Trump's tariffs are about to take effect, but the test for the global economy has just begun.

Author: Long Yue, Wall Street Journal

The Trump administration's radical moves to reshape the global trade landscape are pushing the US into a new, uncertain, protectionist phase and posing a severe challenge to the global economy. Whether this policy can revive US manufacturing as hoped remains to be seen, but the potential risks of triggering inflation and disrupting financial markets are becoming increasingly apparent.

According to media reports on Thursday, the US's comprehensive tariff policy took effect after midnight New York time. The US Customs and Border Protection was given a week to make necessary adjustments. After months of chaotic threats and back-and-forth, nearly all of the US's trading partners will face higher tariff barriers.

It is estimated that the new tariffs will raise the average US tariff rate from 2.3% last year to a staggering 15.2%.

According to CCTV News, on July 31st local time, the White House issued an executive order resetting "reciprocal tariff" rates for certain countries: Individual tariff rates will apply to countries listed in Annex 1 of the executive order, while a uniform 10% tariff will apply to countries not listed. If any country or region circumvents tariffs by transshipping goods through a third location, their goods will be subject to a 40% transshipment tax. The White House announced that the new tariffs will take effect on August 7th. This move has sparked alarm in financial markets. Analysts at major Wall Street firms have warned that investors should prepare for a market correction. Morgan Stanley, Deutsche Bank, and Evercore ISI all issued reports on Monday predicting that the S&P 500 index may face a short-term decline in the coming weeks or months. Tariff details remain unresolved, putting continued pressure on global supply chains. Since Trump first announced and subsequently suspended tariffs in April, the global economy has been shrouded in turmoil, sparking months of intense negotiations with the US. This uncertainty has led to widespread anxiety among businesses about supply chain disruptions and rising costs. Now that the broad outlines of the new tariffs have been finalized, most economies have accepted that high tariffs will remain in place for the long term. Many countries have pledged hundreds of billions of dollars in investment to the US in exchange for lower tariff rates. However, key details of Trump's plan remain unresolved, creating ongoing uncertainty for global supply chains. For example, auto tariff concessions for the EU, Japan, and South Korea have yet to be legislated, and until then, vehicles will continue to face higher costs. Negotiators from countries that have already reached agreements with Trump, such as the European Union, Japan, and South Korea, are continuing behind the scenes to press US officials for further relief for key export sectors. Furthermore, specific details regarding investment commitments and adjustments to market access policies have yet to be released. Meanwhile, last-ditch efforts by some countries to secure more favorable terms have failed. Switzerland's president left Washington on Wednesday, having failed to secure a reduction in the 39% tariffs it faced. Separately, according to CCTV News, Trump signed an executive order on Wednesday imposing an additional 25% tariff on goods from India in response to India's continued "direct or indirect imports of Russian oil." Tariff negotiations with Mexico and Canada, the United States' largest trading partners, are currently proceeding independently on a separate track. Trump has also vowed to soon announce tariff plans targeting key industries such as pharmaceuticals. CCTV reports that Trump has already announced tariffs of approximately 100% on chips and semiconductors.

Economic Alert: Hard Times Are Coming

Trump insists that high tariffs will significantly reduce the trade deficit and force companies to move manufacturing back to the United States. But critics say the move could lead to runaway inflation and cause shortages on store shelves.

Although the full economic impact has yet to emerge, recent economic data has flashed red lights. July's employment data reportedly showed the sharpest downward revision in U.S. job growth since the COVID-19 pandemic. At the same time, U.S. economic growth slowed in the first half of this year due to slowing consumer spending and businesses adapting to changes in trade policy.

Currently, the unemployment rate remains low and prices have not soared, partly because companies have so far absorbed most of the increased costs. But experts warn that this situation is unsustainable. "There are signs of tougher times ahead," said Wendy Cutler, vice president of the Asia Society Policy Institute and a former U.S. trade negotiator. "Many companies built up inventories before the tariffs took effect," she said. She believes that since businesses are unlikely to withstand lower profit margins for long, "price increases are almost inevitable." Tariff Revenue Growth and Manufacturing Boom at odds: Despite facing numerous challenges, Trump insists his measures will usher in a new economic golden age and dismisses economic data that doesn't support his narrative. He also touted the growing tariff revenue, even suggesting it could result in tax rebate checks for some Americans. U.S. Treasury data shows that tariff revenue soared to a record $113 billion in the nine months ending in June. However, it's unclear whether the plan's other stated goal—bringing production back to the United States—has made progress. Brad Jensen, a professor at Georgetown University's McDonough School of Business, has pointed out the inherent contradiction between these policy objectives. He said it would be difficult to achieve both rising tariff revenue and a boom in manufacturing jobs.

"You can't have both be true at the same time," he explained. "If domestic manufacturing picks up, then we won't have as much tariff revenue" because imports will fall. This fundamental contradiction casts a huge question mark over the long-term viability of Trump's trade agenda.