A global trade war has been brewing for weeks. And just a few days from now – on Wednesday, April 2 – it’s about to heat up in a major way.
That’s the day that U.S. President Donald Trump is set to launch a new set of sweeping reciprocal tariffs against our nation’s trading partners.
This ongoing drama could end with a fizzle – with the parties involved reaching a solid deal – or a bang – wherein hefty tariffs remain in place and weigh down our global economy.
Trump has referred to it as “Liberation Day.” From his perspective, these tariffs will free America from its numerous bad trading deals with countries across the globe.
Recent reporting suggests Trump will target the “Dirty 15” on Wednesday – the 15 trading partners with which the U.S. has the largest bilateral trade deficits. That may seem small, as the U.S. does business with over 100 countries. But together, those 15 partners account for more than 75% of all U.S. imports.
So, by targeting these nations with tariffs, Trump is going after the bulk of America’s imports.
And if importers pass that cost onto consumers, the pain could be drastic and widespread…
The Three Major Avenues
There are three ways Trump can go after the “Dirty 15.”
First, he can enact “matching tariffs,” wherein he would simply enforce levies on countries to close the tariff rate differentials. For example, let’s say a country tariffs the U.S. at 5%, but the U.S. only tariffs that country at 2%. With a matching tactic, Trump would slap an additional 3% tariff to match the overall rate at 5%.
Second, Trump could attack value-added taxes (VATs). These are indirect taxes imposed on goods and services at each stage of production or distribution, rather than just at the point of final sale. Europe has a lot of VATs, and they tend to hit U.S. goods going into European markets. Trump could attack these by exacting new tariffs on countries equal to their VAT rate.
Third, Trump could pursue non-tariff measures. That is, across the world, there are a lot of regulatory statutes that limit free and fair trade, such as country-specific sanitary standards, quotes, licensing obligations, etc. This is a complex web, but Trump could aim to alter these measures as well.
Those are the three major ways Trump can go after the “Dirty 15” on Wednesday.
Measuring the Possibilities
To us, options one and two – matching tariffs and attacking VATs – seem most likely since Trump has talked about them often since taking office.
According to recent research from Bloomberg, matching tariffs wouldn’t be too big a deal because the U.S doesn’t get tariffed that much. They would only increase the average tariff rate by one to two points, minorly impact GDP growth, and barely raise inflation. It would be more of a non-event.
Option two, however, would cause some damage. Attacking VATs on the “Dirty 15” would increase the average tariff rate by a little more than 10 points, per Bloomberg research. This would hit GDP growth by almost two points, while raising inflation by about a point.
That’s not good – but it’s also not terrible.
Now… if the president chooses option three, things could get pretty grim.
Attacking non-tariff measures could potentially increase the average tariff rate by nearly 30 points, spiking it to levels not seen in over 100 years. Subsequently, that would hit GDP growth by four points and raise inflation by two to three points.
And we don’t have a clear idea about which path Trump will take on Wednesday.
The Final Word on the Potential Trade War
As we said earlier, we think options one and two are most likely, while option three is not.
But who’s to say? If the first two months of Trump 2.0 has taught us anything, it is to prepare for the unexpected.
And here, the unexpected just may plunge the global economy into a recession…
We need to be prepared for that.
That’s why we’ve created a brand-new special report: the Trade War Protection Playbook.
This defensive guide includes our top 10 favorite stock market plays to protect and potentially even grow your wealth if this global trade war spirals out of control.
And with “Liberation Day” fast-approaching, we think you’ll want to check it out ASAP.
On the date of publication, Luke Lango did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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