.
Nevertheless, certainty is currently elusive, and the core of the US economy could be impacted, cautioned RSM economist Brusuelas.
“The US economy is service-oriented,” he pointed out. “That’s where the wealth resides; that’s where the economic power lies. (Nations) are likely to retaliate against the financial institutions, airlines, and technology sectors.”
The potential for retaliatory measures could escalate, depending on how the administration proceeds with its sectoral tariff strategies and Trump’s ongoing enforcement of Section 232 of the Trade Expansion Act of 1962, which gives the president the authority to impose tariffs based on national security concerns.
The recent tariff announcement included several noteworthy exceptions: Steel, aluminum, and automobiles are already subject to tariffs; copper and lumber are under Section 232 investigations for potential national security concerns; and pharmaceuticals, semiconductors, and critical minerals are also expected to undergo Section 232 probes.
Trump has often claimed that the US does not need to rely on imports for goods such as lumber, vehicles, and oil, asserting that the nation has sufficient natural resources and manufacturing capacity to be self-reliant.
Experts, including economists and researchers, have continually cautioned that the situation is more complex: the establishment of manufacturing plants, supply chains, and the training of skilled labor takes a significant amount of time. (Additionally, building these new plants would typically require imported materials, which are now subject to higher costs.)
Nevertheless, sector-specific tariffs could further elevate inflation rates, warned Kathy Bostjancic, chief economist at Nationwide Mutual.
After last week’s announcement, Nationwide’s projections indicated that the Consumer Price Index, which had decreased to an annual rate of 2.8% in February, could rise to between 3.5% and 4% by year’s end. The new tariffs could push this figure toward the higher end, ranging from 4% to 4.5%, she stated.
The Consumer Price Index has not exceeded 4% in almost two years, according to data from the Bureau of Labor Statistics.
Additionally, beyond the immediate and long-term challenges, tariffs could introduce distinct issues for various sectors:
Copper and Critical Minerals: It remains unclear which minerals the US might investigate under Section 232; however, an inquiry concerning copper, which is essential for the electrification of America and industries such as defense, is already underway.
Approximately 50% of the copper utilized in the US is imported, with demand expected to surge, particularly as energy-intensive sectors like artificial intelligence and blockchain continue to expand, noted Dan Ikenson, an economist and trade policy expert at Ikenomics Consulting.
“Obtaining mining licenses and refining permits can take 16 to 18 years,” he said. “Given that we lack these resources, and our dependence on the global supply, we should focus on establishing long-term access arrangements for imports from Canada, Chile, and Peru rather than provoking trade tensions.”
Lumber: Softwood lumber is a vital component for homebuilding, with 30% of it imported by the US. Homebuilders are cautioning that rising tariffs and charges (including potentially doubled duties on Canadian lumber) could intensify the housing affordability crisis.
Increases in lumber import costs could also affect other products like furniture and even paper products.
The Trump administration has recently mandated that half of the national forests in the US be opened for logging to support the domestic lumber industry—a move criticized due to its potential adverse environmental effects, such as disruptions to species habitats, watersheds, and recreational areas.
Pharmaceuticals: The imposition of tariffs in this sector presents contradictory policy goals for Trump, who aims to lower drug prices while also boosting US manufacturing, commented Diederik Stadig, a healthcare economist for ING, in a recent post.
“While some branded production might gradually shift to domestic manufacturing, a significant increase in generic production is improbable,” he pointed out, noting that building new manufacturing facilities typically takes about 10 years.
Additionally, tariffs would likely add to inflationary pressures, which would increase healthcare expenditures and make medications less affordable, particularly for uninsured individuals. Under a 25% tariff, commonly prescribed medications could escalate from 82 cents per pill to 94 cents, costing roughly $42 more annually. More complex treatments, such as cancer prescriptions, could see costs rise even higher; estimates suggest that a 24-week treatment could result in an additional expense ranging from $8,000 to $10,000.
Semiconductors: Semiconductor chips are integral to a wide variety of products including medical devices, Wi-Fi routers, laptops, smartphones, automobiles, home appliances, and LED lighting. A single new car can contain thousands of these chips.
In other words, semiconductor chips are akin to the crude oil of the 21st century. The repercussions of their shortage became glaringly obvious during the pandemic, as the lack of chips contributed to significant shortages in cars and various other products, exacerbating inflation.
Although the bipartisan CHIPS and Science Act passed in 2022 aimed to encourage semiconductor manufacturers like TSMC to establish production facilities in the US, even if tariffs lead to increased domestic chip production, the US still lacks significant electronic assembly capabilities, as previously noted by John Dallesasse, an electrical and computer engineering professor at the University of Illinois Urbana-Champaign.
Consequently, any chips manufactured in the US would still need to be shipped to countries like Taiwan, South Korea, China, and Mexico for incorporation into the finished products that consumers purchase in America, and those shipments will also incur tariff charges.
