Whether 2 April 2025 will go down in history books as “Liberation Day,” as US President Donald Trump called it, or as “incredibly stupid”, as Eurasia Group president Ian Bremmer described it, is yet to be decided. What we do know is that there is no place to hide from US tariffs anymore, not even on an island in Antarctica inhabited only by penguins.
Firstly, there’s the 10% universal tariff on goods from all countries, which will go into effect on 5 April. Then, there are the tariffs for the “worst offenders”. These include Cambodia (49%), China (54%, which is inclusive of other tariffs that have been imposed recently), the EU (20%), Japan (24%), South Africa (30%), Taiwan (32%), Thailand (36%) and Vietnam (46%). These will come into effect on 9 April.
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Canada and Mexico, two of Trump’s earliest tariff targets, were spared further increases above the 25% rate on all goods, excluding USMCA (United States-Mexico-Canada Agreement)-compliant ones. In fact, according to TS Lombard chief US and global macro economist Steven Blitz: “Latin America is the relative winner, and we expect eventually North America too, once new USMCA talks add in Trump’s current strategic priorities.”
Blitz spoke to Investment Monitor to break down why the tariffs were put in place, what retaliation reveals about other trading partners and why the trade contract that held the US dollar as one of the most important trade currencies has now been broken.
Two major outcomes of the tariffs overhaul will be that “we are going to know how much the rest of the world is in favour of free trade”, Blitz thinks, or “whether they counter with higher tariffs, which means no, they really are engaged in protectionist activity”.
Second, we will see if Trump “has created permanent damage to the brand of the US economy, such that those capital flows that really drive the deficit are going to disappear, and it is going to leave the US with a higher cost of funding”.
Eugenia Perozo (EP): What is Trump’s goal with these tariffs?
Steven Blitz (SB): The base issue is that the US growth rate isn’t high enough relative to trade. Some of that is because of slower population growth and factors like that. But if you look at the trade gap, you can say: ‘If I can shrink the trade deficit by raising domestic investment spending, I can get GDP growth back to an upward trend. I can stop the downward mobility of the mid-skill, mid-income worker, who has really been the big loser in globalisation.’
Globalisation is a wonderful thing because it raised incomes around the world, and it did for the poorest countries, right? But it also lowered incomes for mid-income workers in developed countries, not only in the US but in Europe – England and places like that. And we never really politically had a way to counter that, other than government income subsidy types of programmes. That is part one of your motivation.
And so to try to get from here to there, you look at trade and you say: ‘We have a lot of unfair trade agreements where US products are going to these countries are very highly tariffed, whereas we don’t tariff or have low tariffs for countries selling their goods to us.’
Now this habit of ours in the US began really after the Second World War, when we told Japan, Europe and Germany, look, you can sell to us, don’t worry about whether you can buy from us, and they had this idea that this would help the economic rebirth of these war-damaged countries. And then that turned into doing that to keep countries in the US sphere of influence versus the Soviet sphere of influence. That is the context to understand that Trump didn’t just wake up and decide to do tariffs.
So they came up with a list. There are a lot of questions about how this was made. It was clear even within this that there were some geopolitical aspects, right? He hit Asia harder than South America, for example. People will claim that is just the way the numbers work out, although I am not entirely sure that is true.
Trump says he wants free trade – and the reality is that we don’t have free trade. We don’t have free-floating exchange rates, right? The economists’ promise back with the breakdown of Bretton Woods of a free-floating exchange rate and that would equilibrate and balance all the various trade balances around the world, it didn’t work because countries do manipulate their currency. Europe, for example, manipulates its currency, right? So it is a difficult task.
So you have to start someplace, and you just hit these huge tariffs. It is interesting if you think about the reaction. Are the countries reacting by going to a zero tariff or countering with higher tariffs? To me, if they are countering with higher tariffs, they are telling you that they are using tariffs to be protective of their industry because they are unwilling to challenge the US on that and be in a zero-tariff world.
EP: So, it is a better bet for countries to increase tariffs in order to protect domestic industries than to risk opening that market up completely and getting overtaken by bigger foreign companies?
SB: Yes. Most of the analysis of what he is doing starts from the perspective that we are in this stasis, this trade balance based on free-flowing trade of goods and services, and that is not true. US companies can’t get their banking licence to set up a bank in Canada, they can’t do it in China, because they won’t let them. I think Trump is right when he says: ‘Well, I don’t blame these countries for protecting their industries, I blame us for not attacking that or doing the same to these countries.’
EP: So, the US has always been more open to businesses from other countries than the other way around?
SB: Exactly. So the issue is, how do you get from here to there? So he is trying to do it with a hammer. Now, there is a second part of this which is also important. He is also making a calculated bet that he is not going to negotiate these down to zero. The idea is that this is going to be a source of revenue for the US Government. If you go back to before income taxes were established [pre-the First World War], we used customs to fund the federal government. He wants to go back to financing the government with essentially a sales tax, as opposed to an income tax.
It is a way to fund the government, but in the shorter term, it is important because there are a lot of things he wants, there are a lot of tax cuts he wants to put in beyond the extension of the Tax Cuts and Jobs Act. He wants to lower the corporate income tax, and he wants to end taxation on social security income, overtime, on tips. But he can’t put in everything because he also wants to narrow the budget deficit, and you can’t cut spending enough to cover that. Then the third part is, he can also put in punitive tariffs, which he is trying to do with Canada and Mexico to try to bang home changes in their behaviour.
So, it is a rebalancing of the US economy first, which is needed. It is not like China, where we over-invest and under-consume. We have the opposite problem. And second, it’s a way to finance tax cuts, which is about rebalancing how the government raises revenue and hence impacts economic behaviour. And third, it’s a way to get other parts of the world to agree to your political goals.
