Weekly global economic update
What’s happening this week in economics? Deloitte’s team of economists examines news and trends from around the world.
Week of April 07, 2025
Tariff announcement shakes the global economy
- After much anticipation, last Wednesday, US President Trump announced his tariff plan. In his speech, he said that the plan is to impose reciprocal tariffs on other countries. Yet the tariff rates will not be based simply on the tariffs that those countries impose on the United States. Rather, his administration said that the tariffs will reflect the impact not only of tariffs but also of currency manipulation and nontariff barriers. The latter include quantitative restrictions on imports, onerous regulations, and even high value-added taxes.
How did the US administration calculate the implicit tariff that other countries impose on the United States? The administration used a simple formula, which it revealed in a report. It divided the US trade deficit with a country by that country’s exports to the United States. For example, last year, the US trade deficit with the European Union was US$236 billion, while EU exports to the United States were US$605 billion. Dividing the deficit by the export numbers yields 39%. Likewise, the US trade deficit with Indonesia was US$18 billion, while Indonesian exports to the United States were US$28 billion. Dividing one by the other yields 64%—the same as the administration’s figure.
Trump said that he will impose a reciprocal tariff of only half the estimated implicit tariff charged by other countries. As such, he will impose a tariff of 20% on all imports from the European Union. In the case of Japan, the effective average tariff on imports from the United States is 1.9%, but the administration estimates that the true impact of nontariff barriers is equivalent to a tariff of 48%. As such, the administration is imposing a tariff of 24% on imports from Japan.
The numbers vary by country. The tariffs to be imposed will include 34% on all imports from China, 31% on Switzerland, 26% on India, 32% on Taiwan, 25% on South Korea, 36% on Thailand, 32% on Indonesia, 46% on Vietnam, and 49% on Cambodia. The tariff on imports from the United Kingdom, however, will be only 10%. Trump said that there will be a baseline tariff of 10% applied to all countries regardless of their trade policies.
Regarding Canada and Mexico, the reciprocal tariffs will not be applied—at least not yet. Rather, the existing 25% tariff minus exemptions for goods covered by the United States-Mexico-Canada trade agreement will remain in place. However, the administration said that, once the dispute over fentanyl is resolved, the United States will revert to reciprocal tariffs for Canada and Mexico. Also, the administration will implement the 25% tariff on imported automobiles that was previously announced.
The administration’s formula yields results that are not necessarily related to actual trade restrictions by other countries. For example, in the case of the European Union, the actual average tariff on imports from the United States is 2.7%. As for currency manipulation, it is difficult to make that case, given that the euro/dollar exchange rate is largely determined by market forces. Finally, there might be nontariff barriers, but it is unlikely that they are equivalent to a tariff of nearly 39%. Thus, the 20% tariff on imports from the European Union that was announced is surprisingly large and will leave the United States with a far more restrictive trade policy than the European Union.
Also, it is important to note that the tariffs announced will be added to existing tariffs. Thus, the 34% tariff on Chinese imports adds to the 20% already imposed. Thus, every item exported from China to the United States will face a minimum tariff of 54%. However, when that tariff is added to existing tariffs that were imposed in 2018, the Peterson Institute calculates that the average US tariff on Chinese imports will now be 74%—a massive number that is higher than the 60% President Trump had threatened during the election campaign.
Some countries were lucky, in that they will only face the baseline 10% tariff. Aside from the United Kingdom, these include Brazil, Chile, Australia, Turkey, and Colombia. On the other hand, some of the steepest tariffs were applied to some of the world’s poorest countries. These include tariffs on Bangladesh (37%), Pakistan (29%), Myanmar (40%), and Sri Lanka (44%). If these countries face obstacles to exporting to the United States, it is likely that their businesses and governments will focus instead on other export markets such as China and the European Union.
