Supposed Retreat

What Trump’s Supposed Retreat Really Means in a Historic Trade War

Even with Trump’s recent reversal, net tariffs are still the highest they’ve been in a century. We break down what this all means.

By Sudeep Reddy

At the start of this month, President Donald Trump announced enormous tariffs on nations across the globe. Just as the tariffs took effect Wednesday, he changed course, announcing a 90-day pause on most of them in the face of market tremors and economic worries.

But even with Trump’s recent reversal, net tariffs are still much higher than they were before he was elected, and sky-high tariffs on China remain in place. What does this mean for the economy, the world and for Trump? POLITICO Magazine breaks it all down.

1 What does the tariff picture look like after the back and forth over the past 10 days?

Much of the news over the past day has focused on the 90-day pause. Markets initially rebounded; many traders seemed relieved to avoid a worst-case scenario. But that ignored the reality: Significant tariffs remain in place. The effect even after Trump’s partial pause is a 10-fold increase in levies on goods imported to America. At the start of the year the nation’s overall average effective tariff rate stood around 2.5 percent. With this week’s moves, it’s around 27 percent — the highest for the U.S. in more than a century. The U.S. imported about $3.3 trillion worth of goods in 2024, so taxing all of that amounts to a substantial tax on consumers and businesses buying from overseas.

The levies vary among the largest U.S. trading partners. The president’s moves leave 10 percent tariffs in place for most countries. The levies on imports from China — America’s No. 3 trading partner — now sit at a sky-high 145 percent. That’s a tax on every import hitting U.S. companies that buy either finished goods or parts from the world’s second-largest economy. Canada and Mexico also face a high 25 percent tariff rate on some goods (steel, aluminum, autos) and are spared tariffs on goods that comply with a 2020 trade agreement he signed with the two countries.

2 Who will benefit from this? Who will get hurt?

The president is deploying a remarkably risky strategy. The Trump tariffs will reshape the U.S. economy, the world economy, foreign policy and global financial markets as long as they remain in place.

In the long run, the president hopes the U.S. will benefit through investment in the U.S. — more factories and jobs — and higher tariff revenue.

In the short run, U.S. companies large and small will need to decide whether to keep buying products from countries hit by those tariffs or switch to goods from other countries. They’ll also need to decide whether to pass any added costs on to consumers. Some companies will shut down because they can’t eat the cost of a 10 percent tax on many goods, let alone a 145 percent tax on their products from China. Business leaders will also be weighed down by the uncertainty — Trump has shown he can change his mind at any time. Who will build a long-term business plan, or invest in capital-intensive projects, with the sword of uncertainty hanging over your head?

U.S. consumers will quickly face higher prices for all sorts of goods. Economists at The Budget Lab at Yale University put the initial estimate at the equivalent of $4,700 per American household. Even after the pause in some of the tariffs, we can expect inflation to rise due to higher prices and unemployment to rise through business failures and layoffs. That’s a stagflation scenario — at least in the short run.

3 What does this mean for all the recession warnings we’ve seen?

Whether a recession arrives depends largely on whether Trump backs down even further in the coming weeks. A walk-back could restore confidence enough to save the U.S. economy from entering a recession. But the uncertainty from sudden tariffs, even lasting a few weeks, will exact an enormous toll around the world.

Every sizable business that imports anything into the U.S. is holding emergency meetings this week to decide whether, and how, to reshape their purchasing and investment plans. Even those that don’t import goods will need to react to the realities of lower purchasing power for consumers (because of the tax on the goods Americans buy) and the volatility of the stock market. A lower stock market often translates into cost-cutting, including layoffs, to raise profitability. Higher borrowing costs — due to inflation — will also weigh on consumers and businesses.

Trump, in pursuit of a long-term strategy, appears prepared to swallow a recession in order to reshape American manufacturing and trade. It’s unlikely he can accomplish such a rapid, sweeping restructuring of the nation’s industrial base while keeping the economy above water over the coming year.

4 What are Trump’s long-term trade motivations?

Trump is fulfilling a lifelong dream to alter the balance of power in the world economy. He’s breaking from most of his predecessors (from both parties) who pursued ever-freer trade over the last century. His deep interest in trade developed during the rise of Japan throughout the 1980s and persisted through the national debates about NAFTA. “What I would do if elected president would be to appoint myself U.S. Trade Representative,” Trump wrote in 2000 as he weighed running for president on the Reform Party ticket. “I would take personal charge of negotiations. … Our trading partners would have to sit across the table from Donald Trump and I guarantee you the rip-off of the United States would end.”

The president finally put trade — and himself — at the center of the global policy agenda. As long as the Trump tariffs remain in place, they will reshape the American economy and the global economic order in unpredictable ways.

5 What does this week tell us about how Trump reacts to markets?

The markets seemed rather giddy on Wednesday on perceptions of Trump pulling America back from falling over the cliff. Then they sobered up on Thursday and tumbled as the reality of a new world order on trade set in. An old adage on Wall Street is that bear markets make fools of both bulls and bears. Expect continued volatility as long as the China tariffs remain in place.

How much that moves Trump remains to be seen. Outwardly, he’s adopted a surprising openness to the notion that a recession could result and a willingness to message to Americans that pain is ahead. But his decision to scale back his trade war on Wednesday grew out of concern about disorderly moves in bond markets, following an appeal by top aides. In many cases, stock fluctuations are temporary and recoverable. Bond market turmoil can exact deeper damage to the broader economy by freezing credit for consumers and businesses who aren’t even invested in stocks.

The president warned in his three presidential campaigns — 2016, 2020 and 2024 — that stocks would crash and a depression would result if any of his opponents won. Instead, those risks have only appeared on his watch.