William Krist's Blog, page 2

Shifting from Geopolitics To Geoeconomics: How Trump Turned Trade Into Strategy – Analysis

The pattern is straightforward: threaten harsh tariffs, negotiate down to something painful but manageable, and walk away claiming a win.

During his presidency, Donald Trump made it very clear that trade wasn’t just about goods and services—it was about leverage. He flipped the traditional script, where foreign policy meant diplomacy, alliances, and sometimes conflict, and instead pushed a bold economic toolkit to achieve geopolitical goals. This wasn’t just a few random tariff hikes or trade wars. It was a full-on pivot—replacing classic geopolitics with geoeconomics as the primary way of exerting American influence.

Instead of dispatching troops or deepening treaty commitments, Trump’s White House leaned into tariffs, deals, and trade frameworks like a general wielding economic weapons. His administration threatened sweeping tariffs, then used that threat to bring countries to the negotiating table. And while critics may have called it erratic or improvisational, there was a consistent underlying tactic: use market access as both a carrot and a stick.

To understand this shift, you don’t need to look far beyond five major works that frame the thinking behind Trump’s actions. In War by Other Means (Blackwill & Harris), the idea of geoeconomics is laid out clearly—economic instruments used for geopolitical ends. Trump didn’t just read that playbook—he rewrote it in real time. Robert Gilpin’s Global Political Economy reminds us that international markets are always political, never neutral, and Trump’s tariffs were political to their core. In The Economic Weapon by Nicholas Mulder, we’re reminded that sanctions and trade restrictions can function like war—slow, grinding, often just as destructive. Henry Kissinger’s World Order hinted at this earlier: power today flows not only through armies but through the control of systems—financial, commercial, and technological. And finally, Dani Rodrik’s Straight Talk on Trade cautions about the backlash from global economic entanglement—something Trump leaned into rather than away from.

Trump’s approach was blunt but strategic. Take, for instance, the flurry of trade activity in recent days. After pausing reciprocal tariffs briefly in April, the administration vowed to close 90 trade deals in 90 days. That wasn’t just campaign bravado—it reflected a frenzied push to reset how the U.S. engages with the world. Within months, deals were struck with the UK, Indonesia, Vietnam, the Philippines, Japan, and the EU. The pattern was straightforward: threaten harsh tariffs, negotiate down to something painful but manageable, and walk away claiming a win.

One of the clearest examples was the U.S.-EU agreement framework. Initially staring down a 30% tariff, European exporters found relief when the figure was knocked down to 15%—still higher than the previous 10%, but a far cry from the doomsday scenario. Japan received similar treatment: a proposed 25% import duty shrank to 15%, again after a round of high-stakes negotiations.

Then came China. The Trump administration didn’t just pick a fight—it waged a multi-front trade battle. Tariffs soared past 100% on both sides. But beneath the headlines, both powers were still talking, still crafting frameworks, and extending temporary truces. A 90-day ceasefire in tariffs gave way to more talks—this time in Sweden, with heavyweights like Scott Bessent and He Lifeng at the table. What emerged wasn’t peace, but a managed tension, negotiated in percentages and clauses instead of ceasefires and demilitarized zones.

It wasn’t just about rivals. Even allies like Canada weren’t spared. Despite the U.S.-Mexico-Canada Agreement (USMCA), which preserved tariff-free trade on roughly half of Canadian exports, Trump’s team didn’t hesitate to threaten higher tariffs. His frustration with Canada’s digital services tax pushed him to float restrictions on lumber and other goods. The underlying message: friend or not, everyone’s fair game if it serves American interests.

In Europe, Trump similarly dangled trade penalties over transatlantic relationships, especially where tech regulation or defense spending was involved. Germany faced pressure over its car exports and Nord Stream II project. And in Southeast Asia, Trump stepped into regional crises not with UN envoys or State Department memoranda—but by wielding tariff threats. In one case, as tensions flared between Thailand and Cambodia, the U.S. president warned that neither country would see trade deals—each was staring down a potential 36% tariff—unless hostilities ended. He effectively used trade to broker a kind of regional peace talk in Malaysia. It wasn’t traditional diplomacy. But it worked, at least for a time.

