Dr Yim-fai Luk

1 April 2026

Tomorrow marks the first anniversary of the reciprocal tariff war initiated by Donald Trump against the world. On 2 April 2025, he swaggeringly announced in the White House Rose Garden that the day was America’s “Liberation Day”, claiming that after the US had been ripped off by other countries through trade over the years, it was time for the country to strike back with reciprocal tariffs. The use of the word “reciprocal” is more in the sense of tit-for-tat than of “equal” tariff rates. He had also come up with tariff rates for all economies, including the uninhabited Heard and McDonald Islands near Antarctica. For the better part of 2025, tariff negotiations between the US and other economies, particularly China, dominated the international economic agenda.

Trump is utterly convinced of the power of tariffs, regarding them as an “ultimate weapon” against other countries. To him, reciprocal tariffs form a cornerstone of his economic and diplomatic policies while in office. Apart from bragging about them on social media, he uncharacteristically published an article entitled “My Tariffs Have Brought America Back” (see Note 1) in Wall Street Journal on 30 January 2026. This appears to have been the only time he expressed his views in the print media during his presidency. While the piece is typical braggadocio and does not hold up to fact-checking, it also reflects the importance of reciprocal tariffs to him. After all, the last such large-scale tariff policy dates back to 1930, when the Smoot-Hawley Tariff Act was introduced in the US. The then US president Herbert Hoover raised tariffs on 20,000 imported goods, prompting other countries to retaliate in kind. As a result of the trade clash, global trade shrank by two-thirds within just a few years, deepening the woes of the Great Depression. Given such a cautionary precedent, why still impose reciprocal tariffs? Below are several of the more commonly cited motivations.

The first is the above-mentioned goal of eliminating the trade deficit. America’s trade deficit already reached US$0.91 trillion in 2025. In comparison with that at US$0.9 trillion in 2024, the effect of the reciprocal tariffs implemented in the intervening eight months is not evident at all. However, this figure covers trade in goods and services. Over the years, the US has run a surplus in services trade, which Trump obviously does not regard as a consequence of America ripping other countries off. Given that tariffs do not apply to services trade, looking only at goods trade, America’s trade deficit widened, instead of falling, from US$1.2 trillion in 2024 to US$1.23 trillion in 2025. This may have stemmed from greatly increased imports by many companies before Liberation Day to build up inventories, but even so, large-scale tariff hikes targeting various economies cannot offset America’s goods trade deficit. From a macro perspective, at the end of the day, the trade deficit is the result of excessive nationwide overconsumption, including spending by the government, companies, and households, as well as overconsumption of both domestic and foreign products. Tariffs have little impact on this total consumption, especially government spending. Over the 50 years from 1976 to 2025, the US federal government expenditure averaged 21.2% of GDP, rising to 23.1% in 2025. In 2026, the estimate is 23.3% and the estimate for 2036 is projected to be 24.4% of GDP. During his second term as president, Trump once placed Elon Musk in charge of the Department of Government Efficiency (DOGE) to cut government spending, but the department vanished in less than a year.

Another policy objective is to reinvigorate US manufacturing. The decline of America’s manufacturing industry, such as the downturn in shipbuilding, could compromise national security. However, tariffs are not a viable solution to these problems. First of all, US manufacturing is quite reliant on imported semi-finished goods, which account on average for approximately 30% of output value and in some industries, e.g. pharmaceuticals, the figure exceeds 50%. Tariffs increase the price of such semi-finished goods imported by American manufacturers, thereby pushing up production costs. Originally intended to protect domestic industries, tariffs end up inflicting self-harm as well. Slightly over 20% of America’s imports of semi-finished goods come from China. One can imagine the impact on American manufacturers if tariff rates are at the 125% level seen before. Apart from China’s restrictions on rare-earth exports, this is probably another reason why Trump has backed down to China.

Another related issue is employment in manufacturing. That tariffs can enable American workers to reclaim jobs from foreign workers has been a political and economic myth since Trump’s first term in office, which has won him a large number of votes. Nevertheless, employment data shows that instead of rising as a result of reciprocal tariffs, the number of Americans employed in manufacturing slightly dropped from 12.66 million in April 2025 to 12.53 million in February 2026. Manufacturing output, by contrast, surged during the same period. The higher output generated by a smaller labour force reflects an enhancement of labour productivity. Apart from the loss of competitiveness to emerging economies, the continued fall in the number of American manufacturing workers can mainly be attributed to advances in production technology that have replaced human labour. Even without accounting for technological innovation, for increased tariffs to offset the wage gap between American manufacturing workers and their counterparts in developing countries, tariff rates might have to reach an unrealistic several hundred percentage points, making such a move economically counterproductive.

