Understanding the Background and Consequences of Trump’s “Independence Day” Tariffs

On Wednesday, April 2nd, at 4 p.m., all eyes were on the White House Rose Garden as President Trump (Donald Trump) announced a global trade policy of reciprocal tariffs. The President has repeatedly stated that April 2nd is the “Freedom Day” for the United States, as he aims to reclaim a fair share for the country in global trade and bring in substantial tariff revenue.

Ever since taking office, Trump has swiftly taken action to prioritize tariffs in the US economic policy as he fulfills his campaign promises. His strategy includes implementing new tariffs and/or using tariffs as leverage to address other disputes, signaling a significant shift in global economic/trade policies over the past century that could directly impact most major participating countries in the World Trade Organization (WTO) system.

In early February, the US imposed an additional 10% tariff on all imports from China, which was later doubled to 20% a month later. In early March, comprehensive tariffs of 25% were imposed on most imports from Canada and Mexico. Following commitments from both countries to strengthen border control measures against drugs and illegal immigration, a series of exemptions were announced by President Trump.

On March 12th, the US imposed a 25% tariff on imported steel and aluminum. On March 26th, the US declared a 25% tariff on imported cars, with plans to extend the tariffs to entire vehicles starting from April 3rd, and expanding to include major auto parts by May 3rd.

President of Mexico, López Obrador, stated that they would not implement reciprocal tariff measures. Vietnam announced the reduction of import tariffs on a range of products such as liquefied natural gas and automobiles. Additionally, they proposed lowering import duty rates for 10 categories of goods from all WTO member countries.

Thailand’s Ministry of Commerce announced plans to reduce tariffs on American products. Ursula von der Leyen, President of the European Commission, emphasized in a speech on Tuesday that the EU seeks negotiation resolutions but also has “strong plans” to respond with increased tariffs to the US when necessary.

Israel’s Finance Minister Bezalel Smotrich signed a directive to immediately cancel all remaining tariffs on imported American products, making all US products duty-free in Israel.

According to CNBC, US Treasury Secretary Scott Bessent informed congress members that the reciprocal tariffs to be unveiled on Wednesday would represent an “upper limit,” indicating the maximum tariff levels listed, after which countries can take measures to equivalently reduce tariffs with the US.

During his second term, Trump has imposed and threatened tariffs at a significantly higher rate compared to his first term. Based on analysis by Yale’s Budget Lab, the 20% tariff on Chinese imports in early March, and the 25% tariffs on Canadian and Mexican goods have led to an average effective tariff rate increase of 7 percentage points in the US, reaching almost 10%, the highest level since 1943.

Yes, the US Congress has authorized the President to modify tariffs to address various trade-related issues including threats to national security, wartime or emergency situations, harm or potential harm to American industry, and unfair foreign trade practices.

In a column published by the Center for Strategic and International Studies, it is noted that while companies can challenge higher tariffs in court, they face “significant challenges,” especially considering the respect for presidential authority in precedents. The article was co-authored by Warren Maruyama, former General Counsel at the Office of the US Trade Representative.

In a nomination hearing in early January, Treasury Secretary Scott Bessent stated that the Trump administration would use tariffs in three scenarios: correcting unfair trade practices, increasing federal revenue, and as leverage in negotiations with foreign entities instead of sanctions.

Trump believes that sanctions have been overused, and tariffs can revitalize American industry while the tariff revenue helps offset the decrease in government revenue resulting from the 2017 tax cuts.

“We will bring these companies back (to the US),” Trump stated in an interview with Bloomberg at the Chicago Economics Club in October 2024, “We will further reduce the corporate tax rates for companies producing in the US. We will protect these companies with high tariffs.”

During his first term, Trump levied several rounds of tariffs on Chinese goods, intending to reshape the US economy with these tariffs, but his plans were disrupted by the COVID outbreak in Wuhan. This led to a deterioration in US-China relations until later stages of the Biden administration when gradual improvements began.

Commerce Secretary Howard Lutnick described the tariff plan as a means to regain world respect in a nomination hearing. He told senators that America’s allies and adversaries alike have been “taking advantage of us, they don’t respect us, and I hope that changes.”

Moreover, Trump also aims to offset the revenue loss resulting from policies like tax cuts by using tariff revenues. Bloomberg estimated that the tax cuts are expected to cause a $4.6 trillion loss in government revenue over 10 years.

Bloomberg stated that the relatively higher tariffs proposed by Trump only affect a small portion of US trade, with the trade-weighted average tariff rate for imported industrial goods into the US at only 2%. This figure is calculated by dividing total import value by total revenue from tariffs.

Within the total imported goods into the US, around 94% of goods have an average weighted tariff of around 2%, with half of these goods entering the US duty-free.

In fact, Trump’s approach to imposing tariffs is not entirely new. Throughout the US history, heavy tariffs were levied on imported products for most periods, until the 1930s when government leaders embraced the concept of free trade, leading to a fundamental shift in policy.

Over the past few decades, the belief in free trade has garnered support from both parties in the US, as American companies aimed to build cost-effective supply chains overseas. With US assistance, China joined the WTO in 2001, gaining increased access to global markets, though critics argue that Beijing violates the text and spirit of free trade rules, such as subsidizing domestic industries and forcing technology transfers from foreign firms operating in China.

Researchers also found that trade from China led to a surge in imports, leading to a decline in employment rates for American manufacturers. Additionally, the US-China trade deficit rapidly climbed to over $500 billion annually.

During Trump’s first presidential term, he imposed new tariffs on approximately $380 billion worth of Chinese imports in 2018 and 2019, using tariffs to rejuvenate American industry and counter Beijing’s unfair trade practices.

The Biden administration has maintained these tariffs and increased tariffs on an additional $18 billion worth of Chinese imports in 2024. Subsequently, the enthusiasm for imposing tariffs spread to the European Union. In early October, the EU voted to impose a tariff of up to 45% on electric cars from China.

When a country imposes import tariffs, domestic manufacturers may not immediately begin producing the affected products. If the country lacks alternative domestic suppliers for these goods, their prices will rise.