President Trump announced what could be one of the most dramatic economic policy changes in decades on Wednesday, when he substituted America’s longstanding system of taxing imports with a new tariff system of his own devising.
The president said the tariffs would reverse decades of unfair treatment by the rest of the world and result in factories and jobs moving back to the United States.
“The markets are going to boom” and “the country is going to boom,” Mr. Trump said on Thursday, as global financial markets suffered their biggest rout in years. He added that other countries “have taken advantage of us for many, many years.”
Economists’ estimates have been far more grim, with most predicting that the president’s sweeping tariffs and likely retaliation will slow U.S. economic growth, push up costs for consumers and make life difficult for businesses that depend on international supply chains.
The president’s measure is both consequential and complicated. Here’s what you need to know.
What did the president just do?
Mr. Trump announced two big tariff plans that apply to most of the world. One component is a “base line” tariff of 10 percent that will apply broadly to nearly all U.S. imports, except for products coming from Canada and Mexico.
The second measure is what the president is calling a “reciprocal” tariff. That levy will apply to 57 countries that Mr. Trump says have high tariffs and other unfair economic practices that have hurt American exporters. He said this is a reciprocal tariff because it will match the way other countries treat the United States.
But the tariff that Mr. Trump announced is not actually based on other countries’ tariffs or other economic barriers to U.S. trade. The number is calculated based on the U.S. trade deficit, which is a measure of the difference between what the United States sells to a country and what it buys from it.
The reciprocal tariffs range from 1 percent to 40 percent and will be added to the 10 percent base line tariff.
The 10 percent tariffs will go into effect on Saturday, and the reciprocal rates next Wednesday.
Which countries were targeted most by the tariffs?
The tariffs put a heavy burden on some of America’s biggest trading partners, including China, Japan, Germany, India, South Korea, Taiwan and Vietnam.
Notably, Canada and Mexico were not included. Mr. Trump hit those countries with a 25 percent tariff on many of their exports last month, though he also provided an exception for products that qualify for the trade agreement he signed in 2020, the United States-Mexico-Canada Agreement. The countries are also subject to tariffs Mr. Trump has applied globally on cars, steel and aluminum, and the administration appears to have decided that America’s closest neighbors did not need further tariffs.
But the new tariffs will hit other allies with substantial levies. European goods will face a 20 percent tariff, Japanese goods will face 24 percent and South Korean products 26 percent.
Because of the way the tariff was calculated, Asian countries that send the United States a lot of exports but don’t buy much in return will see some of the highest rates.
Chinese exports face an extra 34 percent tariff. That is on top of a 20 percent tariff Mr. Trump applied in recent months and other levies from his first term. As a result, some products from China will face a tariff of 79 percent.
Vietnam — where many companies moved their factories after Mr. Trump put tariffs on China in his first term — will now face a 46 percent tariff on its exports, while Cambodian exports will be taxed at 49 percent.
The White House also did not apply tariffs to Russia, North Korea, Cuba and Belarus, arguing that these countries are already subject to heavy sanctions. But U.S. imports from Russia were $3 billion last year; small compared to many countries, but far larger than tiny countries like Lesotho and the Falkland Islands, which Mr. Trump chose to hit with substantial tariffs.
What is the president’s goal?
The president and his advisers say their goal is to make the tariffs so painful that they force companies to make their products in the United States. They argue that this will create more American jobs and push up wages.
“If you want your tariff rate to be zero,” Mr. Trump said outside the White House on Wednesday, “then you build your product right here in America.”
One of the biggest questions is whether the president sees these tariffs as a negotiating tactic, and would be willing to remove them in return for concessions from other countries.
The administration has given mixed signals on that front. It seems unlikely that the president will remove the 10 percent base line tariff he has issued globally. And if the administration is truly looking for U.S. trade deficits with other countries to be eliminated, that may be difficult, if not impossible.
