Liberation Day: A Dark Day for the Global Economic Order

With great pomp and circumstance, President Trump finally unveiled what will likely be the most impactful piece of economic policy of his second term—and indeed, of his entire presidency. Of course, we can expect further tax cuts, and maybe even other relatively important measures, but those are standard fare for sitting presidents. But with Wednesday’s trade policy announcements, Trump has all but singlehandedly broken the global economic order that has been in place since the end of World War II.

The president was undoubtedly quite pleased with himself. This was, after all, “Liberation Day.” Market reactions to the announcement may be sobering, but Trump’s protectionist beliefs seem truly unshakeable at this point. His entourage may be a bit more nervous, though, as may Congress. We’ll see if these convictions waver sooner or later ... and what real effects these tariffs and any retaliatory measures have on the US economy in the meantime.

“Reciprocal” Tariffs

Before we dive into the consequences, let’s look at what Trump announced from the White House Rose Garden. After listing the many evils that have resulted from international trade and his predecessors’ mismanagement of the country, the president announced that he would be invoking the International Emergency Economic Powers Act and applying tariffs on all US trading partners. The tariffs range from 10% to 50%. Imports from China will therefore now be subject to a 34% tariff—on top of the two rounds of 10% tariffs that were announced in response to the fentanyl crisis.¹ Imports from the European Union will be tariffed at 20%, Japan’s imports at 24%, South Korea’s at 25%, et cetera. According to the White House, these tariffs represent roughly half of what the US administration considers “tariffs charged to the USA including currency manipulation and trade barriers.” But these figures have little basis in reality, and the calculations don’t seem to have any real connection to the tariffs and barriers imposed by other countries.² All countries that have a trade surplus with the United States (including the United Kingdom, Brazil, Australia and others) will have a new tariff of at least 10% levied against them. The effective tariff being imposed on all US imports is expected to climb from 2.3% in 2024 to 24.5%.³ This is the highest it’s been since before the First World War (graph 1).

The executive order signed by the president on Wednesday states that a 10% tariff will be applied to all affected countries on Saturday, April 5, and the remaining tariff percentages will come into effect starting April 9.

These tariffs do not apply to goods already affected by other decisions, including the 25% tariff on automobiles, steel and aluminium. There are also other exceptions for goods that will probably be subject to other decisions (copper, pharmaceuticals, semiconductors, lumber, certain critical minerals, energy).

What About Canada?

For once, Trump seems content to leave Canada (and Mexico) out of it. There were no new tariffs announced for US imports of Canadian and Mexican goods. The previously announced tariffs remain in effect, and as a happy surprise, the exemption for CUSMA-compliant goods is being maintained. That being said, Canadian exports that aren’t CUSMA-compliant are still subject to the tariffs imposed in response to the fentanyl crisis (25% on all goods, with a 10% carveout for energy and potash). If the president revokes (or Congress overturns) the February 1 executive order linking tariffs to the fentanyl trade, Canada and Mexico will be hit with tariffs of 12% on non-CUSMA compliant goods instead of 25%. Meanwhile a 25% tariff on the non-US content of Canadian and Mexican automobiles came into effect on Thursday.

The Consequences

First and foremost, this week’s announcements don’t diverge significantly from the assumptions used in our March Economic and Financial Outlook External link.. In fact, the situation may even be slightly less negative for Canada: the CUSMA exemptions are being maintained, whereas we expected them to end. That said, economic conditions here and in the United States could still deteriorate, and there’s still a good chance that both countries will slide into a technical recession over the coming quarters.

The rest of the world will not be spared, but the severity of the setbacks will vary from country to country. While European countries will still be affected, they are far less dependent on US demand than we are (graph 2). The protectionist measures levied against Chinese goods are so large that it would be surprising if the country made it through unscathed, especially since its own economy has improved but remains fragile. Other emerging economies in Asia are also being hit by tariffs of over 35%. This includes Vietnam, which is the United States’ fifth-largest exporter, sending more than US$141B in goods to the United States in 2024. It will now face rather gargantuan tariffs of 46%.

And while tariffs have a direct impact, they also do collateral damage. It’s been clear for some time now that Trump’s protectionist stance has been fuelling uncertainty, which has in turn caused problems in the United States and around the world. At best, Wednesday’s announcements give us some insights into a fairly bleak situation. However, it would be surprising if this were the last of it. We can expect a wave of reprisals, some of which have already been announced. Canada has imposed 25% tariffs on the non-Canadian portion of automobiles imported from the US, and China has announced 34% tariffs on imports from the United States. Other countries are also expected to retaliate. But on the other hand, further trade negotiations could bring about positive developments. It will also be interesting to see if this new distance with the United States leads to greater solidarity between other countries. And finally, Trump being who he is, we can’t rule out the possibility that further tariffs are ahead of us. The situation therefore remains fluid.

We’ll also need to see how the markets and businesses worldwide react in the weeks ahead, as well as in the longer term. Confidence was already shaky in many places, but will it deteriorate further? How severely will supply chains be disrupted? How will inflation evolve—not just in the United States, but also around the world? There are still many unknowns and many risks.

Breaking away from 70 years of global economic order can’t be done without making a mess.

¹ Potentially in addition to a 25% tariff being levied against importers of Venezuelan oil.

² Most of these tariff percentages look like they were determined through simple division: The US trade deficit with that country (if there is one) is used as the numerator, and the amount the US imports from that country is used as the denominator.

³ Preliminary estimate. Based on the level of imports in 2024, without considering any exemptions or special tariffs and excluding the negative effects that tariffs may have on imports.