- Importantly, trade between countries involves not only physical goods, but also services. In fact, services trade is massive. It includes financial services, professional services (such as what we do), tourism and hospitality, transportation, and more. Although the United States runs a trade deficit in goods, it has a trade surplus in services. When trade balances in goods and services are combined, along with net payments and transfers, it amounts to the current account balance, which is the only balance that really matters. The current account plus the capital account is the balance of payments. In the case of the United States, it is usually close to zero. That is, capital flows pretty much offset current account flows. The balance of trade in goods has no real meaning, yet it is the focus of everything that is now happening.
Why is this important? The reason is that the formula that the US administration used to determine what tariff to charge other countries only included trade in goods. If it had included trade in services, the formula would have led to almost no tariff on the European Union. Tariff rates on other countries would have been significantly different as well. On the other hand, it is probably just as well that the United States did not impose tariffs on imported services. This would have severely disrupted our own business model at Deloitte and would have been even more disruptive to financial markets than what we are now seeing. Meanwhile, the European Union is considering restrictions on service trade with the United States as a way to retaliate against US tariffs on EU goods.
- Trump said that his tariff plan would generate significant revenue for the US government, would compel companies to invest more in production in the United States, would revitalize US manufacturing, and would generate wealth for the country. Critics might say that significant tariffs would boost consumer prices, thereby creating higher inflation and compelling the Federal Reserve to adjust monetary policy; increase production costs for US companies, thereby reducing their global competitiveness; undermine consumer purchasing power, thereby leading to slower spending growth; and damage relations with allied countries.
- There was a financial market meltdown during the two days that followed the announcement. By Friday, the price of Brent crude oil was down 6.4% from around 12% from two days earlier. The price of copper and other key metals as well as the price of European natural gas were down sharply.
In addition, after having dropped nearly 5% on Thursday, the S&P 500 index of US equities closed down 5.4% on Friday. This put equity values at the level last seen in August of last year. US equities were not alone. The rout continued around the world. Equities were down sharply in Western Europe, Japan, Canada, and many other places. It was a global decline in the prices of risky assets.
Bond yields fell as well. The yield on the US Treasury’s ten-year bond fell to 3.93% on Friday, before bouncing back to 4.0%, having been as high as 4.18% just two days earlier. The yield is now the lowest since early October. Yields in most other developed economies were down sharply as well. This reflected an expectation that central banks will be more aggressive in easing monetary policy in the coming year. That, in turn, reflected expectations of a substantial economic downturn. Indeed, futures markets’ implied probability that there will be two US interest rate cuts this year fell from 35% one month ago to just 4% now. Investors now see a 75% chance of four more Federal Reserve rate cuts this year. One might infer that investors are now expecting a recession soon. Also, the drop in US bond yields likely reflected a flight to safety on the part of global investors. US Treasury bonds are still seen as the world’s safest asset, especially at a time of uncertainty and risk.
Regarding the Fed, the chair of the Federal Reserve, Jerome Powell, gave a speech late last week in which he said, “It is now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of the economic effects, which will include higher inflation and slower growth.” He noted that uncertainty remains high, as we don’t yet know how long the tariffs will remain in place, and what degree of retaliation will take place by other countries. He said, “Inflation is going to be moving up and growth is going to be slowing, but to me, it is not clear at this time what the appropriate path for monetary policy will be.” He added that “while tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent.” In other words, it remains unclear what the Fed will do.
Interestingly, the five-year break-even rate for US Treasury securities, which is a measure of bond investor expectations for average inflation over the next five years, fell by 10 basis points in the two days following the tariff announcement. Thus, despite the introduction of high tariffs, which are normally inflationary, investors evidently expect lower inflation to ultimately prevail, perhaps after a temporary hike in inflation, likely due to a sizable decline in demand.
- The tariffs that were introduced are without precedent in modern times. One might compare this to the Smoot-Hawley tariffs that were introduced at the start of the Great Depression and exacerbated it. Yet the new US tariffs represent a bigger increase in tariffs than the Depression-era boost in tariffs.
In fact, the Yale Budget Lab has estimated that the new tariffs, added to existing tariffs, will boost the effective average tariff rate of the United States to 22.5%, which is the highest level since 1909. In addition, they estimate that, if the tariffs are fully passed through to consumers, the average US household will see its purchasing power reduced by US$3,800.
