The Great Barrier Tariff: How Trump's tariffs hit the global economy — and the U.S. itself

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How Trump confused tariffs and the trade deficit

“My fellow Americans, this is Liberation Day. April 2nd, 2025, will forever be remembered as the day American industry was reborn, the day America's destiny was reclaimed and the day that we began to make America wealthy again,” Trump declared, standing before members of his administration and journalists gathered in the White House Rose Garden. “For decades, our country has been looted, pillaged, raped and plundered by nations near and far, both friend and foe alike,” he claimed. “I say to the leaders, look, you got to take care of your country, but we have to start taking care of our country now.”

Trump immediately demonstrated what the new reality would look like, presenting large boards with tables. The first column of the table was “Country,” the second was titled “Tariffs Charged to the U.S.A., including currency manipulation and trade barriers,” and the third column was “U.S.A. Discounted Reciprocal Tariffs.” Trump explained, holding the table: “For nations that treat us badly, we will calculate the combined rate of all their tariffs, non-monetary barriers and other forms of cheating. And because we are being very kind…we will charge them approximately half of what they are and have been charging us. So, the tariffs will be not a full reciprocal. I could have done that, yes, but it would have been tough for a lot of countries.”

To avoid the need for Congressional approval of the tariffs, Trump declared an economic state of emergency (not to be confused with a general state of emergency), which grants him the right to approve tariffs and other economic measures unilaterally. The 10% base tariff took effect on April 5. “Mirror” tariffs were supposed to take effect on April 9, but on that very day Trump decided to freeze them for 90 days for more than 75 countries which had not implemented retaliatory measures. Most notably, the “truce” did not apply to China.

The figures in the table puzzled many observers, as countries' actual customs barriers are much lower than those presented by Trump. However, it quickly became clear exactly how the “calculation” had been made: for any given country or entity, the difference between the value of its goods imported into the U.S. and the value of goods exported to it from the U.S. were taken, and the difference between these two figures was calculated as a percentage. This is how the 67% for China and 39% for the EU — the figures featured under the second column on the chart — were obtained.

This formula helps explain why Trump's team maintains that trade imbalances between states constitute “robbery.” Trump and his team profess not to understand the simple economic reality that a trade deficit is the same as a financial surplus, economist Konstantin Sonin, a professor at the University of Chicago, told The Insider. “A significant (if not the main) reason why the U.S. has a persistent trade deficit with the rest of the world is that the dollar, the American currency, is the most reliable and liquid publicly available asset in the world. People, banks, central banks hoard dollars, not other assets, because they believe that nothing will happen to the dollar,” says Sonin.

The economist explains this with a simple example:

“If you regularly buy things from a store or on Amazon, you have a constant trade deficit with them, because they don't buy anything from you. But this deficit only indicates that you prefer not to grow your own potatoes or parsley, not to repair your own car, etc. The same applies to the U.S. with other countries: they prefer to 'buy' dollars from the U.S., exchanging their products for them. And these dollars, typically in the form of government bonds issued by the U.S. Treasury, are held as the most reliable, stable, and liquid asset. Trump's actions, however, are destroying the dollar's reputation.”

Sonin's words are confirmed by the behavior of the currency market following Trump’s introduction of the tariffs: while the general fall in stock markets was predictable, the dollar's decline relative to other currencies was unusual. The market has long operated under the rule: “in any trouble, run to the dollar.”

For the first time since the modern economic structure emerged after World War II, dollars were being sold off the way weak currencies used to be. Moreover, the first signs appeared that not only China, but also central banks of other countries were starting to divest from U.S. bonds.

In early April, the U.S. 30 Cash index, which tracks the value of 30-year government bonds — the most popular “dollar substitutes” — lost almost 15%. “Markets are nervous because the administration, convinced that America is a victim, is ready to punish its closest allies. If such behavior reduces the dollar's attractiveness, then it might indeed become an exorbitant burden. But this is not the future Americans should wish for,” wrote economist Raghuram Rajan, former Governor of the Reserve Bank of India and former Chief Economist of the IMF.

