The Trump administration has announced a 90 -day break in its plan to impose “reciprocal” tariffs on almost all US imports. But the pause does not extend to China, where import tariffs will increase by 125%.
The movement indicates a partial retreat of what had been drilled as a broad and aggressive commercial war. For most countries, the United States will now apply a 10% reference rate for the next three months. But the White House made it clear that its tariffs on Chinese imports will remain in place.
So why did President Trump go back to the wider tariff thrust? The answer is simple: the economic cost for the United States was too high.
Our economic model shows the consequences, even after the 'pause'
Using a global economic model, we have been estimating the macroeconomic consequences of Trump administration fees plans as they have developed.
The following table shows two versions of the economic effects of the Rate Plan:
- “Prevent previous”: as the plan was immediately before the 90 -day break on Wednesday, under a scenario in which all countries retaliate except Australia, Japan and South Korea (which they said they would not take reprisals)
- “Post-Pause” after reciprocal tariffs were removed.
As it is clear, the United States would have faced steep and immediate losses in employment, investment, growth and, most importantly, real consumption, the best measure of domestic living standards.
Heavy War Costs Tariff
Under the stage prior to pause, the United States would have seen a real consumption to fall by 2.4%only in 2025. The Gross Real (GDP) domestic product would have decreased by 2.6%, while employment falls by 2.7%and real investment (after inflation) sank 6.6%.
These are not trivial adjustments. They represent significant contractions that would feel in everyday life, from the loss of jobs to price increases and the reduction of the purchasing power of households. Since the current unemployment rate of the United States is 4.2%, these results suggest that for every three Americans currently unemployed, two more would join their ranks.
Our modeling shows that the damage would not only be in the short term. During the 2025-2040 projection period, the real consumption losses of the United States would have averaged 1.2%, with persistent investment weakness and a long-term decrease in real GDP.
It is likely that internal economic advice reflects this type of perspective. The decision to stop most rates increases can be a recognition that politics was economically unsustainable and would result in a permanent reduction in the global economic power of the United States. The financial markets were also shaken.
The Scale Plan: still aggressive in China
The new agreement announced on April 9 scale the tariff regime higher than 10% fixed for approximately 70 countries, but maintains the total weight of tariffs on Chinese products in around 125%. Canadian and Mexican import rates remain at 25%.
In response, China has announced a rate of 84% on US goods.
The “post-pause” column of the table summarizes the results of the setting plan scale if the pause becomes permanent. By consistency, we assume that all countries, except Australia, Japan and Korea, retaliate with tariffs equal to taxes by the United States.
As it is clear in the results of “post-pause”, the lowest rates of the USA. UU., Together with lower retaliation rates, equal to less damage to the economy of the United States.
Tariffs applied uniformly are less distorted, and significant reprisals of a single important partner (China) is easier to absorb than a broad global response.
However, the costs will remain high. The United States is expected to experience a 1.9% drop in real consumption in 2025, driven by lower employment and reduced efficiency in production. It is expected that real investment falls by 4.8%and employment by 2.1%.
Perhaps we should not surprise ourselves that costs remain so high. In 2022, China, Canada and Mexico represented almost 45% of all imports of US goods, and many countries already faced reciprocal tariffs on the “pre-causa” stage. Trump's tariff pause has not changed tax rates for these countries.
What does this mean to Australia?
Much of the domestic comment in Australia has focused on the risk of collateral damage of a commercial war between the United States and China. Given the economic ties of Australia with both countries, it is a reasonable concern.
But our modeling suggests that Australia can actually benefit modestly. In both scenarios, the real consumption of Australia increases slightly, driven by a stronger investment, improved trade terms (a measure of our export prices in relation to import prices) and the redirection of commercial flows.
A mechanism is what economists call commercial fun: if Chinese or European exporters find that the US market is less attractive, they can redirect goods to Australia and other open markets.
At the same time, the reduction of the global capital demand, especially in the United States and China, means lower interest rates worldwide. That stimulates investment in other places, even in Australia. In our model, real Australian investment increases in both scenarios, which leads to small but sustained gains and household consumption.
These results suggest that, at least under current policy environments, it is unlikely that Australia suffers significant direct effects due to rate increases.
However, the growing uncertainty of investors is a risk for global and Australian economies, and this is not taken into account in our modeling. In the single week space, the Trump administration has caused the confidence of global investors through three large tariff ads.
A temporary respite
Tariffs seem to be central to the administration's economic program. Then, Trump's decision to stop his broader tariff agenda may not indicate a change in philosophy: only a tactical retreat.
The updated strategy, the high tariffs on China and the lowest in other places, could reflect an attempt to forward where the administration sees its main strategic concern, while avoiding the unnecessary setback of the allies and neutral partners.
It remains to be seen if this narrower approach is durable. The most acute economic pain has been deferred. If you return it depends on how the next 90 days develop.
James Giesecke is a professor at the Policy Studies Center and the Impact Project at the University of Victoria. Robert Waschik is an associated and deputy director at the Center for Policies Studies of the University of Victoria.
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