- One reason that investor sentiment declined late last week is that China retaliated against US tariffs. The Chinese government announced that it will impose a 34% tariff on all imports from the United States. This is far more aggressive than anything China has done previously. In addition, China imposed new restrictions on exports of rare earth minerals and launched an investigation of a large US-based chemicals company. It is likely that China’s action is meant to set the stage for negotiations with the United States.
The 34% tariff launched by China is the same as the 34% tariff announced by the United States. Meanwhile, China imported US$143 billion in goods from the United States last year. The high tariffs will likely lead to a reduction in imports from the United States, with trade being diverted elsewhere.
The high US tariff on imports from China could lead China to attempt to boost exports to other countries, perhaps by lowering prices. This is a concern for the European Union. As such, it is reported that the European Commission is preparing to impose emergency tariffs on China, should there be a surge of imports from China.
In recent years, many global companies have shifted some processes from China to neighboring countries in Southeast Asia. This shift, often known as “China plus one,” was a reaction to US tariffs on China as well as fears of further worsening of US-China relations. It is a strategy undertaken by companies based in the United States, Japan, and Europe. Yet, now, this strategy is under question, given that the United States is imposing severe tariffs on several Southeast Asian nations, especially Vietnam. Indeed, Vietnam has been a major destination for producers of electronics, apparel, and other consumer products.
- In anticipation of tariffs, imports had surged in January. It is likely to be true of February and March as well. In January, imports of goods and services hit a record high of US$401.2 billion. This was up from US$364.6 billion in December and US$326.0 billion in January of last year. That is a 23% increase from a year earlier. Now that high tariffs are being introduced, it is likely that imports will recede in the months ahead. Meanwhile, exports remained steady in January. The increase in imports was entirely due to a surge in imports of goods. Service imports were steady. Also, it has been reported that consumer spending on cars surged recently in anticipation of tariffs.
- Finally, one question that arises is whether the US administration will keep these elevated tariffs in place for a prolonged period. In the past three months, the administration has backtracked on some tariff proposal and reversed course on others. Investors and business leaders have become wary of making investment decisions based on tariff expectations. It is likely that uncertainty has taken a toll on business investment and business confidence. Business leaders will want to know what the trading environment will look like, not only in the next several months, but in the next several years. Only with that knowledge can they make sensible long-term investment plans.
US tariffs on automotive imports and their potential impact
- In recent days and weeks, there have been conflicting announcements regarding US trade policy. Tariffs have been proposed but not implemented, announced and then postponed or reversed, generating a high degree of uncertainty about trade policy. In addition, there were reports that the President intends to relieve some countries of the new tariffs that are planned for April 2. “I’ll probably be more lenient than reciprocal,” he said, “because if I was reciprocal, that would be very tough for people.” All this suggested that the US administration might take a more measured approach to tariffs than previously expected. And then the President made an announcement that suggested otherwise.
President Trump recently announced that, starting on April 2, there will be a 25% tariff on all automobiles and some automotive parts not assembled in the United States. This would include automobiles imported from Canada and Mexico as well as those coming from Europe and Asia. He said, “This is the beginning of Liberation Day in America. If you build your car in the United States, there will be no tariff.” When asked if there is any chance these tariffs could be delayed or reversed, he said that “this is permanent.”
The US tariffs on automobiles are, according to the US administration, meant to revive car manufacturing in the United States. In his proclamation, the President said that the automotive industry “has been undermined by excessive imports threatening America’s domestic industrial base and supply chains.” Yet, following the announcement, shares of US and foreign automotive companies fell sharply. Plus, automotive executives warned of significant price increases and a likely decline in sales. There is also an expectation that supply chain disruption will lead to a temporary decline in production.
The tariffs will apply not only to cars but to major components such as transmissions, engines, and other large parts. There is talk of extending the tariffs to other smaller components as well. In addition, regarding the existing free-trade agreement with Canada and Mexico, known as the USMCA, the President said that “USMCA-compliant automobile parts will remain tariff-free until the Secretary of Commerce, in consultation with US Customs and Border Protection (CBP), establishes a process to apply tariffs to their non-US content.” In other words, the tariffs will not immediately apply to all automotive products imported from Mexico and Canada. Yet the statement implied that some tariffs may eventually be applied.
