By Jill Hurley
In the lead up to the 2024 election, America’s business community had mixed feelings about what a return of Donald Trump to the White House might mean. Some saw his return as a form of salvation; a return to lower corporate taxes and freedom from suffocating regulatory compliance. Others saw it as a return of uncertainty around economic and trade policy that had the potential to raise prices and alter market conditions.
For the latter group, the ascendancy of a Trump presidency 2.0 is cause for warranted consternation. The president-elect has been quite vocal about his intentions and – given the actions taken in his first term – there is little cause to doubt him.
To begin, it’s important to understand precisely what sorts of trade policies the Trump campaign has already floated:
- A universal tariff of 10% or 20% to be applied to all imports from all points of origin.
- A universal tariff on imports from China of 60%.
- A tariff of 100% on all automobiles entering the U.S. from Mexico.
- A tariff of 25% on all imports from Mexico
- Pass the Reciprocal Trade Act so that the U.S. can impose matching tariffs on countries that tariff U.S. goods at a higher rate.
To be clear, these are not ideas the president-elect has conjured up on his own. On the contrary, they are part and parcel of a strategic economic approach espoused by key policy advisers, some of whom have been with the president since his first term in office. Economists outside the president’s circle of advisers have warned that such policies would have devastating effects. The implementation of a universal 10% tariff would drive up the average tariff rate to from 2.3% in 2023 to 17%, the highest rate since the Great Depression, earning the U.S. the distinction of the highest tariffs amongst advanced economies.
So, why impose the tariffs? What’s goals is the president trying to achieve, and what should commercial decision makers plan for in 2025?
What’s the point?
Make (lots of) money: A universal tariff of 10% or 20% would be a massive windfall for a U.S. administration eager to drawn down the fiscal deficit while simultaneously keeping its promise to reduce taxes. And a windfall it would be. Consider that the trade “remedies” imposed in 2018 have to date yielded the government $257 billion in revenue. The tax foundation estimates a 10% universal tariff would generate $2.7 trillion in customs-duty revenue by 2034 and a 20% tariff would generate $3.3 trillion over the same time period. This would allow the Trump administration to reduce corporate and income taxes, though both individuals and corporations would end up incurring the cost of the duties through prices increases.
Appeal to his base: President-elect Trump handily won the 2024 election due to increased support from union workers and residents of Rust Belt states who continue to hold out hope for a manufacturing renaissance in the U.S. that would see jobs return en masse to hollowed-out industrial communities throughout the Midwest. That was also the purpose of the tariffs imposed on China in Trump’s first term, though it didn’t really work out that way. While U.S. companies did in fact shift production out of China (imports from China have dropped from $538 billion in 2018 to $426 billion in 2023), the production didn’t return to the U.S. Rather, it was transplanted to other low-cost countries, such as Thailand, Vietnam, Singapore, Bangladesh, Mexico and others. The outcome is that while the trade deficit with China has declined, the overall international trade deficit has climbed from $870 billion to $1.06 trillion in 2023, and not because of a decline in exports. Lesson learned. Rather than target a single country of origin, apply the tariffs to all imports.
Fairness through strength: The president-elect has often promoted a sense of toughness as a virtue. The tariffs applied against China were initially to be used as a bargaining chip to draw concession from Asia’s economic hegemon. Similarly, tariffs imposed against steel and aluminum coming from allied nations on the basis of “national security” were used to later secure more advantageous trading arrangements. The threat of a universal tariff and 60% tariff against China will be used to strike fear into the hearts of those who will be immediately impacted with hopes that they will lower their tariffs on U.S. goods.
Will it work?
Economists aren’t convinced the government will achieve its goal of reducing the fiscal deficit, nor the trade deficit, particularly since the proposed tariffs are designed to spur domestic production, which will increase the value of the dollar, creating greater imbalances in exchange rates and reducing export demand. Moreover, the average American would end up paying about $1,200 annually through price increases on common goods as a result of the tariffs, which isn’t likely to go over well with voters.
What to plan for in 2025?
Don’t make any sudden moves: If there’s a lesson to be gleaned from Trump’s first term, it’s that trade policy – like all other policies – are fluid and can mold and shift based on how other countries (and Congress) responds. In some cases, the imposition of tariffs may be future-dated, allowing businesses to prepare; in others they could be gradually phased in over an extended period. The key is to ensure your supply chain is nimble enough to shift and scale production when necessary, and that your revenue and pricing models have sufficient elasticity to adapt to new supply chain costs (which won’t be limited to tariffs alone).
Plan for higher freight rates and less capacity: In the event the threat of tariffs becomes real, precedent suggest high-volume importers in the U.S. will begin stockpiling goods stateside. That trend creates a dearth of capacity in the freight market, which immediately translates to higher ocean and air freight rates in the short term. It also translates into higher land freight rates as companies work to distribute their stockpiled goods across distribution centers.
Leverage exceptions: Tariffs aren’t necessarily written in stone. Their goal is to discourage reliance on foreign inputs and encourage reliance on domestic ones. But in the event the volume of domestic inputs are inadequate and/or prohibitively expensive based on what the market will bear, applications for exceptions can be made. Keep in mind that some exceptions that are granted are based on the Harmonized Tariff code, not the applicant, so one company can be the beneficiary of another’s successful application.
Prepare for market diversification: One of the misguided beliefs amongst proponents of universal tariffs is the notion that other countries won’t reciprocate. There’s little to believe this is true. In 2018, Canada, Mexico, the EU and China all reciprocated U.S. tariffs with tariffs of their own; others did not. The impact was that U.S. goods were less competitive in those countries that did reciprocate. Be prepared that your international markets may be disparately affected depending on the extent of their reciprocity; those that choose not to reciprocate or not reciprocate in kind may be more competitive markets for your product.
Hope for the best; plan for the worst: In the event tariffs are applied against Canadian and/or Mexican imports, there’s a good chance the 2026 review of the U.S.-Mexico-Canada Agreement (USMCA) will result in irreconcilable differences. While it’s highly unlikely and cooler heads are far more certain to prevail, there’s always the remote chance that free trade within North America could be a thing of the past. That may mean revisiting the entire configuration of your supply chain.
Prepare for the unexpected
Those who remember well the 2017-2019 period will remember that when it came to trade, the only certainty was uncertainty. There is likely to be far more change in the coming months and years than at any time in the recent past. America’s business decision makers will need to be prepared for disruption. Effective scenario planning without making hasty decisions will be critical, as will the ability to scale and adapt with little preparation. Supply chains that can achieve that balance will overcome the challenges brought on by the new trade environment.
Jill Hurley is Senior Director, Global Trade Consulting at Livingston. As the practice leader, she spearheads U.S. import and export projects, offering comprehensive reviews of clients’ business models for risk assessment, crafting, and implementing import/export compliance programs, conducting audits, navigating export licensing requirements, and providing support in U.S. trade remedy matters.