Another objective of reciprocal tariffs is to generate fiscal revenue, which explains why Trump has cast a wide tariff net covering all corners of the world, including the UK and Australia, with which America has a trade surplus. According to data from the Peterson Institute for International Economics (see Note 2), in the 13 months between January 2025 and January 2026, America’s tariff revenue was US$290 billion, while the US federal government’s fiscal deficit was US$3.72 trillion. The US government has been in the red for years, with the fiscal deficit growing faster than the economy, a trend that tariffs are far from reversing. Also related to this issue is whether the tariff revenue comes from foreign countries or the US itself. While Trump has repeatedly emphasized that the tariffs are paid by foreign exporters, a research study by Harvard University has calculated that approximately 94% of the tariffs are paid by US importers and consumers (see Note 3). A survey conducted at the end of February 2026 (see Note 4) shows that 70% of Americans think the tariffs have pushed up their living costs, and even 64% of Republican voters think likewise. Under the influence of the ongoing war in the Middle East, prices are unlikely to come down this year, and the conflict is a crisis of Trump’s making. Inflation was the main reason why Trump and the Republicans won a landslide victory over the Democrats in the presidential election two years ago. There is no telling how many seats in the Congress the Republicans will lose in the midterm elections at the end of this year.

For Trump, tariffs are an effective tool he can use on a whim to coerce foreign countries to satisfy his demands. In his article published in the aforementioned Wall Street Journal, Trump boasts that by threatening other countries with tariffs, he has secured US$18 trillion worth of foreign investment for America in less than a year. The figure is an exaggeration, but in tariff negotiations, some countries, such as Japan and South Korea, have indeed pledged to invest in the US in exchange for tariff reductions. However, few related reports have gone into detail, e.g. how and when the pledged foreign investment will materialize, and whether it will be carried out through governments or private enterprises. It seems some countries may be stringing Trump along. But what matters more is that international investment falls under the capital account. In balance-of-payments accounting, if the central bank does not intervene in the foreign exchange market, the sum of the capital account and the current account should equal zero. When foreign nations invest in the US, the US records a capital-account surplus, which is reflected in the current account as a deficit. Since trade is the main component of the current account, a current-account deficit is most likely to correspond to a trade deficit. Think of it this way: for foreign countries to invest in the US, they must first have US dollars. Where do those dollars come from? Ultimately, they have to come from exports to the US, i.e. from the US trade deficit. In other words, by coercing foreign countries to invest in the US, Trump will end up creating a trade deficit for the country. This directly contradicts his aim of reducing the US trade deficit.

On 20 February 2026, the US Supreme Court ruled that the US president had no authority to invoke the International Emergency Economic Powers Act to impose tariffs, greatly limiting his room to wield the tariff stick. A few days later, Trump cited Section 122 of the Trade Act of 1974 as the legal basis for continuing to levy tariffs averaging about 13%, which is lower than the previous average of 16%, but subject to a 150-day deadline.

All in all, Trump’s reciprocal tariffs arrived with serious menace but ended up causing more thunder than rain. Their impact is way less than he expected or fantasized. With the exception of China, America’s other major trading partners have neither the capacity nor strategic judgment to retaliate against the US. Therefore, there has been no tit-for-tat tariff escalation like that of the 1930s, and the global economy has not sunk into a quagmire as a result of the reciprocal tariffs. According to World Bank estimates, the global economy grew by 2.7% in 2025, only slightly lower than the 2.8% recorded in both 2023 and 2024. Even so, the reciprocal tariffs have clearly highlighted US unilateralism, which has eroded the country’s international credibility, while further exposing the ineffectiveness of international trade rules and the World Trade Organization (WTO). At the WTO’s 14th Ministerial Conference, held in Cameroon last week, many members expressed a strong desire to reform the WTO. Yet due to divided opinions and a lack of clear leadership, no consensus was reached. Returning to the current situation in the Middle East, the world has now entered a period of great upheaval before fundamental reconstruction can begin. One can only hope that this turbulent period will soon give way to renewal and better times.

Note 1: https://www.wsj.com/opinion/donald-j-trump-my-tariffs-have-brought-america-back-2248391b

Note 2: https://www.piie.com/research/piie-charts/2025/trumps-tariff-revenue-tracker-how-much-us-collecting-which-imports-are

Note 3: https://gopinath.scholars.harvard.edu/publication/incidence-tariffs-rates-and-reality-0

Note 4: https://www.theguardian.com/us-news/2026/mar/13/trump-tariffs-poll