This kind of policy move—where trade becomes a substitute for broader strategic policy—isn’t new in theory. But the intensity and visibility under Trump were unprecedented. For example, his administration threatened a sweeping new global tariff, targeting “the rest of the world” with a blanket rate between 15% and 20%. Even Australia, a long-standing ally, wasn’t exempt. Such policies shook the confidence of the international trading system, but also forced countries to take U.S. demands more seriously—something that multilateral diplomacy hadn’t always achieved.

Outside the examples already mentioned, other regions also felt the tremors. Brazil faced scrutiny over its meat exports, especially after environmental concerns tied to the Amazon. South Korea was pressured to revise its KORUS trade agreement, and India, once enjoying preferential trade treatment, saw its status revoked. Turkey, another NATO ally, faced tariff spikes during a diplomatic spat involving a detained American pastor. Each situation followed a similar rhythm: economic pressure first, political outcome second.

So what does this all add up to?

Essentially, Trump flipped the board. Rather than seeing trade as the outcome of strategic diplomacy, he made it the starting point. He saw tariff schedules not as dry bureaucratic details, but as chess pieces. He used them to test loyalty, punish misbehavior, and reward concessions. This strategy was risky. It disrupted global markets, spooked long-term investors, and occasionally backfired. But it was also effective in forcing faster negotiations, especially with countries that had long benefited from America’s more relaxed approach to trade enforcement.

And while critics often paint Trump’s tactics as scattershot, they missed the pattern: negotiate through confrontation, frame every trade imbalance as a threat to national security, and make sure every agreement feels like a campaign win. Even his threats of global tariffs weren’t just economic bullying—they were tools to reshape how other nations viewed their relationship with the U.S. It wasn’t diplomacy with handshakes and photo-ops; it was leverage via spreadsheets and customs duties.

In the end, Trump’s strategy blurred the lines between economic and foreign policy so thoroughly that it’s hard to tell them apart. That’s the lasting imprint. Whether future administrations follow his lead or not, the message has been delivered: in a world where every dollar counts, trade isn’t just business—it’s power.

To read the full article as it was published on the Eurasia Review website, click here.

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China Slashes Coal Imports As Economy Readies For Tariffs

China Cuts Coal Imports

For years, as the rest of the world turned away from coal, China had been boosting imports to power its booming electrification, and a vibrant new industry of electric vehicles and batteries. In 2024, it imported 352.2 million metric tons of coal, up 79% from 197 million in 2019.

This year, China is finally giving up the rock. In July, its purchases of coal dropped 22.9% year-on-year by volume to 35.6 million tons, while boosting imports of other energy sources. Imports of natural gas rose 82.4% to 10.6 million tons, and imports of crude

petroleum oil increased 11.5% to 47.2 million tons.

China diminished imports from its top sources: Russia, Australia, Mongolia and Indonesia. The only country it increased coal imports from was Canada, boosting imports 13.3% to 5.4 million tons.

So what is going on? China has been producing more coal domestically and also developing more alternative energy sources such as wind and solar. It’s also transforming its economy to become less dependent on global trade, by ramping up production in assets like coal, where it has abundant resources. Exports of fertilizers rose 134.5% to $2.1 billion, and exports of agricultural products increased 1.6% to $8.4 billion.

Adjusting to U.S. Tariffs

The switch is just one of the ways China has been adjusting to duties from its biggest export market. How the world adapts to a newly protectionist U.S. is one of the most important economic stories of the decade. On Thursday, August, 7, Washington slapped duties from 10% to 41% on hundreds of billions worth of imports from dozens of countries.

Also on Thursday, China said its overall goods exports increased 7.2% in July to $321.8 billion, surpassing the expectations of analysts who’d predicted growth of around 6%. Exports to the U.S., however, fell 21.6% to $35.8 billion, while imports from the U.S. shrank 18.6% to $12.1 billion.

Current U.S. tariffs on Chinese imports vary, but are generally around 45%. The U.S. has also eliminated the de minimis exemption, which allowed companies to ship goods worth under $800 into the U.S. tariff free.

Negotiators from Washington and Beijing are currently negotiating a new agreement governing tariffs between the two countries. The two sides have set an August 12 deadline, after which they’ve threatened to impose duties of over 100%, which would cripple trade between the world’s dominant trading economies.

Destination Europe

One surprising development has been how much China has managed to redirect its exports into the European Union. Officials from Brussels visited Beijing last month. Shipments into the EU increased 9.3% in July to $50 billion, even as imports from the EU declined 1.4% to 24.5 billion.

