Ahead of Liberation Day, trade watchers expected that the Trump administration would levy tariffs using one of two strategies. Either there would be reciprocal tariffs, based on the trade barriers used by other countries to disadvantage U.S. producers, or global tariffs that applied the same flat rate to everyone regardless of their behavior. On Liberation Day, the answer arrived: we’re getting both. All countries seeking to export to the U.S. will face a flat 10% global tariff, and a list of 57 named countries that run trade surpluses with the U.S. will pay additional reciprocal tariffs of up to 40%.
It’s the biggest tariff increase since 1930 and marks a complete upending of the global trading system. Previously, the U.S., like other countries, regarded itself as bound by the tariff rates it negotiated at the formation of the World Trade Organization in 1994. Those rates—for most U.S. imports—were extremely low, often in the low single digits or entirely duty-free. WTO tariffs were implemented under a principle called “Most Favored Nation,” meaning countries had to offer their lowest tariff rate to every other country and couldn’t single out trading partners for higher rates. The system was designed to keep global tariffs low. That system is now over.
An important principle to keep in mind is that the U.S. did not end this system—our trading partners did. The WTO was an attempt to get the world to agree on a uniform set of competitive rules for trade and permitted tariff increases only when those rules were broken. The U.S. followed these rules in good faith. China, after gaining entry to the WTO in 2001, embarked on a set of state-led industrial policies and trade barriers that were calculated to avoid violating the letter of WTO rules, while still conferring massive advantages to Chinese producers. Other countries, like Vietnam and Germany, adopted elements of China’s strategy. This enabled these countries to accumulate massive trade surpluses at the expense of the U.S., whose market remained open while others’ were distorted by currency manipulation, industrial subsidies, regulatory barriers to trade, financial suppression, and other measures designed to force the U.S. to absorb excess foreign production. U.S. producers were squeezed by a flood of imports at home and scant opportunities to sell abroad. The result was American deindustrialization.
Liberation Day is an attempt to escape this vise by placing high barriers on access to the U.S. market conditioned on our trading partners ending distortive practices that advantage their producers at the expense of our own. Those barriers have turned out to be very high—higher than financial markets were expecting triggering yet another selloff. The Liberation Day tariffs have been excoriated by the press as “mindless” and “baffling,” designed merely to “carpet-bomb the global economy.” Sen. Chris Murphy believes they are “a tool to collapse our democracy.” We should ask a more sober question: as constructed, is Liberation Day an effective way to address the trade imbalances that triggered American deindustrialization? Here are a few points to consider.
First, the reciprocal tariffs are likely about negotiation for managed trade. They are a forcing mechanism pushing countries named on the Liberation Day list to come to the table and make a bilateral trade agreement with the U.S. These countries, many of whom are existentially dependent on exporting to the U.S. market, will be prepared to offer major concessions rather than lose access, but the administration needs to quickly staff up to extract maximum value from these negotiations. That value can come either in the form of increased market access for American firms abroad or investment into U.S. production. The auto quota that the Reagan administration negotiated with Japan, which spurred Japan to invest in making cars in the U.S. rather than pay tariffs, can serve as a model. The recent creation of the United States Investment Accelerator inside the Commerce Department, designed to “dramatically expand assistance to companies seeking to invest and build in the United States,” indicates that the administration is aware of the challenge.
The best evidence that the reciprocal tariffs are designed to be a negotiating platform is that Canada and Mexico have been given the opportunity to almost entirely avoid these tariffs. The Liberation Day executive order specified that previously announced 25% tariffs on Canada and Mexico to address fentanyl and illegal immigration won’t apply to goods that are compliant with the USMCA, the trade agreement binding the U.S., Mexico, and Canada. This comes after news that these countries are negotiating “tariff matching” policies with the U.S. designed to exclude China from the North American market and create what Treasury Secretary Scott Bessent has called “fortress North America.” Canada and Mexico are now major Liberation Day winners—and likely the nucleus of a new trading bloc with the U.S. Other countries——will likely negotiate to join it.
Accordingly, the USMCA has now skyrocketed in importance, providing the only duty-free conduit to the American market. Goods become USMCA compliant when they are manufactured in the U.S., Mexico, or Canada. The incentive to manufacture in these countries has greatly increased, but so has the danger that China and other trade cheats will end-run their countries’ tariffs by offshoring production to low-wage Mexico and exporting duty-free to the U.S. As I previously wrote in Commonplace, the U.S. must prioritize the 2026 renegotiation of the USMCA to ensure that this circumvention strategy is not available.
Much attention has been paid to the fact that the reciprocal tariffs, as announced, are a function of the size of the U.S. bilateral trade deficit with each named country, rather than an attempt to mathematically model and match the extent of that country’s trade barriers. Effectively, our bilateral deficits are being used as a proxy for the level of distortionary policy affecting trade with surplus countries. This is defensible from an administrability standpoint—after all, mathematically modeling every single subsidy and trade barrier in every country would be exceedingly complex, and the size and persistence of the U.S. trade deficit is powerful evidence that it is the result of manipulation rather than market forces.
However, the administration’s approach is a blunt instrument because there are innocent reasons why we might run a trade deficit with any one country—what matters is our overall deficit. Instead, Liberation Day pushes us to pursue balanced trade with every country, even though our trade deficit with, say, Chad is probably not a function of Chadian industrial policy or currency manipulation. We should quickly negotiate with small, Chad-like economies—perhaps for anti-China cooperation on critical minerals—and focus on fundamental changes from larger economies where deficits are more likely to reflect conscious manipulation.
Meanwhile, the 10% global tariff is designed to incentivize reshoring of manufacturing to the United States. Flat tariffs are hated by economists, who bemoan the deadweight loss inherent to applying tariffs to non-strategic goods like bananas and avocados that the U.S. doesn’t produce. However, a 10% global tariff is an effective industrial policy measure that is likely cost justified. First, it is most impactful for industries at the early stage of their cost curve, where costs fall rapidly with small increases in output, and such nascent scale-economy industries are exactly the high-potential strategic industries of the future that we should be most interested in retaining. As the economist Ian Fletcher has pointed out, a flat tariff is effectively an infant industry tariff without the problem of deciding which industry to protect.
Second, it leaves market dynamics intact. Instead of picking winners, all specific decisions about which industries the tariff will favor remain set by the market, as the tariff doesn’t create an uneven playing field between any two sectors. Third, it takes away the ability of manipulator countries to circumvent country-specific tariffs by transshipping or offshoring production through third countries. It is likeliest to address the structural source of the U.S. trade deficit—our absorption of global imbalances caused by foreign subsidies to their export sectors—by making it impossible for the source of those imbalances to simply shift to a different exporter. The economists may have it wrong: a flat tariff is possibly the most strategic tariff we could apply.
The opportunities that Liberation Day has created are real. But to capitalize on them, policy certainty is key. Both the reciprocal and global tariffs were implemented using the president’s emergency powers authority under the International Emergency Economic Powers Act. Whether the IEEPA is broad enough to cover these tariffs is an open question that will be subject to intense litigation. And open questions are not good for capital markets or for businesses wondering whether to invest significant amounts of money in moving their supply chains to the U.S.
The best way to realize the opportunities presented by Liberation Day would be for the administration to facilitate participation in the emerging North American trade bloc for countries willing to pursue balanced trade, while Congress legislates the global 10% tariff floor into law along with reciprocal tariffs for all countries that refuse to drop distortive trade policies. Given that Congress is under significant pressure to find revenue to pay for the renewal of the Tax Cuts and Jobs Act, perhaps there is a deal to be made.
