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04/03/2025 | Press release | Distributed by Public on 04/03/2025 14:41
“Liberation Day” Tariffs Explained
"Liberation Day" Tariffs Explained
Photo: Chip Somodevilla/Getty Images
Commentary by Barath Harithas, Kyle Meng, Evan Brown, and Catharine Mouradian
Published April 3, 2025
Introduction
On April 2, 2025-a date President Trump proclaimed "Liberation Day"-the administration announced the most sweeping tariff hike since the Smoot-Hawley Tariff Act, the 1930 law best remembered for triggering a global trade war and deepening the Great Depression.
A universal 10 percent tariff on all imported goods will take effect on April 5, followed by further tariffs on dozens of named countries, set to begin on April 9. Canada and Mexico are largely exempted from this round of tariffs, at least for the time being, and previously announced sectoral tariffs on steel, aluminum, and autos, along with anticipated tariffs on semiconductors, pharmaceuticals, copper, and lumber, will be assessed separately and not stacked onto the new tariffs.
What's Driving "Liberation Day": Reckoning or Revenue Play?
The rationale behind "Liberation Day" follows a two-part story. The first is the administration's own framing, that this is a necessary corrective to decades of open U.S. markets being met with asymmetrical foreign tariffs and other barriers that boxed out U.S. goods. Only aggressive retaliation can reverse the damage and pull manufacturing back onshore.
The second is more transactional: that tariffs are ultimately a revenue-raising mechanism to help finance the sweeping tax cuts the administration hopes to announce before year's end.
They can both be true. One supplies the story. The other pays the bill. But there is also a tension: the higher the tariffs, the lower the remaining trade and thus revenue.
The Public Story: Retaliate, Reclaim, Reindustrialize
At the center of the Trump administration's trade doctrine lies a conviction that the U.S. trade deficit with each partner is not just a data point, but a ledger of national failure. It is a scarlet letter testifying to decades of asymmetric trade agreements, in which the United States bartered away its industrial birthright for mere corporate margins and cheaper imports.
What the United States gained in shareholder returns, it lost in productive capacity. Steel, aluminum, and shipbuilding were left to wither-casualties of an indifferent trade regime. And this, in Trump's framing, is where trade policy crosses the Rubicon. What began as economic decline becomes a national security liability, one that would be exposed in the event of a sustained military conflict. After all, it was the United States' unmatched industrial base, not just its battlefield tactics, that secured victory in World War II. Today, the argument goes, that the "arsenal of democracy" has been allowed to rust, while China has assembled the very industrial capacity that once defined U.S. strength.
Tariffs, the administration believes, in addition to punishing countries that have imposed unfair trade barriers on U.S. goods, will catalyze the reindustrialization of the United States. Raising import prices will tilt the cost-benefit calculus of multinational production, nudging firms to reshore manufacturing capacity and reanchor supply chains within U.S. borders.
The Quiet Story: Raise Money Now, Cut Taxes Later
The emphasis on tariff revenue also serves a political function-convincing the ultra-conservative Freedom Caucus that the administration's planned tax cuts can be financed without further increasing the national debt. Any major tax legislation will require congressional sign-off, and in a GOP conference fractured along fiscal lines, the Freedom Caucus wields outsized sway. Their support often hinges on the appearance of fiscal discipline-particularly the promise of offsetting revenue without new borrowing. In this context, tariff revenues offer a convenient workaround. But it does not obviate the fact that tariffs are themselves a tax, ultimately raising prices on U.S. households.
In a January 30, 2025, interview with Fox News, White House economic adviser Peter Navarro claimed that the new tariffs would raise "about $600 billion a year-roughly $6 trillion over a decade." No specific tariff proposal or calculation was offered then.
To reverse-engineer that figure, analysts initially looked to last year's roughly $3 trillion in goods imports and applied a flat 20 percent tariff across the board. Our own modeling, using that same uniform 20 percent rate, produced a much lower estimate-$226 billion in annual revenue.
Now that the April 2 tariffs are out, we can see where those revenue numbers come from, with the United States imposing across-the-board tariffs between 10 and 34 percent. Our own general equilibrium trade modeling finds that those tariffs, together with other tariffs Trump has already introduced, would indeed bring annual revenue of about $600 billion. But just like any tax, it comes at a cost: We find these tariffs would raise U.S. prices by 9.5 percent and lower U.S. GDP by 1 percent.
The administration, it seems, wants to claim both economic benefits and a fiscal windfall. But, like any tax, with tariffs, you cannot have both. And indeed, not only are we already seeing stock market drops, we are also seeing U.S. manufacturing job layoffs from Cleveland Cliffs, Stellantis, and Whirlpool, all presumably because of tariff-induced higher input costs and reduced U.S. demand. In the end, which goal is allowed to fail will tell us more than which was declared to matter.
Acknowledging Legitimate Grievances and Briefly Unpacking the Trumpian Narrative
To be clear, not all of the Trump administration's trade grievances are invented. There are legitimate critiques buried beneath the bombast. The global trading system, particularly the World Trade Organization, has proved ineffective at disciplining industrial subsidies, forced technology transfer, and intellectual property theft, especially in the case of China.