The reason that the automotive tariffs are so important and potentially so disruptive is that nearly half of all cars sold in the United States are imported. In addition, the domestic content of the cars assembled in the United States accounts for somewhere between 40% and 50% of the value. The remainder involves imported components. The introduction of such large tariffs is unprecedented in modern times and the potential impact could be huge. If it leads to a decline in automotive employment, that could cascade to many other industries that supply the automotive industry.
Automobiles are the second most traded product in the world. Moreover, the US accounts for 21% of all the imported vehicles. In 2023, the most recent year for which data is available, the United States imported US$208 billion and exported US$65.3 billion worth of cars. The United States was the biggest importer of cars, by far, and was the fourth largest exporter after Germany, Japan, and China. In 2023, trade in automobiles amounted to nearly one trillion dollars. Thus, a disruption of US automotive trade will have significant global repercussions. The immediate response to the announcement on tariffs was that share prices of automotive companies fell sharply.
Also, some analysts have noted that the 25% tariff will be added to other existing and potential tariffs such as the reciprocal tariffs the United States promises to introduce soon. As such, the tariff on some automobiles could be much more than 25%. For example, the administration has already introduced a 20% tariff on all imports from China. Adding the 25% tariff on cars will bring the total to 45%. Also, the United States already has a 25% tariff on imported SUVs (sport utility vans). The new tariff will bring the total to 50%.
One concern is that the United States is a major automotive exporter. Yet the cars that are exported have plenty of imported components. European automotive companies export as much as 60% of the cars they assemble in the United States, using plenty of imported components. If the tariff applies to those components, US automotive exports are expected to become less competitive in global markets. It is possible that European producers might then choose to shift assembly back to Europe.
The tariff announcement sent shockwaves around the world, with political and business leaders in Europe, Japan, Canada, and Mexico facing difficult choices. In Japan, Prime Minister Ishiba said that there needs to be an appropriate response and that “all options are on the table.” A senior official said that Japan hopes to negotiate exemptions. It has been suggested that Japan could offer to boost defense spending, including purchases of US-made weapons, in exchange for tariff forbearance. South Korea’s Hyundai announced a US$21 billion investment in the United States last week. The Korean government hopes that such action might help to obtain exemptions.
Europe likewise faces difficult choices. European Commission President Ursula von der Leyen sharply criticized the tariffs. Yet she also said that “the EU will continue to seek negotiated solutions, while safeguarding its economic interests.” Another senior EU official said, “We are going to back an industry that complies with the highest standards in terms of labor rights, in terms of environmental standards. And that is key for a well-functioning economy here in Europe and worldwide.” That suggests the possibility of financial support for companies that are disrupted.
In addition, French President Macron said that he hoped “to find an accord to dismantle the tariffs.” The question, then, is what can Macron and other European leaders offer to the United States that might compel it to back down? Perhaps more defense spending and purchases of US weapons. Germany, meanwhile, took a harder approach. The economics minister, Robert Habeck, said there must be a decisive response and that “it must be clear that we will not back down.” German automobile producers are highly dependent on the US market. Also, many of the cars they produce for the US market are assembled in Mexico. On the other hand, European high-end luxury producers such as Porsche and Jaguar can probably boost prices without necessarily hurting demand due to the lower price sensitivity of their customer base.
Regarding supply chains, if automotive companies perceive the tariffs to be permanent, they will likely consider significant changes in their operating models, including undertaking assembly in the United States even if it involves importing components. US auto makers import a sizable number of vehicles from Mexico, while European and Japanese car makers import some cars and assemble others in North America.
