Study by Australian economists says Trump paused tariff hikes after realising cost to US was too high; it was a 'tactical retreat' for economic reasons
If there was anything President Donald Trump’s week-long grim comedy demonstrated, it was this: China was always the intended target. The rest of the dithering and the bluster appear to have been just a costly sideshow as global equity markets went on a rollercoaster even as the more important bond market gyrated spectacularly.
China the main target
Having pressed the 90-day “pause” button on the escalated tariffs announced on April 2, retaining only the 10 per cent duty on imports from most of the rest of the world, Trump slapped on imports from China an eye-popping tariff of 125 per cent, effective immediately.
Clarifications issued by the White House later revealed that the total tariffs on goods from China would be 145 per cent, inclusive of the 20 per cent tariff imposed on China for its alleged role in the fentanyl crisis in the US.
Also read: Why India can only grin and bear Trump’s tantrums while China roars back
The talk of “reciprocal” tariffs evaporated quickly as Trump made it evident that his objective was to isolate and target China. Was this always the “method” in the madness — that China was always the intended target, the rest a mere macho swagger aimed at convincing his MAGA rank and file that he was America’s messiah taking on the big bad world?
Immediately after April 2, the general consensus among economists — also brutally echoed by the markets’ reaction around the world – was that the US was likely to enter a period of stagflation, pummelled simultaneously by both inflation and a severe economic slowdown, if not a recession.
Markets in turmoil
The markets too reflected this as the bond market gyrated in a rare two-way reaction. Interest rates (yields on bonds, actually) went up sharply in anticipation of a contractionary stance (by hiking interest rates) of the US Federal Reserve in response to the fears of an inflationary spiral and going down in the expectation that the US central bank may cut rates (as Trump and his cohorts have been aggressively demanding) amidst mounting fears of an impending recession.
While the equity markets were themselves already reeling, the added pressure from the bond market is perhaps what forced Trump to fall back on his old calling card — acting as the consummate deal maker.
After a week in which it was the US versus the rest of the world, the about-turn came with the assertion by the US Commerce Secretary Howard Lutnick that marked China as the odd one out. The rest of the world, he claimed, “was ready to work with President Trump to fix global trade.”
No channel for talks
The observation by economic historian Adam Tooze that in China the American elite has found “a full-spectrum scapegoat,” seems absolutely on point.
Watch | Trump’s China tariff war: Has he bitten off more than he can chew?
Clearly, Trump’s idea is to isolate China and put pressure on the rest of the world in the next 90 days to join the US on the dangerous, costly and unpredictable adventure.
A striking aspect of this crisis — the most devastating in global trade since World War II — has been the confirmation by multiple media outlets, including the London-based Financial Times, the Wall Street Journal and the New York Times, that there had been no meaningful channels for communication between the world’s two biggest economies.
Given that even adversarial powers maintain a channel of communication open to facilitate back-channel negotiations, the lack of any communication at all between the two countries was shocking.
Media reports indicate that this time the Chinese, unlike during the previous Trump administration, were not even aware of whom to speak with even if they wished to. This adds credence to the theory that China was always the intended target and that Trump was never interested in negotiations.
Complete decoupling unrealistic
Trump’s agenda for a complete decoupling from China is likely to increase the pain for the US economy. Estimates show that the increase in tariffs on imports from China — even from the already escalated rate of 84 per cent to 145 per cent — effectively means that overall tariffs on consumer goods imported into the US would actually increase, simply because a very large proportion of such goods come from China.
Also read: Trump may have done what Lenin, Mao and Ho Chi Minh could not
Trump expects — actually demands — that companies pivot away from China but that is easier said than done.
For instance, Apple has tried to move some of its iPhone manufacturing operations — mostly lower-end ones — to India; four of its five suppliers’ plants in India are now in Tamil Nadu. However, high-end electronics are still produced at its other centres; 80 per cent of its phone manufacturing output is still located in China.
Costly, unviable option
Although, in theory, India could negotiate for concessions during the 90-day “pause”, Apple would still be significantly exposed to high tariffs on components sourced from Chinese suppliers. The company would either have to pass on the higher costs to customers or take a hit on its own margins.
In fact, analysts expect the iPhone 17 (due in September) to be launched globally so that the increased burden of the tariffs it faces in the US can be recovered from other territories.
The Financial Times quotes a source from Morgan Stanley as saying that Apple would incur costs running to “several billion dollars” to just move a small part of its production capacity to the US. The newspaper quotes another analyst as saying that it would take Apple “three years and $30 billion to move just 10 per cent of its supply chain from Asia to the US.”