The points on labor dislocation and Chinese substitution are not entirely unfounded as well. The now-canonical "China Shock" study by Autor, Dorn, and Hanson estimated that between 1999 and 2011, rising import competition from China contributed to nearly 1 million manufacturing job losses and close to 2 million total job displacements across the U.S. economy. These are not trivial numbers.
The narrative, however, that "bad trade deals" and globalization are chiefly responsible for the United States' manufacturing decline is economically incomplete.
Empirical evidence strongly suggests that automation is the dominant factor behind manufacturing job losses. According to a widely-cited study by Hicks and Devaraj, automation and productivity gains explained about 88 percent of manufacturing job losses between 2000 and 2010. Moreover, U.S. manufacturing output actually increased in absolute terms by roughly 20 percent between 2000 and 2020, despite a substantial employment decline. This dovetails with the Caliendo, Dvorkin, and Parro trade model, which showed that the "China Shock" only accounted for about 15 percent of the observed decline in manufacturing employment from 2000 to 2007.
The United States has also transitioned significantly toward services-finance, healthcare, education, technology, and professional services-as its economic growth engine. Household spending patterns have followed suit, with U.S. households spending less proportionally on manufactured goods and more on services. Cultural shifts away from "blue-collar" jobs towards white-collar professions and knowledge-intensive work also play a role. Younger generations are often reluctant to take up manufacturing roles, seen as physically taxing or offering fewer prospects for social mobility.
These long-term trends are often overlooked in favor of a narrower narrative anchored to the trade in goods deficit-ignoring the fact that the United States runs a substantial trade surplus in services. The manufacturing job decline, in other words, is real. But it is the product of multiple, intersecting forces, not all of which lend themselves to tariff-based remedies.
Kyle Meng
Associate Professor of Economics, University of California, Santa Barbara
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Program Coordinator and Research Assistant, Economics Program and Scholl Chair in International Business
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Program Manager and Research Associate, Economics Program and Scholl Chair in International Business
Remote Visualization
Structure of "Liberation Day" Tariffs: One Tariff For All, Another For Serial Offenders
The April 2 announcement contained two distinct tariff actions.
First, a universal 10 percent tariff will apply to virtually all U.S. imports starting April 5.
Second, beginning April 9, the administration will impose country-specific "reciprocal" tariffs-targeted at 57 named countries, with rates reaching as high as 50 percent. These nations were identified as chronic trade offenders, based on their bilateral trade surpluses with the United States, perceived tariff asymmetries, and other barriers to U.S. exports.
Remote Visualization
Regional Breakdown of "Reciprocal" Tariffs
The tariffs announced on April 2 reveal a stark regional pattern in their application.
Remote Visualization
Europe was not spared. The European Union, with 27 countries, is hit with a 20 percent blanket tariff, while several non-EU European countries-like Bosnia and Herzegovina (36 percent), Switzerland (32 percent), and Serbia (38 percent)-face rates well above the average.
Africa is the next most affected, with 20 countries targeted. Many face tariffs above 30 percent, including Botswana, Angola, and Mauritius. Notably, Lesotho tops the entire list with a 50 percent tariff.
Asia is hit hard as well, both in breadth and severity. Nearly all of East, South, and Southeast Asia appear on the list, with especially high rates in countries like Vietnam (46 percent), Cambodia (49 percent), Laos (48 percent), and Myanmar (45 percent).
The Middle East (4 countries), the Americas (4 countries), and Oceania (3 countries), by contrast, are lightly represented and face relatively moderate tariffs.
Still, some inclusions-like the Falkland Islands at 42 percent-stand out, raising questions about the targeting logic.
How Were "Reciprocal" Tariffs Calculated?
The appeal of so-called reciprocal tariffs lies in their rhetorical symmetry-match our tariffs to theirs. But this is not what the Trump administration has introduced.
What We Expected
Originally, analysts assumed the administration would aim for parity. That would have meant comparing individual line tariffs classified under the Harmonized System, or "HS codes"-the global standard for tracking and taxing traded goods-with over 5,000 categories at the six-digit level and even more detailed classifications at the national eight- and ten-digit levels. A full accounting would also need to capture non-tariff barriers such as regulatory hurdles, opaque licensing regimes, and other behind-the-border restrictions.
What They Actually Did
Instead, the administration opted for a back-of-the-envelope formula to assign tariffs based on bilateral trade imbalances.
The underlying equation is:
Surplus ÷ (Imports × ε × φ)
Where:
- ε = -4, the assumed elasticity of U.S. import demand
- φ = 0.25, the assumed pass-through rate of tariffs to prices
This simplifies mathematically to:
"Reciprocal" Tariff (Percent) = U.S. Trade Deficit with Country ÷ U.S. Imports from Country
To soften the impact, the result is then halved-producing what officials have called a "discounted reciprocal tariff."