But in the executive order he signed, the president said that if countries eliminate their unfair trade practices, or the U.S. trade deficit with them drops, the reciprocal tariffs could be rolled back.
Howard Lutnick, the commerce secretary, described other countries’ trade barriers as “the monster that needs to be slayed.”
“Our teams are talking to all the great trading partners today,” Mr. Lutnick said Thursday on Bloomberg Television. “It is time for them to do deep soul-searching on how they treat us poorly and how to make it right.”
How did they come up with the numbers?
Mr. Trump said Wednesday that each nation’s tariff rate would be calculated based on “the combined rate of all their tariffs, non-monetary barriers and other forms of cheating.” But it turned out that their methodology revolved around something more straightforward: the gap between what America exports to a country and what it imports.
The White House put out a complicated-looking formula, but it boiled down to a simple ratio. Countries that send the U.S. more goods than they buy were deemed to have “unbalanced” trade and will face higher tariffs.
This formula doesn’t account for any comparative advantage, or the idea that countries trade goods because some are better at making some products than others, and that countries can trade to maximize their benefits. Instead, the administration’s point of view appears to be that any trade deficit is bad, and tariffs will be applied until it is eliminated.
How do the tariffs work?
As they go into effect over the next week, the tariffs will immediately increase the cost for importers bringing goods into the country. Typically, those importers are U.S. companies.
For example, if Walmart brings in a $10 shoe from Vietnam — which faces a 46 percent tariff — Walmart will owe $4.60 in additional tariffs to the U.S. government.
It’s less clear what happens next. Walmart could try to force the cost onto the Vietnamese shoe manufacturer, by telling it Walmart will pay less for the product. Walmart could cut into its own profit margins and absorb the cost of the tariff. Or, it could raise the price it sells shoes for at its stores, to make up the cost.
Economists found that, when Mr. Trump put tariffs on China in his first term, most of that cost was passed on to consumers. But economic studies found that the tariffs on steel were a bit different; only about half of those costs were passed on to customers.
Estimates vary, but given the scale of Mr. Trump’s new tariffs, American households could see thousands of dollars of additional costs annually. An estimate released by the Yale Budget Lab, a research group, found that American households on average would pay an additional $2,100 because of the April 2 announcement, with poorer households paying a larger share of their income.
The particularly high tariffs that the Trump administration applied to many Asian countries means that the price of many consumer items will likely increase, including shoes, clothing and electronics.
The government will earn a lot more revenue from tariffs that the Trump administration has promised to channel into tax cuts. The value of tariffs for all the goods imported by the United States last year was $78 billion. With the new tariffs announced on Wednesday, the figure would skyrocket to more than $1 trillion, according to an analysis by Trade Partnership Worldwide, a research firm based in Washington.
What happens next with the economy?
The tariff announcement triggered a global meltdown in stock markets, indicating that investors see it as significantly harmful for listed companies.
It is not yet clear whether, or how, other countries will retaliate. But if they impose their own tariffs on U.S. products, that will likely hurt U.S. exporters and could spark escalating trade wars.
Many analysts quickly downgraded their forecasts for economic growth, saying that tariffs would push up prices for consumers and costs for businesses, slowing demand and economic activity.
Nancy Lazar, chief global economist at Piper Sandler, estimated the U.S. economy might contract 1 percent in the second quarter. She had previously expected a flat quarter. “It’s an immediate hit to the economy,” she said.
Economists at Fitch Ratings said in a note Thursday that the tariffs had significantly raised the risk for a recession in the United States. It said that tariffs would result in higher consumer prices that would squeeze real wages and weigh on consumer spending.
The tariffs would also lead to lower corporate profits, which, along with policy uncertainty, would drag on business investment in the United States. Altogether, the effect would “likely outweigh the benefits U.S. companies might gain from increased protection against foreign competition,” Fitch economists said.
Lazaro Gamio and Colby Smith contributed reporting.