Interestingly, it is reported that, prior to the announcement of tariffs on imported automobiles, global automotive producers were rushing to ship cars and automotive components from Europe and Asia to the United States. The goal was to get the cars to the United States before new tariffs are implemented. Consequently, ships were being rushed to Europe and Asia to collect the cars. This has been going on since the new US administration took office. In February, for example, the volume of cars shipped from the European Union (EU) to the United States was up 22% from a year earlier. Shipments from Japan were up 14%.
It is likely that the impact of tariffs on automobiles won’t show up in the form of higher new car prices for about two months while dealers sell existing inventories. However, demand might surge in the interim, leading to a quick unwinding of inventories and a sooner increase in prices. When new car prices rise, it will likely lead to a surge in used car prices. Recall that this happened during the pandemic. At that time, the rise in used car prices made a disproportionate contribution to the overall rise in inflation. Also, if new car prices rise sharply, it will likely dampen demand for new cars, thereby boosting demand for used cars.
US proposes new fee on China-related ships
- The US administration is concerned that the United States is too dependent on Chinese shipping, with particular concern that the US military relies on foreign shipping to obtain supplies. The United States has 185 ocean-going commercial ships while China has 5,500 such ships. To revitalize the US shipping industry, the administration has proposed imposing a fee of up to US$1.5 million on any Chinese-built or Chinese-flagged vessel docking at US ports. The idea is to discourage use of Chinese ships and thereby undermine China’s dominance of the industry. It is also meant to encourage more shipbuilding in the United States.
However, there are several potential problems with the plan. First, many US-based shipping companies use ships made in China and, consequently, would be subject to the fee. In fact, China accounted for 50% of global shipbuilding in 2023. Thus, a large share of ships operated by US companies were built in China. It has been suggested that US shippers can offset the higher cost by shipping goods to ports in Canada and then transporting the goods by land to the United States. Of course, if tariffs are applied to Canadian imports, this wouldn’t be effective. If goods are diverted to Canada, it would hurt US port facilities.
US consumer spending slows
- The US government reported recently that, in February, real (inflation-adjusted) consumer spending grew slowly despite a strong rise in income. Households boosted their savings. Meanwhile, underlying inflation appeared to accelerate modestly in February. This data spooked already jittery investors who pushed equity prices down sharply. Moreover, bond yields fell while the value of the dollar dropped against the euro and the Japanese yen. The drop in bond yields, despite a signal of potentially accelerating inflation, likely reflected concern that the economy could be weakening, thereby ultimately leading to easing of monetary policy later this year. In any event, let’s look at the data.
In February, real disposable personal income (which is after inflation and taxes) was up 0.5% from the previous month, driven by strong growth of wage income as well as transfer payments from the government. At the same time, real consumer expenditures increased only 0.1% from the previous month. This resulted from an increase in the personal savings rate, which rose from 4.3% of disposable income in January to 4.6% in February. This was the second consecutive month in which the savings rate increased.
Meanwhile, the real increase in consumer spending, which followed a sharp decline in January, included a 1% increase in real spending on durable goods from the previous month, a 0.5% increase for non-durable goods, and a 0.1% real decline in spending on services. It was the first decline in real spending on services since January 2022.
The relatively strong growth in spending on durable goods might reflect frontloading of spending due to anticipation of tariffs. The decline in spending on services, however, could reflect anxiety about the state of the economy. This would be consistent with data from the recent survey of consumer confidence conducted by the University of Michigan. The confidence was down sharply in February. It also fell again in March, perhaps boding poorly for spending in March. Also, the survey found weakening confidence among most cohorts, including across both political parties. The survey authors said that anxiety about tariffs played a role.
Finally, the report on spending and income included data on the Federal Reserve’s preferred measure of inflation; the personal consumption expenditure deflator, or PCE-deflator. In February, this measure was up 2.5% from a year earlier, the same as in January. However, when volatile food and energy prices are excluded, core prices were up 2.8% in February versus a year earlier, up slightly from the 2.7% seen in January. Notably, the core PCE-deflator was up 0.4% from the previous month, the largest such monthly increase since January 2024. Thus, underlying inflation clearly accelerated in February. However, one month does not make a trend. Moreover, the direct impact of tariffs on prices will not likely be felt for several months.
