On Wednesday, April 2, President Donald Trump signed Executive Order 14257 in the White House Rose Garden, unveiling sweeping tariffs on countries across the globe. In his announcement, President Trump proclaimed April 2 “Liberation Day,” describing it as one of the most important days in American history.
In their most basic form, tariffs function as a tax imposed by one country on the goods and services imported from another country, with tariff revenues being collected and utilized by the federal government. This, in turn, raises prices for consumers when purchasing foreign products. Eric Sims, professor and chair of the economics department at Notre Dame, explained the general economic consensus around tariff policy.
“Economists typically believe that free trade is good, increasing the total surplus available to an economy. Tariffs impede trade and specialization,” Sims said. “Of course, there are winners and losers from trade, and we need to be cognizant of that. There are tools other than tariffs to compensate the losers from trade and globalization. Such tools are likely both more efficient and more effective than blanket tariffs on trading partners.”
Despite the economic consensus surrounding tariff policy, some professors did note valid reasons for their continued use. For her part, Susan Rosato, a political science professor specializing in globalization and international political economy, acknowledged some of the rationales behind tariff policy.
“Historically … when countries have dismantled tariffs, we've seen that the result has been a tremendous amount of growth in the international economy,” Rosato said. “That doesn't mean that there aren't times when countries might want to implement tariffs. If you would like to protect a certain industry from competition from abroad, tariffs might be a really good way to do that. You could also imagine that there are certain industries national security that you would want to protect from competition.”
The Trump tariffs, the first tier of which took hold on April 5, applied a global baseline rate of 10%. The president then announced that a planned second tier of tariffs would commence on April 9. These second-tier “reciprocal” tariffs would be applied on top of the 10% rate, impacting 60 individual countries. The weight of these second-tier tariffs was measured using each respective nation’s trade deficit with the United States, dividing net exports by total imports.
The immediate reaction of markets to the news was severe. Following Trump’s announcement on Wednesday, the Dow Jones Industrial Average plummeted, falling 4% on Thursday. The 1,680 point drop in a single day marked the biggest loss for the Dow since June 2020. Other notable stock indexes, including the S&P 500 and Nasdaq, fell by 4% and 6%, respectively. Economics professor Robert Johnson gave his interpretation of this volatile reaction.
“I don't think the markets knew exactly how high the tariffs were going to be,” Johnson said. “As a result, I think investors got spooked. So there's a level effect of tariffs, and then there's a general question of how uncertain is the trading environment. The more uncertainty there is … the seemingly larger the decline in equities.”
Over the next few days, the markets continued to fluctuate, as observers remained unsure whether the reciprocal tariffs would actually go through. After a week of uncertainty and market instability, the White House announced a 90-day pause on all reciprocal tariffs on April 9, giving countries time to negotiate with the Trump administration. Notably, the pause on reciprocal tariffs excluded Chinese imports, which were increased to 125%, appearing to mark a period of renewed tension between the two countries.
“Right now, the U.S. and China are engaged in this seemingly destructive trade war,” Johnson said. “We ratcheted up tariffs on China. China reciprocated with higher tariffs. The Trump administration then ratcheted them up again. And so we're in this tit-for-tat situation with China. Whether we can negotiate our way out of that, I think, is the big question for the world trading system going forward.”
For the rest of the world, the future remains unclear. With this pause, the international ramifications of “Liberation Day” seemingly depend on upcoming negotiations between the United States and dozens of other countries. Several nations, including the European Union, have offered the U.S. “zero-for-zero tariffs,” in which both countries would lower their industrial tariff rates to zero. Rosato noted that any potential agreement would have to overcome multiple barriers.
“One of the things that the Trump administration objects to are other unfair trade practices which are not necessarily tariff based,” Rosato said. “They're upset with government subsidies for industry, currency manipulation and other non-tariff barriers to exchange. So just reducing your tariffs to zero would be great for the United States, but that won't cover all of these other practices which the administration objects to.”
Regarding the trade war with China, Rosato expressed uncertainty about its outcome, noting both sides’ unwillingness to back down. She described the situation between the two countries as a question of “Who will blink first?”
“This is still really, really costly for the Chinese government,” Rosato said. “My understanding is that the Chinese think that they will ultimately suffer less than the United States … They think that they might actually come out on the better end of this. I don't know if that's true, but it really is a game of chicken right now.”