And the complaints don't end there. A big issue is that Trump's table only tallies the trade deficit for physical goods. That misses America's real strength, which lies in services, which range from Amazon's online shopping and Microsoft's software to Meta's social media ads and Google's cloud storage payments. It's a similar story with Apple, where app sales are increasingly more profitable than the iPhones themselves. The economic logic is so obvious that jokes are emerging about Trump wanting to punish Europeans for buying high-markup U.S. services while selling low-markup goods to Americans. The crucial point here is that when you actually look at the services trade, the US runs a $300 billion surplus.

Not everything is straightforward with the 10% “base” tariff either. Many observers speculated that it was introduced because the U.S., unlike most other countries, does not have a Value Added Tax (VAT), which in other countries is also levied on imported goods. In the U.S., this function is replaced by a sales tax, which ranges from 2.5% to 7.5%, depending on the state. VAT in most countries is 12–20% — and if you add 10% to the sales tax, you arrive at roughly equal prices for goods imported into the U.S. and American-made goods.

The problem here is that VAT is somewhat more complex to calculate than sales tax: not only is it collected at each stage of the supply chain (with a VAT refund to the seller), but it also has numerous exemptions, discounts, and other nuances. Simply punishing countries with a tariff because their fiscal system is structured differently doesn't seem very fair.

Furthermore, suspicion arose that artificial intelligence helped the Trump administration with the “reciprocal” tariff formula. Whether that is true or not, if you ask a neural network how to calculate fair customs duties, it advises the exact same formula. As for the list of “countries” in the first column of the table — which included uninhabited islands populated by penguins — it also coincided with internet lists of the world’s territories.

Initial reaction: China's response, market collapse

Although Trump had spoken during the election campaign of his desire to impose tariffs — and despite the fact that his previous presidency was marked by a tariff war with China — many hoped that his promises to raise tariffs were merely an intimidation tactic aimed at “making a deal.” Therefore, when Trump announced the universal 10% tariff on April 2, euphoria prevailed in the first minute. Stock markets were closed at that time (and this timing was clearly chosen for the announcement deliberately), but currency markets, and especially cryptocurrency markets, reacted positively at first.

However, as soon as Trump took his now-famous table in hand and began explaining how much (in addition to the 10% tariff) each country would be obligated to pay for the right to supply its goods to America, the markets began to collapse. On April 3, the global market began a rapid fall, which worsened the next day when China announced it was imposing a retaliatory tariff on American goods of the same amount — 34%. Things only got worse when the U.S. responded with a promise to raise duties on Chinese goods to 84%, bringing the total to 104%. China, in turn, announced a similar increase in duties to 84%, and Washington's response — a 125% duty — came alongside the announcement of a 90-day pause for other countries, sending markets upward despite the ongoing dispute between the world’s two largest economies. April 9, the day of the tariff war truce, was celebrated by markets with a massive rally, which increased the value of the S&P 500 by approximately $4.3 trillion, making it the best singe day for the index since 2008. For the Nasdaq index, it was the best day since 2001.

For China, all this could be a strategic mistake. Liddell Hart's strategy of indirect approach states that a head-on response is disadvantageous unless you have a threefold advantage over the opponent. China lacks such an advantage, as it exports low-value-added products to the U.S. and imports high-value-added ones. Many other Asian countries, which have also already modernized, will readily take China's place in the global manufacturing sector.

Before China's response, there was hope that Trump's tariffs would worsen global trade but still end up being just an episode in trade negotiations between various countries and the U.S., but the world's second-largest economy’s decision to respond signifies the start of a real trade war. Everyone ought to recall how trade wars end: in 1930, then-U.S. President Herbert Hoover signed the Smoot-Hawley Act, imposing tariffs on over 20,000 imported goods, triggering a retaliatory response that led to a global trade war — and the Great Depression.

Smoot-Hawley was intended to protect the American market and American workers affected by the 1929 crisis. Instead, it turned the crisis into the economic catastrophe that lasted until the beginning of World War II, after which multilateral negotiations among the Allies began, eventually leading to the emergence of the modern system of trade relations.