Mindboggling complexity
Apple’s unique position as a quintessential outsourcer company — exemplified by the fact that it does not manufacture anything in-house — that has built and nurtured suppliers in Asia over decades makes such a transformation an impossibility.
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The complexity involved is mindboggling. Consider this: There are 387 individual parts going into the iPhone 16; in 2023 Apple sourced supplies from 187 companies, which accounted for 98 per cent of Apple’s “direct spend”; and, most significantly, 169 of these companies had a manufacturing base in China or Taiwan.
But this is just the case of a single premier manufacturer. In goods ranging from laptops to lithium-ion batteries and game consoles, imports from China accounted for more than two-thirds of all such imports into the US in 2024.
To expect that the Chinese retaliation would take the form of a tit-for-tat strike in terms of tariffs would be silly; they have other levers at their command, especially in a situation in which they have the option of falling back on networks of trade and investment they have assiduously cultivated all over the world, including in our own region.
Costlier for US
A study published on April 10 by two Australian economists at Victoria University reveals that the impact on the US economy would be far more severe than that suffered by China.
The study by James Giesecke and Robert Weschik at the Centre for Policy Studies in Melbourne shows that although Trump’s “pause” mitigates the impact, the magnitude of the relief that the US is projected to enjoy is much smaller than the adverse impact that China would face from the escalated tariff announced on April 9.
Although the study is based on the assumption of US tariffs of 125 per cent on Chinese goods — later clarified to be 145 per cent — the results can be seen as reflecting the minimum impact on the two economies. The study’s projections for 2025-2040 are based on the assumption that the 90-day “pause” will be extended permanently.
The authors of the study argue that Trump’s rollback was because of his realisation that the “economic cost to the US was too high.” Trump’s “pause,” they claim, is a “tactical retreat,” not a position that “signal(s) a shift in philosophy.”
Big hit for US economy
Before the “pause” came into effect, US GDP (in real terms) was expected to decline by 2.55 per cent in 2025 and by an average of 2.07 per cent between 2025 and 2040.
Also read: What prompted Trump’s 90-day pause on higher tariffs for most nations
The “pause” will likely give some relief to the US economy, mainly because all other of America's trading partners would not be hit by “reciprocal” tariffs. In such a situation, the study projects US GDP to decline by 1.95 per cent (60 basis points lower than the original April 2 “formula”); over 2025-40, US GDP is expected to still decline but at a lower average rate of 1.55 per cent (52 basis points less than would have been as per the April 2 declaration).
The costs in terms of employment, a key issue Trump championed as he rode to power, are “not trivial,” according to the study. “They represent significant contractions that would be felt in everyday life, from job losses to price increases to reduced household purchasing power.”
Based on the current unemployment level of about 4.2 per cent, the authors note that “for every three currently unemployed Americans, two more would join their ranks.”
Investment rate slide
However, as the accompanying table shows, the biggest hit to the US economy would be the slide in the investment rate, widely regarded as the weak link in the US economy, and of which Trump has been championing a revival.
Investment, adjusted for the price levels, is projected to drop by a whopping 6.56 per cent in 2025, according to original tariff proposals; and by an average of 4.62 per cent in the period between 2025 and 2040. Although these magnitudes are lower in the wake of the “pause”, they are still projected to decline significantly not just in 2025 but all the way up to 2040 (on average).
The charts below display the two 2025-2040 averages — of the indicator estimates had America's worldwide tariff kicked in, and the projections in the scenario of increased tariffs for China alone:
Also read | Why retaliatory tariffs on US do not make sense for India
Trump’s own admission that people — ostensibly referring to influential business interests — “were getting yippy”, confirmed that pressure from the big moneybags had a significant role in the reversal of his stance. In hindsight, it appears that the realisation among this extremely influential section of American opinion that Trump’s maximalist stance would hurt their own interests significantly is what perhaps forced him to soften his position on tariffs.
Collateral damage
The significant takeaway from the table is that the magnitudes of impact for all these variables — GDP, consumption, investment and employment — are projected to be significantly lower for China than they are for the US.
Trump's continuing flip-flop, the latest being the reduction of some of the "reciprocal" tariffs on electronic products — among them smartphones, computers and semiconductors — announced late at night on April 11, will make little difference to the projections made by the Australian economists. The production of these products is heavily concentrated not just in China but also in Southeast Asia.
These reduced tariffs are applicable to imports from all countries, they do not appear to be country-specific. Apple is expected to be a prime beneficiary of this reprieve.
The inescapable conclusion is that the US economy is likely to get hurt much more badly in the bruising battle between the two economies that have a combined GDP of $46 trillion, a significantly large fraction of the global economy.
It is only natural that the rest of the world would suffer significant collateral damage in the process.