Examples:
- European Union: $235.6 billion deficit ÷ $605.8 billion imports = 39 percent, halved to 20 percent
- Indonesia: $17.9 billion ÷ $28.1 billion = 64 percent, halved to 32 percent
This formula is essentially tied to the bilateral trade imbalance. If there were no bilateral imbalance, the tariff would be zero. This approach punishes high-deficit trading partners from which the United States imports a lot and buys little from, not necessarily those with the most restrictive trade regimes. For example, the formula produces high values for many South and Southeast Asian economies, such as Vietnam, Thailand, Cambodia, Bangladesh, and Sri Lanka, which are countries that sell lots of clothes to the United States but from which the United States buys little in return. In short, the formula provides rough justice at best, blunt force at worst.
Are There Exceptions to the Tariffs?
Section 232 Products: Products already covered (steel, aluminum, and autos) or expected to be covered under Section 232 national security tariffs are exempt.
Strategic Carve-Outs: Copper, pharmaceuticals, semiconductors, lumber, critical minerals, and energy sectors are explicitly exempted.
USMCA-Compliant Goods: Imports from Canada and Mexico that meet USMCA rules-of-origin standards are exempt. However, a 25 percent tariff remains on goods related to the fentanyl crisis, with a fallback 12 percent tariff for noncompliant products if the emergency expires.
U.S. Content Rule: Tariffs apply only to the non-U.S. portion of a product's value, so long as at least 20 percent of the good is U.S.-origin. For instance, a product with 40 percent U.S. components would receive a tariff only on the remaining 60 percent.
Special Legal Status: Goods under 50 U.S.C. 1702(b), which refers to an existing executive authority to restrict trade for defense and national emergency reasons, are exempt. Imports from Column 2 countries (Cuba, North Korea, Russia, and Belarus) already under non-most-favored nation (MFN) status are also unaffected by this round of tariffs.
Do the Tariffs Stack?
The universal 10 percent tariff and the country-specific "reciprocal" tariffs do not appear to be additive. But these new tariffs may stack on top of existing ones.
Take Chinese imports as an example. Many products are already subject to a 25 percent Section 301 tariff, a 20 percent fentanyl-linked tariff, and now face an additional 34 percent "reciprocal" tariff. Add that to the standard MFN rate, and the total tariff burden on a single product could near 80 percent.
In effect, the tariff structure functions like modular trade penalties-layered atop one another unless a specific carve-out applies.
Economic Impact of Tariffs
To study the impacts of these tariffs, we employ a global general equilibrium trade model calibrated to recent trade data. We find that the April 2 tariffs, along with other Trump tariffs- iron, steel, aluminum, and car imports, on Chinese, Mexico, and Canadian imports-would reduce U.S. GDP by 1 percent, which is equivalent to roughly $300 billion in annual output loss at 2024 GDP levels. Prices would rise by 9.5 percent, while nominal wages would increase by 8.6 percent. In other words, real wages will fall. In effect, the policy shrinks the broader economy, delivers inflation, and reduces household income, all while claiming to rebuild it.
It is also worth noting that tariffs function as part of a consumption tax, and like all such taxes, they are regressive. Lower-income households spend a greater share of their income on imported goods and essentials, meaning they will absorb a disproportionate share of the cost. Meanwhile, the revenue raised is expected to help finance tax cuts that will proportionately benefit higher-income earners. The result is a policy that shifts the fiscal burden down the income ladder, shafting the cost burden onto working households while delivering gains to those already at the top.
Retaliation from Partners
In the hours since the "reciprocal" tariff package was unveiled, governments have begun to respond-some with threats of retaliation, others with restraint. Two major blocs already signaling pushback are China and the European Union. China's Ministry of Commerce vowed to take "countermeasures" to defend national interests, though no details have yet been released. Media reports released by China initially suggested a coordinated response by China, Japan, and South Korea, but Tokyo and Seoul swiftly distanced themselves from this assertion.
European Commission President Ursula von der Leyen confirmed that the European Union's first response package is near completion and said that Brussels is "preparing further countermeasures to protect [its] interests and [its] businesses if negotiations fail." One likely vehicle is the Anti-Coercion Instrument-a legal tool originally conceived during Trump's first term in response to his own tariff threats, though only formalized under the Biden administration.
Elsewhere, reactions have ranged from passive observation to quiet preparation. Australia, New Zealand, and Singapore have ruled out retaliation. Others, like Brazil, have already passed a "Reciprocity Bill" that gives its government the legal standing to retaliate. Many more are keeping their powder dry, signaling flexibility but offering no immediate plans.
As additional retaliation packages take shape in the coming weeks, the outlines of the global response will come into sharper focus. But one thing is already clear: No one is walking away untouched.
Barath Harithas is a senior fellow in the Economics Program and Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Kyle Meng is an associate professor of economics at the University of California, Santa Barbara, and a faculty associate at the National Bureau of Economic Research. Evan Brown is a program coordinator and research assistant for the Economics Program and Scholl Chair in International Business at CSIS. Catharine (Katya) Mouradian is a program manager and research associate with the Economics Program and Scholl Chair in International Business at CSIS.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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