Before China's decision, analysts and politicians primarily spoke about the negative impact of tariffs on American consumers — Republican Senator Ted Cruz, for example. However, after the retaliatory duties were announced, the discussion shifted to an impending global crisis. Investment bank JP Morgan estimated the probability of the global economy entering a recession by year-end at 60%, up from a previous forecast of 40%. “There are no winners in a trade war,” says Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab.

Where did the trade deficit and national debt come from?

Before World War II, the economy operated on the principle of “all against all.” Countries occasionally formed coalitions, made bilateral agreements — and readily broke these arrangements, depending on their current usefulness. The Great Depression, which impacted the economies of all developed countries, is widely believed to have created conditions for World War II. It also demonstrated that further economic development was impossible without global cooperation.

The seeds of such cooperation emerged among the U.S. and its Western war-time allies, leading to the creation of the Bretton Woods system in 1944. One of its most famous consequences was countries abandoning the gold standard for and instead pegging all participant currencies to the U.S. dollar. It was also at Bretton Woods that new global organizations were founded — from the International Monetary Fund (IMF) to the World Bank.

Thanks to the agreement, the U.S. gained the unique ability to sell its own currency — not just the fruits of its labors — in exchange for goods. Even after the Bretton Woods system was replaced by the Jamaica Accords (1971–1978), the U.S. dollar, even devoid of the gold standard, was still universally recognized as the global reserve currency based on the leadership and power of the United States alone.

The next step in building the modern global economic system was the 1995 creation of the World Trade Organization (WTO), which was based on the General Agreement on Tariffs and Trade (GATT) concluded in 1947. The WTO finalized the new neoliberal system of economic relations based on free trade and the international division of labor.

Its principles are simple: all countries compete freely on the global market, striving to produce the goods they are best at making and purchasing those they produce less efficiently. It is thanks to this system that globalization began. For example, a single car can be manufactured by a dozen countries working at different points in the production chain — ore is mined in one, the metal is smelted in another, engines are made in a third, seats are manufactured in a fourth, and so on, right up to final assembly in yet another country.

Thanks to this system, transnational corporations emerged, with their production facilities scattered across the globe. A new era in logistics dawned, with millions of goods, raw materials, spare parts, and production equipment crossing national borders multiple times.

But problems also arose — primarily with regard to the taxation of these same transnational corporations. When the IT sector developed as an economic force, it became unclear where and how to tax its companies. Offshore havens with zero or minimal taxation appeared, and complex tax avoidance schemes emerged — with individuals also taking advantage of the opportunities they provided.

After the 2008 financial crisis, these problems were partially addressed: some offshore havens were dealt with by placing them on black or grey lists, while agreements were reached with others to introduce a minimum tax of 15%. Additionally, control over global financial flows was strengthened. This is why bank compliance is so meticulous and strict today.

Still, one problem remained: due to this specialization, production began to move to countries where labor is cheap, leaving only headquarters and sales operations in the countries of origin. Moreover, companies learned to outsource not only production lines, but also intellectual labor: the most striking example is Indian programmers creating software for American IT giants.

Despite the complexities, globalization benefited everyone, including the U.S. Starting from the early 2000s, U.S. GDP began to grow almost exponentially. Then the Triffin paradox came into play, which states that a country whose currency serves as the reserve currency for others will always run a balance of payments deficit, but this same deficit will undermine confidence in that currency, and to strengthen confidence, the country needs a balance of payments surplus.

Essentially, the Triffin paradox implies that United States in its current role must issue currency not only for its own needs, but also for the needs of countries whose currencies are pegged to its currency. This explains the growth of the U.S. national debt, writes Trump's chief economic advisor Stephen Miran.

China joined the WTO in 2001 and, as a developing country, received several benefits. For example, it could slap tariffs on certain imported goods in order to protect its own nascent industries. And China, it must be said, took full advantage of these benefits: by 2018, the Chinese economy had become the second largest in the world after the U.S.