EP: In the short term, for the average US consumer who might see a reduction in their income tax but higher inflation, would this not all be counterproductive?
SB: One could argue that he might have done worse in terms of the tariffs he put in because of what happened with the election.* They put all that money and everything else in that Wisconsin Supreme Court election, and the Democrats still won. The margins of victory for the two conservative candidates in Florida were half of what they were during the general election. They only have a seven-seat majority in the House of Representatives that could easily flip.
These things are much more movable than people think. Trump is rolling the dice in the belief that he is going to get that reshoring activity going fast, and I am rather sceptical on that. That is not to say there won’t be any reshoring, but to the extent that he thinks it is going to come, I think is a bit of a heroic assumption on his part.
EP: Might some foreign companies that sell in the US but produce elsewhere just prefer to look for new markets that aren’t the US because the level of uncertainty they are facing is higher than the potential gains?
SB: Theoretically, that is right, and that is what people like to profess as the reaction, but the problem with that is that the rest of the world is not a net buyer of the world’s overproduction. For 40 years or more, you have had a general sort of quid pro quo in the world, where the world finances the US and, in turn, the US buys the world’s overproduction, and we get lower-priced products, and we get lower inflation and interest rates than we otherwise would get.
So the idea of saying: ‘Ok, I’m going to sell to some other country’ is more complicated. You know, Germany runs a trade surplus of 8% of its GDP or something like that [it was 5.8% as of 2023]. That is a big number, that means you are a depressant. Now, are you going to all of a sudden shrink that surplus? Well yeah, they could do it with defence goods, but you know that doesn’t let me sell you more TVs. You could argue that this is also a needed rebalancing of the world – and getting to this rebalancing is not trivial. And we have had a world that was one way.
So the bottom line to your questions is, is this shift going to reveal a market that is willing to buy? We don’t know that. Everyone looks to China, because they have the greatest potential to grow the consumer side of their economy. Are they going to step up and do it?
EP: You wrote in your TS Lombard piece: “For capital market participants, tariff tinkering from here is besides the point. They are repricing against Trump breaking the trade/dollar contract that has ruled for 40 years.” Could you expand on this?
SB: So, part of the contract is that the US said we are going to keep a stable dollar, which means keeping real interest rates where they need to be to make our debt attractive to you. And we will, in turn, buy your stuff, and we will have lower inflation. So, you get the financialisation of the US economy, which we know about, right.
But if you break the trade agreement side, why am I still going to invest or drive capital into your country? The initial response is: ‘Well, you have this much of a deficit, and you are getting dollars anyway, so you have to buy them. You have to do something with them.’ And the answer to that is yes and no, right? You have to do something with it, but I don’t, I could sell them to you. I could sell them to my central bank. My central bank may decide, as a matter of policy, that it doesn’t want to hold as many dollars.
So you could have the dollar become a hot potato. If the dollar goes down, in order to stabilise it, domestic rates have to go up – but then the Fed comes into play. What does it want interest rates to be, given its objective of employment and inflation, and where is inflation/employment at the time?
I think Trump neglects this in his nostalgia for this tariff era. We were a net exporter of capital at the time [before income taxes and when high tariffs were in place], and now we are a net importer of capital. We are a net debtor nation. And this disruption on the capital side, even if you go back to a low-tariff world, you are not necessarily going to have the inflow of capital driving trade, right?
So the capital flow really drives the trade flow. Well, now, given what he is doing, he is upsetting that balance. And in doing so, you are going to create a higher cost of funding within the US, and that is not going to be good for growth. So wait and see.
EP: Some of Trump’s first tariff actions were very much focused on Canada and Mexico. With this announcement, that focus has shifted to Asian countries such as Vietnam, Cambodia and Bangladesh. Why is that?
SB: First off, we do have free trade agreements with Canada and Mexico, so he couldn’t do that given the agreement that we have. So that is going to be something that they have to negotiate through the North American trade agreement that we have with them.
A lot of the Asian tariffs come two ways. One, China used these countries as a back door to sell their products to the US without getting hit by the Chinese tariff. So this is a way to sort of close the door. To make the high tariff wall against China more complete. So that is one reason.
Another reason is that a lot of these countries, especially in apparel, they are small but they are major exporters right now, and I think that is why they are being hit with the tariffs. Now, I don’t think you are going to have the apparel industry back in the US. That would be nice, but I don’t think that is going to happen. But you know that the core of these tariffs really impacts US companies.
The real driver of the US deficit is not because Americans prefer foreign products. It is really because US companies gain a huge margin advantage to produce in a low-income country and sell the product in a high-income country. So this is an attack on their margins. How they choose to absorb that transfer and put it all back on the price, we will see, but we also know that once this price ratchets up, it is not ratcheting back down again.
EP: How does this affect Big Tech companies?
SB: I think tech is the most glaring area, because it is where the US is the leader. Take Nvidia, a US company, US engineers – it is US-based and protected by US patents, but the manufacturer is in Taiwan with TSMC. There was a cycle that used to be part of the economic model where you innovated, you created a new product and that created a new industry, and that employed a lot of people.
So tech is an industry that you don’t want to lose. This is the next generation industry, and you don’t want this new industry now to no longer be available to spread wealth beyond just the owners of capital of these companies.
*Elon Musk and allies spent more than $100m in a campaign to elect a Trump-backed candidate to the Wisconsin Supreme Court. However, the Democratic candidate won, keeping a 4-3 liberal majority. The election is seen as having far-reaching implications for the mid-term elections in 2026.
This interview has been edited for length and clarity.