Less surprisingly, exports to ASEAN nations rose 16.8% to $54.6 billion, led by shipments to Vietnam increased 28.1% to $17.1 billion. Imports from ASEAN nations fell 5.4% to $31.4 billion. Exports to Russia continued their decline, falling 9% to $9.1 billion.

Supply Chains or Domestic Demand?

China’s total imports rose 4.1% in July to $223.5 billion. The increase in imports was driven by increases in commodity shipments from Africa, up 20.3% to $10.6 billion, Latin America, up 12% to $22.1 billion, and India, 26.4% to $1.7 billion.

Just as the new American dream appears to be a self-contained continental market, so it goes for China. It’s now a country that makes everything. All it needs is raw materials. Imports of agricultural products rose 5.4% to $18.7 billion. One essential question is how much the trade is focused on supplying the domestic market, and how much is part of global manufacturing supply chains.

Phone and Cars

Shipments of high-tech products rose 4.3% to $78.1 billion. Exports of mobile phones, however, fell 21.8% to $7.5 billion, signaling that China could losing one of the mainstays of its export economy. In the first half of 2025, the U.S. cut smartphone imports from China 27.6% to $11.2 billion from tripling them from India to $11.6 billion. That might change as President Trump moves to slap duties on India. Imports of high-tech products rose 7.9% to $71.9 billion, and exports of chips and integrated circuits increased 29.4% to $17.9 billion.

When it comes to cars, China has already become a country that makes way more than it takes. Exports of motor vehicles rose 18.5% to $11.8 billion. Imports of motor vehicles dropped 42.1% to $2.5 billion. Toy sales fell 3.2% to $3.5 billion.

TDM Insight 7 August 2025 - China Slashes Coal Imports As Economy Readies For Tariffs - By John W. Miller

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Harnessing New Investments In Industrial Policy To Advance North American Competitiveness

Introduction

Following the severe economic and societal disruptions stemming from the global Covid-19 pandemic, many countries vowed to ‘build back better’ to ensure greater supply chain resilience moving forward. This imperative took on new urgency as armed conflicts in Ukraine, the middle east and the Red Sea have strained global trade routes and the strength of those supply chains. Ongoing US-China rivalry has added further stress, with trading partners on both sides working to safeguard their supply chains, from raw materials to intermediate components and finished goods.

One response to this increasingly challenging global trading context is a return to regionalization. Nearshoring is gaining traction, the trend to reduce geographic distance, uncertainty, transportation costs and carbon emissions in supply chains 1. Other trends include friendshoring and ally-shoring, terms used to describe the linked concepts of deepening trade ties between countries that may not be geographically close, but which share common values including a commitment to democracy, human rights, and strong environmental and labor standards 2.

In this context, the Center for U.S.-Mexican Studies at the University of California San Diego (UCSD) with support from the Future Borders coalition, George W. Bush Institute and the Mexican Council on Foreign Relations (COMEXI), convened a working group to focus on key topics in North American competitiveness. Led by co-chairs Shannon O’Neil (USA), Luz María de la Mora (Mexico) and Louise Blais (Canada), more than two-dozen experts from academic institutions, the private sector, and former government officials gathered to address key themes and issues facing the North American economy. Eight meetings took place over 10 months in 2023, and a series of research papers were drafted to explore specific aspects of the group’s agenda (see complete list of participants and associated publications). 

This report summarizes the key themes and outcomes of those meetings and research papers, and offers recommendations to move North America forward as a more integrated region that can compete internationally in the 21st Century.

To read the full report as it was published by the Institute of the Americas, click here.

To access the PDF, click here.

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The Impact of US Tariffs on North American Auto Manufacturing and Implications for USMCA

Overview

Since coming into office, President Donald Trump increased U.S. tariffs on all imports from China to 145% (only to agree with China to 115% tariff reduction for 90 days on the most recent tariffs) and applied a global 10% tariff to the rest of the world and a global 25% tariff on imports of autos and steel and aluminum. Additional so-called reciprocal tariffs on the rest of the world except Canada and Mexico were announced on April 2 and then subsequently paused for 90 days. When it comes to Canada and Mexico, Trump imposed a 25% tariff on all imports from Canada and Mexico that do not comply with the United States-Mexico-Canada Agreement (USMCA) and applied a 25% tariff on autos imported under USMCA, but only on the non-U.S. content. Significantly, Trump did not impose additional so-called reciprocal tariffs on Canada and Mexico. As a result, the majority of U.S. imports from Canada and Mexico that are USMCA compliant continue to enter the U.S. duty free.

