Preface

The article provides insights into President Donald Trump's anticipated announcement of a new tariff plan on April 2. The analysis includes examining the deficit issues, tariff inequalities, and the potential impact on global markets and the U.S. economy. The European Union (EU), Canada, Mexico, and other emerging markets are evaluated for possible tariff increases based on trade deficits and market size.

Lazy bag

The new tariff plan targets trade deficits, inequality, and market size. Key markets like the EU and Canada face higher tariffs. U.S. market volatility expected.

Main Body

On April 2, 2023, President Donald Trump is expected to unveil a new set of tariffs, a move that is highly anticipated by both domestic and international market watchers. The strategy appears to be three-pronged, focusing on addressing trade deficits, reversing tariff inequalities, and being more targeted in its application.

The approach, which stems from a memorandum signed by Trump on February 13, 2023, titled “Fair and Reciprocal Plan”, is expected to impose significant changes to the current trading framework with several countries around the globe. The intended outcome is not only to reduce the American trade deficit but also to enhance local production and export, ultimately augmenting the U.S. fiscal revenue and tackling fiscal deficits.

One major focus will be on rectifying trade inequalities. Currently, direct tariff rates imposed by the U.S. are lower than many other countries' tariffs on American imports. Trump aims to address this imbalance, particularly with emerging markets such as India and Brazil, where excess tariffs on U.S. goods are notably high. By realigning these rates, Trump believes in fostering just and equitable trade terms.

In addition to direct tariffs, the issue of value-added tax (VAT) disparities has come under scrutiny. Trump's administration has cited the disproportionate VAT rates as a cause of unfair burden on U.S. exports. This is especially relevant in the EU, where VAT rates average around 20%, compared to the U.S.’s modest 7% sales tax. This discrepancy results in a concealed tariff effect that the U.S. wishes to counterbalance through increased direct tariffs.

The U.S. is poised to increase tariffs ranging from 10% to 15% on products imported from the EU, given the region's detrimental trade practices, significant trade deficit, and high VAT burdens. Canada and Mexico face potential increases of 5% to 10%, reflecting their substantial trade deficits and market size relative to the U.S. Although China has already been subjected to a 20% tariff hike, their future engagement hinges on ongoing U.S.-China negotiations.

The market reaction could be substantial. Historical delays in implementing tariffs on Canada and Mexico have previously led to declining confidence in Trump's trade policies. Analysts predict market volatility, particularly affecting European assets, until negotiations reach a resolution and tariffs are accordingly adjusted.

If Trump’s strategy successfully uncovers expected revenue from these tariffs, the fiscal landscape will change, potentially influencing Federal Reserve policy. Market observers are also wary of the macroeconomic implications, such as rising inflation, monetary tightening, and subsequent effects on exchange rates and global economic stability.

Key Insights Table