At the same time, China proved omnivorous — it developed almost all types of production domestically while applying the formula for success of Japan and the other “Asian Tigers”: copying foreign advanced technologies, establishing partial production, achieving full production cycles, and furthering development based on its own R&D. Soon enough, China's know-how was attracting foreign manufacturing to the country.

Today, it is hard to find any reasonably large manufacturing company that doesn't have its own factory in China. But the tradeoff was the decline of industry in developed countries. Local workers simply couldn't compete on price with Chinese workers, even if the Chinese workers were less skilled.

The effects were particularly evident in the U.S., where a real “Rust Belt” emerged from the remnants of industries that were unable to withstand the competition — first from Japan, and then from China. The price paid for the drastic cheapening of goods was a radical deterioration in the lives of workers and rank-and-file engineers in the U.S. A significant portion of them lost their jobs, and the federal budget, instead of collecting taxes from them, had to pay them benefits. The tragedy of this group was described by Vice President J.D. Vance in his book Hillbilly Elegy, which was adapted into a film of the same name. Unsurprisingly, it is the voters of the “Rust Belt” who are Trump's most loyal supporters.

With its newfound wealth, China also began vigorously buying up assets around the world — from raw materials in Africa to companies in the U.S., and from oil fields in the Middle East to ports in Europe. Moreover, even the operation of the Panama Canal, a strategically important object for the U.S., ended up under Chinese control. Perhaps not coincidentally, when Trump won his first presidential election in 2016, newspapers worldwide were filled with speculation about when China would surpass the U.S. economically.

It was Trump who started the first trade war with China, claiming that the Chinese had “stolen” America's achievements by exploiting WTO benefits despite the fact that China was no longer a developing country. There was some truth to this, but seemingly based on this case, Trump and the economists who support him took things a step further, concluding that the modern global system does not benefit America. So Trump decided to dismantle it, returning to the “good old” bilateral agreements and a bloc system.

What Trump is counting on

There are several interest groups in the U.S. intending to use Trump to implement their own pet ideas. One of them is concerned about the national debt. At 123% of GDP, it is not so large as to cause a catastrophe, but the costs of servicing it — 4.7% of GDP, already approaching the record levels of the Reagan era — are beginning to exceed the benefits of its growth. Moreover, even if the Federal Reserve lowers interest rates, servicing costs will continue to rise for some time because U.S. debt is roughly equally divided among short-term, medium-term, and long-term obligations.

Improving public finances can be achieved either by increasing revenues or by cutting expenditures. Regarding the latter, attempts by Elon Musk's semi-official DOGE to reduce spending by cutting the bureaucratic apparatus has not yet succeeded. This is not surprising — government administration costs are not a significant budget item. The largest share of U.S. spending goes towards social programs, and proposals are currently being prepared to cut, or even eliminate, the most expensive among them: Medicaid health insurance and the SNAP food assistance program, also known as the food stamp program. However, this could trigger such an explosion of social discontent that doubts exist as to whether such a bill could make it through Congress.

The second option is to increase revenues, and Trump seems intent on accomplishing this primarily through import duties. Some analysts also believe Trump had a tactical goal — to strengthen his negotiating position — along with a strategic one: to spur manufacturing development in the U.S. in much the same way state-directed industrial modernization proceeded in Japan, South Korea, and Taiwan, where prohibitive tariffs were established in order to facilitate the development of domestic production. However, this would require keeping some tariffs high for years.

Some examples of success in the realm of negotiations appeared immediately: Israel, India, Vietnam, Japan, and Serbia announced their readiness for talks. Elon Musk stated that he hopes for “zero tariffs” between the U.S. and EU after negotiations that, ideally, would conclude with the signing of a free trade agreement. A few hours before Trump's decision on the 90-day pause, the EU decided on retaliatory tariff increases of 10-25% on U.S. goods, potentially effective from April 16th. The list of products includes meat, grains, wine, timber, and clothing, as well as chewing gum, dental floss, vacuum cleaners, and toilet paper. Another possible retaliatory measure could involve imposing levies on products from American IT companies. Emmanuel Macron called for suspending investments in the U.S., and European Commission President Ursula von der Leyen threatened a package of EU retaliatory tariffs on goods with an annual trade volume of €26 billion. “We are already finalizing the preparation of the first package of retaliatory measures on steel tariffs. And we are preparing further measures to protect our interests and businesses if negotiations fail,” she stated.