This mix of relatively higher China tariffs compared to tariffs on many of the U.S. imports from Canada and Mexico will have various implications for trade and investment across North America. For one, higher U.S. tariffs on China will also create a stronger incentive for China to circumvent U.S. tariffs by entering the U.S. via Mexico and Canada, and this incentive may extend to other countries that also face higher U.S. tariffs. The following outlines how Trump’s recent tariffs will affect trade and investment across North America with a particular focus on autos, and the implications for the 2026 review of the USMCA.

A snapshot of US tariffs

Table 1 lists tariffs on U.S. imports from Canada and Mexico, and the rest of the world. Following the 90-day pause in U.S. tariffs of 145% on all imports from China, China now faces tariffs ranging from 47.5% for autos, 50% on steel and aluminum, and 30% tariffs on all other imports. The U.S. has also applied a 25% tariff on all imports of autos and steel and aluminum. When it comes to U.S. auto imports from Canada and Mexico that are USMCA compliant, there is a 25% tariff. The rest of U.S. imports from Canada and Mexico that are consistent with USMCA enter the U.S. duty free, covering around 50% of Mexico’s exports to the U.S. and 40% of Canada’s exports to the U.S. In addition, on April 2, Trump announced reciprocal tariffs on the rest of the world (but not Canada and Mexico) ranging from 46% on imports from Vietnam, 36% on imports from Thailand, and 20% on imports from the EU, though these tariffs have been paused for 90 days to give countries time to strike a trade deal with the United States. Trump has also applied a 10% global tariff.

New tariffs are also likely. The Department of Commerce has six national security-focused Section 232 reviews on copper, semiconductors, lumber, pharmaceuticals, critical minerals, and trucks, all of which could lead to additional tariffs on these products. A 25% tariff on non-U.S. content on auto part imports from Canada and Mexico is also planned.

Retaliation by other countries against U.S. tariffs has, except in the case of China, been restrained so far. China applied 125% tariffs on imports from the U.S., (that have been paused for 90 days), banned exports of various rare earths and critical minerals, added 29 U.S. companies to their entities list, and stopped orders of Boeing airplanes. Canada retaliated with a 25% tariff on non-USMCA compliant autos and a 25% tariff on $21 billion worth of steel and aluminum imports. Further retaliation from other countries is also likely should U.S. tariffs remain. For instance, Mexico, the EU, and Brazil have announced a list of retaliatory tariffs on U.S. imports, and Canada is likely to retaliate further in the event that the U.S., Canada, and Mexico are unable to reach a deal.

The impact of US tariffs on North American trade, investment, and auto manufacturing

By July 2026, all three governments must review the USMCA and agree to extend the agreement for another 16-year term. Should an agreement not be reached, the three governments have until 2036 to reach an agreement, and failure to do so will lead to the expiration of the USMCA. The agreement’s review will be an opportunity to assess the USMCA’s operation, and it will also be an opportunity to update the agreement. For the U.S., the goal will be to update the agreement in part to force more manufacturing back into the U.S. The following outlines the key implications of current U.S. tariffs for trade and investment in North America. The next part analyzes what these developments might mean for the 2026 USMCA review.

More trade within North America will be channeled through USMCA as costs of non-compliance with USMCA increase. Under USMCA, the U.S., Canada, and Mexico agreed to reduce tariffs to zero. Trade between the three countries can also happen outside of the agreement, but in that case, imports are subject to the tariff rate the U.S. applies to all other World Trade Organization (WTO) member countries—the so-called WTO most-favored-nation (MFN) rate. As a general matter, the higher the WTO MFN rate, the greater the incentive for traders in Canada and Mexico to comply with USCMA to enter the U.S. duty free. For a product to comply with USMCA requires meeting the agreement’s rules of origin (ROOs). USMCA ROOs prevent traders in countries not party to the agreement from accessing the duty-free tariff rate by merely transshipping goods through Canada, Mexico, or the U.S. to reach another USMCA country. USMCA ROOs generally require some amount of manufacturing or processing to take place in either Canada, Mexico, or the U.S. to benefit from the zero USMCA tariff.

