This Is The Worst Liberation Day Ever
So-called “Liberation Day” brought a wave of new tariffs. Worse than the new tariffs taxes was the questionable logic behind them.
(Updated April 3, 2025)
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On Wednesday, President Trump announced a wave of new tariffs aimed at “protecting our economic sovereignty” and “redressing our trade imbalances.”
The new tariffs include a 10% universal tariff on all trade partners (effective April 5), country-specific tariffs (based on trade imbalances, tariffs, and non-trade policies, effective April 9), a 25% tariff on automobiles (effective April 3), a 25% tariff on aluminum cans (April 4), and a 25% tariff on auto parts (May 3).1
Notably, Canada and Mexico were left out of the reciprocal tariffs table the President held up during the Rose Garden gathering. Still, they will be subject to the 25% tariff on foreign-made cars.
China also faces an additional 34% tariff on top of the 20% rate that has already been implemented. The increase in China’s effective tariff rate could range from 50% to 60%.
So, is there any good news? It’s still an open question, but the April 2 announcement could represent a “ceiling” on tariff rates. In an interview right after the announcement, Treasury Secretary Scott Bessent said, “As long as you don’t retaliate, this is the high end of the number.”
Further, negotiations could lower the numbers on a case-by-case basis. The White House is open to discussions as stated in its “fact sheet”: “These tariffs will remain in effect until such a time as President Trump determines that the threat posed by the trade deficit and underlying nonreciprocal treatment is satisfied, resolved, or mitigated,” and “President Trump [can] decrease the tariffs if trading partners take significant steps to remedy non-reciprocal trade arrangements and align with the United States on economic and national security matters.”
However, to negotiate, one needs to know where to start. At the Rose Garden event, Trump displayed charts comparing “Tariffs Charged To The U.S.” to “U.S.A. Discounted Reciprocal Tariffs” for a list of trading partners.
Unfortunately, the numbers presented as the “Tariffs Charged To The U.S.” are not actual tariff rates, as a casual observer might infer, but are based on a secret formula not released to the public. However, a little back-of-the-envelope math shows that the Trump administration seems to have calculated each country's trade deficit (imports minus exports) as a share of their imports to the U.S. Then, the “discounted rate” appears to be the trade deficit ratio divided by two (see formula below).
The new tariffs include a 10% universal tariff on all trade partners (effective April 5), country-specific tariffs (based on trade imbalances, tariffs, and non-trade policies, effective April 9), a 25% tariff on automobiles (effective April 3), a 25% tariff on aluminum cans (April 4), and a 25% tariff on auto parts (May 3).1
Notably, Canada and Mexico were left out of the reciprocal tariffs table the President held up during the Rose Garden gathering. Still, they will be subject to the 25% tariff on foreign-made cars.
China also faces an additional 34% tariff on top of the 20% rate that has already been implemented. The increase in China’s effective tariff rate could range from 50% to 60%.
So, is there any good news? It’s still an open question, but the April 2 announcement could represent a “ceiling” on tariff rates. In an interview right after the announcement, Treasury Secretary Scott Bessent said, “As long as you don’t retaliate, this is the high end of the number.”
Further, negotiations could lower the numbers on a case-by-case basis. The White House is open to discussions as stated in its “fact sheet”: “These tariffs will remain in effect until such a time as President Trump determines that the threat posed by the trade deficit and underlying nonreciprocal treatment is satisfied, resolved, or mitigated,” and “President Trump [can] decrease the tariffs if trading partners take significant steps to remedy non-reciprocal trade arrangements and align with the United States on economic and national security matters.”
However, to negotiate, one needs to know where to start. At the Rose Garden event, Trump displayed charts comparing “Tariffs Charged To The U.S.” to “U.S.A. Discounted Reciprocal Tariffs” for a list of trading partners.
Unfortunately, the numbers presented as the “Tariffs Charged To The U.S.” are not actual tariff rates, as a casual observer might infer, but are based on a secret formula not released to the public. However, a little back-of-the-envelope math shows that the Trump administration seems to have calculated each country's trade deficit (imports minus exports) as a share of their imports to the U.S. Then, the “discounted rate” appears to be the trade deficit ratio divided by two (see formula below).
For example, Trump's proposed “discounted” tariff rate for South Korea was 25%. However, according to the World Trade Organization, South Korea has had a free trade agreement with the U.S. since 2012, with an effective tariff rate of 3.4% on U.S. imports. So what gives? South Korea exports twice as much to the U.S. as it imports from the U.S. (so a ½, or 50% ratio). Consequently, the Trump administration appears to have listed a “Tariff Charged To The U.S.” of 50% and then instituted a reciprocal 25% tariff as a “discount” (see Figure 1).
