US President Donald Trump’s April 2025 reciprocal tariffs aim to boost US manufacturing but will likely provoke considerable risks for the United States and the global economy. The tariffs will disrupt global supply chains, provoke retaliation and weaken US competitiveness. Enforcement is complex and contradicts goals like reducing bureaucracy and immigration while financial instability, asset losses and political backlash from retirees will undermine domestic support. Global trade may also shift away from the United States, diminishing its leadership. With tightening credit and delayed economic benefits, the policy’s internal contradictions and timing mismatch threaten its sustainability before any intended gains can materialise.

US President Donald Trump’s tariffs have sent a shockwave through global markets, challenging long-standing principles of international trade and disrupting established trade agreements. As these changes unfold, the world will not remain passive, and global responses to Trump’s tariffs pose significant challenges to their domestic political sustainability.

Trump’s tariffs are supposed to strengthen some sectors in the US economy but are highly disruptive to the global economy. At the same time, US fiscal spending constraints seek to reduce demand and curb inflation. Both effects contract the world economy, which Trump views as an investment to restore US global trade dominance and long-term wealth.

It remains unclear which substitutions or adjustments countries are likely to pursue. If tariffs persist, though some substitutions may eventually drive adjustments, some portion of certain tariffs will be absorbed by exporters — especially where the United States is a big buyer — or offset through US dollar appreciation.

Trump’s tariffs are also supposed to be a tool to drive other economies to negotiate. The recent selective pause opens a window for that. But the outcome is not clear and the tariff threat remains in the meantime.

In response, other economies will likely divert trade away from the United States. Supply chains

Differential tariff rates between countries, likely even if there is a negotiated outcome, will prompt economies to divert trade flows to the United States through other channels, such as countries that only face the universal 10 per cent tariff or Mexico and Canada in the case of goods exempt through compliance with the United States–Mexico–Canada Agreement. In response, the United States may need to establish origin rules, the implementation of which remains ambiguous under the April 2025 executive order that underpins the latest tariffs. The bureaucracy necessary for enforcement is at odds with the administration’s goal of reducing the size of the public sector.

Countries, as they seek to manage the uncertainties, may restructure trade with the United States, potentially disassembling goods into components for separate export to the United States, where they would be reassembled. This could involve exporting parts to the United States — depending on tariff classifications and routes — while shifting some services embedded in goods and labour to the United States, which would contradict Trump’s goal of reducing US immigration.

Other economies may retaliate by reducing US imports — as China, and the European Union to some extent, have already done. The United States has already responded to China, at great mutual cost. The economic cost of retaliation is deterring smaller trading partners. Countries may alternatively pursue new trade agreements that could disadvantage the United States and facilitate new growth opportunities among members, potentially accelerating reform agendas — an opportunity for APEC to take the initiative. But this approach would not help make the United States relatively ‘greater’.

US manufacturers will need to identify alternative markets in cases of retaliatory tariffs, which may be difficult given potential competitiveness issues resulting from tariffs on inputs or the costs of vertical integration to avoid tariffs, making the effective protection rate crucial. This poses challenges to Trump’s objective of expanding US manufacturing.

There will be a shift in resources within the US economy. To the extent that tariffs are effective, they will divert resources away from competitive export sectors, effectively levying a tax on exports, including services — which Trump does not prioritise despite the United States’ substantial advantage. Along with the negative impact on manufacturing foreign direct investment, this undermines US economic strength.

There is scope to incorporate more US content into value chains, given efforts to exempt such content from tariffs when reimported. Given the complexity of value chains like automobiles, calculating this will be challenging. This incentivises multinationals to inflate the value of US content, creating another administrative contradiction.

Leadership in the global trading system is expected to transition. While the European Union and China are frequently cited as potential leaders, both face scepticism about their capacity to establish widely supported regimes. It will be interesting to see whether regions like East Asia can collectively articulate a leadership role — China’s APEC chairmanship in 2026 might contribute here — and whether the WTO can initiate new global tariff reduction negotiations. The 90 day offers an opportunity to refine these responses. Regardless, the outcome will be a diminished US role — another contradiction to Trump’s agenda.

The significant wealth effects from variable asset values following stock market responses to the interventions severely impact pension funds at a time when baby boomers are reaching peak retirement withdrawals. This will likely spark domestic political turmoil as retirees and near-retirees face diminished security. Already, this is prompting a policy re-evaluation before the tariff regime has any real effect.

But more importantly, as financial institutions grapple with increased uncertainty and volatility in international transactions, credit conditions may tighten significantly, undermining the very economic foundation these tariffs aim to protect. Policies intended to shift activity in the US economy might instead trigger financial mechanisms that further weaken it, potentially forcing a policy reversal before the intended economic effects can materialise. This now represents the most immediate threat to the tariff regime’s sustainability.

Many elements of the tariff regime and likely global responses contradict its declared purpose. The critical question for the Trump administration is whether it can navigate the financial and political storms. The timeline mismatch poses the most significant challenge to the tariff regime’s sustainability.

Source: East Asia Forum 

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