Until recently, the U.S. WTO MFN rate applied to auto imports was 2.5%. The effect of this was that as the costs of complying with the USMCA ROOs increased, companies increasingly decided to pay the 2.5% tariff instead of meeting the USMCA ROOs. During the negotiation of USMCA (which replaced NAFTA), the U.S. insisted on tighter ROOs aimed at forcing more auto manufacturing back into the U.S. For instance, USMCA increased the Regional Value Content (RVC) for cars and light trucks from 62.5% to 75%—the amount of North American content that must be used to manufacture a car. USMCA also eliminated the so-called deeming rule that had allowed auto parts not on a list created when NAFTA was negotiated to be “deemed” as originating in North America for the purposes of the RVC calculation. USMCA also introduced new requirements that 70% of the steel and aluminum in cars be sourced in North America, and that 40% of the Labor Value Content (LVC) used to produce a car must have a wage of at least $16 per hour.

The costs of complying with these tighter USMCA ROOs led to increasing car imports into the U.S. from Canada and Mexico that were not complying with USMCA and instead entered the U.S. by paying the WTO MFN 2.5% tariff. Indeed, since 2020, the share of vehicles imported into the U.S., which paid the 2.5% duty, went from 0.5% in 2019 (pre-USMCA) to 8.2% in 2023.

The new 25% U.S. tariff on autos is in part a response to this trend by auto companies to pay the WTO MFN tariff instead of complying with USMCA ROOs. The higher auto tariff should lead to higher levels of compliance with USMCA ROOs, and by extension more auto manufacturing in North America. The new 25% tariff on the non-U.S. content on imports from Canada and Mexico will further push more automotive manufacturing back into the U.S. at the expense of Canada and Mexico. The recent announcement by Honda that it would manufacture its next-generation Civic hybrid model in the U.S. instead of in Mexico is an example of this trend.

The overall impact of higher tariffs on auto manufacturing in the U.S. is unclear, with potential to be net negative. Higher U.S. tariffs create an incentive for car manufacturers to avoid the tariff by manufacturing more in the U.S. When it comes to Canada and Mexico, the new auto tariff on non-U.S. content is inconsistent with existing USMCA ROOs, which instead counts production within North America as counting toward the RVC requirement.

However, this tariff could also have various negative impacts on auto manufacturing in the U.S. For one, tariffs will increase the cost of manufacturing automobiles in the U.S., which could lead to less innovation, more costly cars, and lower sales. No other auto manufacturing region in the world has ROOs as restrictive as those under USMCA.

The auto tariff could also lead to retaliation by other countries, which could globally segment the auto market and result in less auto manufacturing in the U.S. for export. As noted, China had imposed tariffs of 125% on all U.S. exports. In 2024, the U.S. exported $4.93 billion of autos to China, which was the U.S.’ third largest market. EU retaliation on U.S. autos is also likely should U.S. auto tariffs on EU imports persist. The EU is the U.S.’ second largest auto market worth $12.4 billion in 2024. EU tariffs on auto imports from the U.S. could lead to EU auto manufacturers, such as BMW and Mercedes that currently manufacture in the U.S. for export to Europe (and globally), to relocate some manufacturing back to Europe. For example, the BMW plant in Spartanburg, South Carolina manufacturers SUVs for sale to Europe, employs 11,000 people, and in 2023 was the largest auto exporter from the U.S. by value.

The current U.S. tariffs could increase investment in Canada and Mexico as a base for export. Proposed U.S. “reciprocal” tariffs on imports from a range of other countries—combined with continuing zero tariffs applied to USMCA consistent trade—will likely lead to even more investment in Canada and Mexico. As countries face higher U.S. tariffs, they will likely invest more in Canada and Mexico to produce goods for export to the U.S.

Canada and Mexico could also see increased investment by companies as a base for export globally. The extent to which this happens will depend on whether countries retaliate and raise tariffs on U.S. exports. When this happens it will create an incentive to export from Canada and Mexico to avoid tariffs that would apply when exporting from the U.S. Existing trade agreements between Canada, Mexico, and third countries also provides trade policy certainty and makes it unlikely that Canada and Mexico will face new tariffs. Canada currently has 15 free trade agreements, including with the United Kingdom, the EU, and countries within the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. Mexico has 13 trade agreements, including with the EU, Japan, and members of the Central America-Mexico Free Trade Agreement.

