Today at Understanding America, here's how I think it makes sense to understand the Liberation Day tariffs:
1. The 10% Global Tariff. Looks like (and should be) permanent. Offers a stable and substantial source of revenue. Not clear the route by which it might be removed. Country-specific tariffs, which we’ll get to, can be negotiated on a country-by-country basis. But a global tariff, by definition, implies the same rate should be imposed regardless of another country’s policies or economic features.
Note also, Trump's decision to exempt Mexico and Canada. Those countries both face other specific tariffs, but the admin seems to be envisioning a renegotiation of USMCA that would address U.S. priorities and drop those tariffs, at which point North America serves as core of a U.S.-led trading bloc.
2. Reciprocal Tariffs. Reports in the days prior to Liberation Day indicated that the administration was debating between a global tariff and reciprocal tariffs. The decision to do both suggests that they have different purposes. Global tariff works best as permanent baseline preferencing domestic production and raising revenue, reciprocal tariffs work best as negotiating leverage.
As I predicted in February, Trump’s focus on trade deficits and the need for balanced trade indicate a focus on proportionality rather than outright reciprocity. Reciprocal tariffs designed simply to mirror foreign tariff rates would have had little relationship to the problem he was targeting. If what Trump cares about is trade imbalances, and he wants to use tariffs to force other countries to reduce those imbalances, what makes sense is to scale the tariff to the size of the imbalance. This is what he did.
The implication: You want a lower tariff? Work on your imbalance.
This is where its helpful to look at Reagan did with Japanese autos in 1981. He negotiated an import quota with Japan, prohibiting imports from rising above the 1979 level. Notably, the quota was not imposed by the United States. It was a “voluntary export restraint” (VER), self-imposed by the Japanese, under threat of more aggressive U.S. action including tariffs.
Japanese firms invested tens of billions of dollars in the American South creating hundreds of thousands of American jobs. Japan-based firms continued to take market share from U.S.-based firms, but the vehicles were American made, with increasingly American supply chains.
Do countries really control their trade imbalances? Not entirely, no. But to a large extent yes. Not by coincidence do all those countries pursuing export-led growth in fact achieve large trade surpluses. They make policy choices. What Reagan showed is that if you can change another country’s calculus, so that its interest is to fix the imbalance rather than foster it, the policymakers have all sorts of tools at their disposal to achieve the new goal. At the extreme, a country can and indeed will literally block the imports of its own producers and tell them to build production capacity in the United States.
I think the story of Reagan and the VER gives the best illustration of where Trump is likely headed. The reciprocal tariffs are, by definition, temporary. If deficits come down, the rates would presumably come down too. But Trump has not made clear what exactly he’s looking for, or how any of this is supposed to work. For now he seems content, at least publicly, to sit back and wait for countries to come to him.
3. China. Trump has already hit China with 20% in targeted tariffs, on top of which he has now layered a 34% reciprocal tariff. The 54% total is higher than for any other country. Note also how this differs from Canada and Mexico, which also face targeted tariffs but got neither the global tariff nor a reciprocal tariff on top.
With Canada and Mexico, the goal seems to be a quick negotiation and a return to free trade. With China, by contrast, I think these enormous tariffs are here to stay. Note that the total value is now approaching the 60% China tariff, alongside a 10% global tariff, on which Trump campaigned.
Whereas he sought a deal with China in his first term, now the dealmaking seems focused elsewhere, with China on the permanent naughty list. Trump’s support for revoking China’s Permanent Normal Trade Relations offers further evidence in support of the China-Out theory. So too, Treasury Secretary Scott Bessent’s indication that the U.S. is pushing Mexico and Canada to harmonize their tariffs toward China with the U.S. policy.
That’s how I interpret the plan: permanent global tariff to give preference to domestic manufacturing, reciprocal tariffs as stick to drive deficit-reducing policy choices by other trading partners, permanent China tariff to decouple our economies. The end result, as I wrote about at the beginning of the week, would be an economic and security alliance that fosters free trade among countries that can agree to balanced trade, burden owning, and China out.
If this is correct, the Trump administration needs to do a few things:
1. Communicate the goals and rationales much more clearly. The American people, markets, and allies all need to understand what is happening and why if they are to support or at least accept the administration’s plan.
2. Legislate the permanent elements. The credibility, stability, and legality of the permanent tariffs would all be greatly improved if Congress codified them. A bipartisan bill already exists for revoking China’s PNTR status, and it was co-sponsored by Secretary of State Marco Rubio when he was still in the Senate. A bill for a 10% global tariff has already been introduced in the House, by a conservative Democrat. Investors will only redeploy trillions of dollars in response to new rules if they believe those rules are going to stick.
3. Revisit sequencing. I continue to believe that a predictable and credible phase-in for tariffs can achieve nearly the same positive effects of an immediate imposition, while greatly reducing the costs. The 10% global tariff is already a gradual enough step.
But going literally “0 to 60” with a country like China imposes large costs on American firms and consumers much more quickly than they can plausibly take the constructive actions we might want. That serves no one. Likewise, if we expect producers to lose access to foreign markets—especially China’s—it’s important for that not to happen faster than the removal of Chinese firms from the U.S. and allied markets is creating new opportunities for sales.
4. Provide support. Finally, Liberation Day needs to be the start of a much larger program of reindustrialization, not a one-and-done action that effectively leaves the troops stranded on a narrow beachhead. More CHIPS Act style investment for critical industries. More energy, less red tape, new infrastructure. And most importantly, according to both the American people and American businesses, workforce training.
There’s no reason the United States cannot achieve a policy success like the Japan VER ten times over, and then achieve another ten comparable successes that increase foreign purchases from American producers. But announcing the tariffs is only the first step. If this is where we stop, we will not get where we need to go.
And of course, enjoy the weekend!