For his part, Trump is already saying he needs not only the elimination of tariffs on American goods, but also for countries to buy U.S. goods equivalent to the value of their trade surplus. For example, Trump believes the EU should buy $350 billion worth of American energy resources — even though the U.S. does not sell that much to the entire world. As a result of this stance, even negotiations with Israeli Prime Minister Benjamin Netanyahu ended with nothing: the 17% tariff on Israel was not lifted, despite Israel eliminating duties on American exports. Under these conditions, world leaders are wondering if Trump even wants to “make a deal,” writes Bloomberg. It's possible that countries will now prefer to wait and watch the epic battle between the Chinese “dragon” and the American “cowboy.”

Whether the main goal of bringing production back to the U.S. can be achieved depends on how much pressure Trump faces and how well he can withstand it. Japan and South Korea have already expressed a desire to expand their U.S. production facilities, but time is needed for new factories to start being built in the country. Will there be enough time, given that a recession could lead to Republican losses in the midterm congressional elections a year and a half from now?

Consequences for the U.S. and the global economy

The U.S. itself will be the first to feel the effects of the tariffs, economists maintain. The duties will be factored into the price of imported goods, which will only accelerate inflation, the fight against which was Trump's main campaign promise. Federal Reserve Chair Jerome Powell mentioned accelerating inflation as the most likely consequence of Trump’s policies: “It is becoming clear that the tariff increases will be significantly larger than expected.” This will likely lead to increased inflation and slower economic growth. U.S. consumer prices “might rise slightly” due to Trump's tariffs, acknowledged Kevin Hassett, Chairman of the White House National Economic Council.

Due to rising consumer prices, as well as increased costs for businesses — since their raw materials and components are often imported too — a recession will begin in the U.S. JPMorgan economists stated that they now expect the U.S. to slide into recession this year, even if Treasury Secretary Scott Bessent responded that he doesn't believe in it. “I see no reason why we should price in a recession,” Bessent stated.

Given that the U.S. makes up a quarter of the global economy, a recession there inevitably spells trouble worldwide. On top of that, the increased tariffs themselves are set to hinder international trade, further damaging global GDP. Investment bank JP Morgan now puts the odds of a global recession by year-end at 60%, a jump from their earlier 40% forecast. However, it's worth remembering, as The Insider has noted before, that experts often struggle to predict GDP accurately, so such forecasts should perhaps be taken with a grain of salt. In this instance, though, the prediction rests on a fundamental economic truth: less trade almost certainly means slower growth — something virtually all economists agree on. The real question isn't if growth will slow, but by how much.

Moreover, this situation isn't shaping up to have winners and losers; it looks like everyone stands to lose. “There are no winners in a trade war,” says Jeffrey Kleintop, Chief Global Investment Strategist at Charles Schwab. This view is echoed by game theory specialist Sylvester Eijffinger, an economist and professor at Tilburg University. “If we try to explain the current situation using the theoretical model of non-cooperative games, much becomes clear,” he writes. He notes that “In Trump's first trade war, there was no winner, and all parties eventually compromised, incurring collateral economic damage in the process.” Professor Eijffinger believes this time is even more serious because Trump has upped the ante by dragging European military security into the mix. “In the end, Trump will not win, but he will end up with damaged relations with America's allies,” Eijffinger predicts. “This non-cooperative game that Trump is forcing on his trading partners will only result in losses for everyone, and, just like the first time, it will again be followed by compromises — with Canada, Mexico, the UK, and the EU.”

Back home, most Americans aren't fans of the tariffs either. Polls show 54% oppose Trump's policy, and two-thirds believe it will inevitably lead to higher prices for consumers. Reflecting this sentiment, this past weekend saw widespread protests against Trump’s policies — erupting across the U.S., and also in other countries.