The increase in U.S. tariffs on China increases the incentive for circumvention by China, and possibly other countries as well. Since the U.S. raised China tariffs in 2018, China was incentivized to circumvent these tariffs by entering the U.S. market via Mexico and Canada. This incentive is likely to grow as the U.S. expands and increases tariffs on imports from China. As noted, if the U.S. also implements “reciprocal” tariffs on other countries, this will create added incentives for these countries to also circumvent these tariffs by producing in Canada and Mexico for export to the U.S.

Implications of tariffs for USMCA review

These developments in U.S. tariffs will have various implications for the upcoming USMCA review. The fact that Canada and Mexico were exempt from the April 2 reciprocal tariffs suggests that Trump is not looking to pull out of the USMCA, and that existing tariffs on Canada and Mexico may ultimately be used as leverage during the upcoming USMCA review. The following does not attempt to address all the issues that will come up during the USMCA review and instead focuses on what these new U.S. tariffs might mean for the USMCA review—with a focus on autos—and how to address the incentives these tariffs create to circumvent them via Canada and Mexico. Getting to a new deal on autos will be critical for a successful USMCA review. Auto trade within North America comprises 17% of total trade across North America and is a major industry in all three countries that employs 13 million people.

A deal on autos will be central to any USMCA review. As noted, the impact of the current U.S. tariffs on U.S. auto manufacturing is unclear and could be net negative, depending on the extent to which other countries retaliate. The current U.S. tariffs on non-U.S. auto content on imports from Canada and Mexico are inconsistent with the United States’ current USMCA commitments, and if allowed to stand, could lead to more automotive manufacturing in the U.S. at the expense of Canada and Mexico. For this reason, a key objective for Canada and Mexico will be for the U.S. to calculate content from the U.S., Canada, and Mexico as counting toward USMCA ROOs. Progress on this issue will also matter for automakers that have built manufacturing supply chains across North America. Failure to reduce tariffs on auto imports within North America will also harm all three countries. Economic modeling of a U.S. 25% tariff on auto imports from Canada and Mexico finds that U.S. exports of automobiles to Canada and Mexico would contract by 25% and 23%, respectively. In the event that Canada and Mexico retaliate, U.S. automotive exports to Canada and Mexico would shrink by up to 55% and 65%, respectively.

Given the stakes of getting to a deal on autos, the following assumes that the U.S. agrees to continue to count North America content toward USMCA auto ROOS. In parallel, it is also assumed that the U.S. will continue to apply a higher tariff on all non-USMCA compliant autos. Without the former, a deal on autos is unlikely. Higher tariffs on non-USMCA compliant auto imports will, however, be needed if the U.S. is to meet its goal of increasing auto manufacturing. With this as background, there are three potential pathways toward a new USMCA outcome on autos:

No change to USMCA auto ROOs.
No change to the USMCA ROOs as written, but Canada and Mexico agree to an interpretation of these ROOS that the U.S. has been pushing, which would have the effect of requiring more auto manufacturing in North America.
Amend USMCA ROOs to be even more restrictive.

The following outlines these options in more detail.

No change to USMCA ROOs. The argument for this outcome is that it is too early to assess the impact of existing ROOs on auto manufacturing. One reason is that USMCA auto ROOs have not come fully into effect. For example, 13 companies were given until 2025 to gradually meet the RVC and LVC standards. Notwithstanding this, 2023 analysis by the U.S. International Trade Commission found that the new USMCA ROOs had already led to higher profits, wages, and manufacturing in U.S. autos. Companies have also reported challenges meeting existing auto ROOs, particularly in the context of the transition to electric vehicles (EVs) where many of the critical minerals needed to produce batteries are not domestically produced in the U.S. Given all of this, sustaining the current UMSCA ROOs with agreement to revisit may be the most prudent approach.

