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Key Takeaways
- The tariffs imposed by President Donald Trump will increase the effective tax rate on imports.
- When he took office for his second term, the effective tariff rate was 2.4%.
- The new tariffs, combined with those that were already enacted this week, could increase the average effective tariff to as high as 27%.
The wide-ranging tariffs of President Donald Trump will dramatically increase the effective tax rate on imports.
On Wednesday, Trump revealed a policy that would impose a base tax of 10% on all imported goods and additional import taxes country-by-country. This new tariff combined with his other policies will likely cause the average effective rate to skyrocket.
The average effective rate of tariffs is a measure that includes all the tariff policies in place by the country. This rate was only 2.4% when Trump became president for the second term. It was slightly higher than in the early 2000s because of tariffs that were enacted during Trump’s first tenure and which Biden did not abandon.
But now it could jump to as much as 27%, more than 10 times higher and around levels not seen since the early 1900s, according to Ryan Sweet, chief U.S. economist at Oxford Economics. He wrote that this could make the United States “dangerously susceptible” to a possible recession. The wallets of consumers would be hit, and trade uncertainty would “suffocate” businesses.
Trump says higher tariffs will incentivize companies to boost production in the United States and raise revenue for the government.
"These tariffs seek to address the injustices of global trade, re-shore manufacturing, and drive economic growth for the American people," the White House said in a fact sheet on Wednesday.
As negotiations for a new North American Trade Agreement continue, some tariffs may not remain in place. Canada and Mexico were also omitted from the actions taken on Wednesday. Tariffs in the United States may still rise, especially if other countries retaliate and spark a tit for tat tariff war.
In a note sent to clients, ING economist James Knightley said that the new tariff rates in the U.S. were higher than the markets had expected.
Knightley wrote: “In the end, it could be positive for the U.S. Economy, but the measures that were taken will mean a painful adjustment period.”