Figure 1 - The Math Checks Out:
Announced Tariff Rate Versus 2024 Annual Trade Deficit Ratio To Imports
Announced Tariff Rate Versus 2024 Annual Trade Deficit Ratio To Imports
Source: U.S. Census Bureau, Payden Calculations
In our view, the entire exercise rests on the misguided view that trade between two countries should always be “in balance”; otherwise, any deficit is due to “unfair trade barriers” such as tariffs, “currency manipulation,” and other “trade barriers.”
Funnily enough, even countries where the U.S. maintains a positive trade balance (countries that import more from the U.S. than they export) still get stuck with a 10% tariff (see Figure 1 again). Sorry, Australia.
Our misgivings about the approach aside, the new slate of tariffs could result in an effective tariff rate for the U.S. ranging from 12.3% to 27%. If the net result ends at the higher end of that range, it would mark the highest effective tax rate since 1932 (see Figure 2).
Funnily enough, even countries where the U.S. maintains a positive trade balance (countries that import more from the U.S. than they export) still get stuck with a 10% tariff (see Figure 1 again). Sorry, Australia.
Our misgivings about the approach aside, the new slate of tariffs could result in an effective tariff rate for the U.S. ranging from 12.3% to 27%. If the net result ends at the higher end of that range, it would mark the highest effective tax rate since 1932 (see Figure 2).
Figure 2 - Back To 100 Years Ago?
Effective Tariff Rates Since 1800 Versus Forecasted Tariff Rates
Effective Tariff Rates Since 1800 Versus Forecasted Tariff Rates
Sources: Historical Statistics Of The United States, U.S. Census Bureau, U.S. Treasury, Bloomberg, Evercore
Second, since tariffs are a tax, the result could be $402 billion in new taxes paid by U.S. consumers and/or businesses, assuming a 12.3% effective tariff rate and no changes in imports. Further, if imports falter, the tariff revenue raised by the U.S. government will also be much less than $402 billion. If consumers shun goods at higher prices, the net result still leaves consumers worse off in welfare terms.
Third, the additional tariffs will hamper business investment and hiring due to higher input costs for imported goods and ongoing uncertainty. Suppose economic activity slows as producers and consumers get taxed. In that case, the U.S. government may generate less individual and corporate tax revenue, washing out some potential revenue gains from tariffs.
In short, if implemented, the new tariff “regime” would easily qualify as one of the worst economic policy experiments in our lifetimes.
Compared to our baseline assumptions from our February 2nd note, “For Whom The Tariff Tolls,” we’ve already shaved our 2025 GDP call to 1.5% from 2% and raised our core PCE call for year-end to 2.5% year-over-year from 2.2% to reflect higher prices in the short run. There could be an additional upside shock to prices in the near term, but we think tariffs will be far more of a growth drag than an inflation story over time.
Will tariffs be enough of a drag to derail an economy growing at a ~2-2.5% annual rate for 10 consecutive quarters? Perhaps not, but they sure seem to be trying.
The Payden Economics Team
Third, the additional tariffs will hamper business investment and hiring due to higher input costs for imported goods and ongoing uncertainty. Suppose economic activity slows as producers and consumers get taxed. In that case, the U.S. government may generate less individual and corporate tax revenue, washing out some potential revenue gains from tariffs.
In short, if implemented, the new tariff “regime” would easily qualify as one of the worst economic policy experiments in our lifetimes.
Compared to our baseline assumptions from our February 2nd note, “For Whom The Tariff Tolls,” we’ve already shaved our 2025 GDP call to 1.5% from 2% and raised our core PCE call for year-end to 2.5% year-over-year from 2.2% to reflect higher prices in the short run. There could be an additional upside shock to prices in the near term, but we think tariffs will be far more of a growth drag than an inflation story over time.
Will tariffs be enough of a drag to derail an economy growing at a ~2-2.5% annual rate for 10 consecutive quarters? Perhaps not, but they sure seem to be trying.
The Payden Economics Team
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Endnotes
1. White House Fact Sheet: President Donald J. Trump Declares National Emergency to Increase our Competitive Edge, Protect our Sovereignty, and Strengthen our National and Economic Security.
Endnotes
1. White House Fact Sheet: President Donald J. Trump Declares National Emergency to Increase our Competitive Edge, Protect our Sovereignty, and Strengthen our National and Economic Security.
© 2025 Payden & Rygel All rights Reserved. This material reflects the firm’s current opinion and is subject to change without notice. Sources for the material contained herein are deemed reliable but cannot be guaranteed.
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