Adopting the U.S. interpretation of USMCA ROOs. The three governments could tighten existing USMCA ROOs by agreeing to accept the U.S. interpretation of their operation (an interpretation that was struck down by a USMCA panel). Under the U.S. approach, non-USMCA content in “core parts”—engine, transmission, chassis, axle, suspension, steering, advanced batteries—would not count toward the overall RVC of a car. Adopting this approach (perhaps with agreement to phase in over time), would prevent auto companies from counting non-USMCA content in core parts toward overall USMCA RVC requirements. The net result being that more North American content would be needed to meet the RVC requirements.

Adopting new and stricter USMCA ROOs. It is also possible that the three governments agree even tighter USMCA ROOs. In this case, a staged approach seems critical given challenges complying with existing ROOs. New ROOs for EVs also seem necessary given developments in technology and challenges in securing North American supplies of the critical minerals used in batteries.

The following addresses additional issues raised by these new tariffs for the USMCA review.

Aligning with U.S. tariffs on China will be important but challenging. Since Trump applied 20% tariffs on imports from China in his first term, there has been an incentive for China to circumvent these tariffs on Chinese products by entering the U.S. market via Mexico and Canada, taking advantage of USMCA zero tariffs where possible. Addressing Chinese circumvention has become an increased focus, and as outlined above, the new U.S. tariffs on China will increase the incentive for China to circumvent these tariffs via Mexico and Canada. Mexico and Canada understand this risk and have been moving to align with U.S. on China tariffs in some areas. For instance, in 2024, Canada applied a 100% tariff to EVs and 25% tariffs on steel and aluminum products from China, and Mexico agreed to require melting and pouring of steel and smelting and casting of aluminum to be restricted to North America. In April 2024, Mexico also increased its tariffs on countries with which it does not have a free trade agreement, including China, on products such as steel and aluminum and some auto parts. The bottom line is that closer alignment between Mexico and Canada with U.S. China tariffs has begun, but more will be needed to address the incentives for circumvention. Yet, the recent expansion and increase in U.S. tariffs on imports from China will make alignment difficult, given that Chinese imports remain important inputs into a range of manufacturing sectors.

Another related issue is Chinese foreign investment into Mexico and Canada, which can be another means of circumventing U.S. tariffs. Trump’s executive order on investment policy signals further restrictions on Chinese investment into the U.S. across a range of critical industries. Canada is already well aligned with the U.S. foreign investment screening for China, but Mexico lags. In 2024, President Joe Biden and Mexican President Claudia Sheinbaum signed a memorandum of intent to establish a working group on investment screening and its role in national security. This progress will likely be an important part of the USMCA review.

Additional U.S. tariffs on other countries might also need to be addressed in the USMCA review. The proposed U.S. reciprocal tariffs on 58 countries (including the 27 EU members) have been paused. But new tariffs are likely, even in the event of successful deals with individual countries. U.S. tariffs on third countries will create a new incentive for these countries to enter the U.S. market via Mexico and Canada. However, getting Mexico and Canada to address circumvention by applying similar tariffs to these countries, or to screen out their foreign investment, will be resisted. Unilateral Mexican and Canadian tariffs against other countries would be in breach of their WTO commitments, and in many cases their free trade agreements with many of these countries. Mexico and Canada will also be reluctant to undermine trade relations with third countries at a time when Trump has sent a clear signal to Canada and Mexico of the imperative of reducing their trade exposure to the U.S., while necessitating more, not less, trade with other countries.

USMCA review will also need to resolve bilateral trade barriers. There are various bilateral trade barriers that are well known and should be largely resolvable during a good faith effort to update USMCA. The Office of the U.S. Trade Representative in its 2025 National Trade Estimate (NTE) Report listed the trade barriers of most concern for the United States. For Canada, this includes its supply-management system for dairy (that has also been subject to a USMCA dispute), various digital trade issues, and access to U.S. agricultural products. For Mexico, trade barriers include access to U.S. agricultural exports, including biotech corn, intellectual property (IP) protection, and various barriers to services and energy exports. For Canada and Mexico, Buy American provisions, including ones that prioritize U.S. businesses, have been another long-standing issue. Perhaps even more important for Canada and Mexico will be the United States’ commitment to minimizing the risk of new tariffs. While this will be seen by some in the Trump administration as inhibiting freedom of action, it is of self-interest to set realistic boundaries on future trade actions against Canada and Mexico in order to restore business confidence in North America.

Conclusion

USMCA is the most important trade agreement for the U.S., Canada, and Mexico. In a world of competition with China and high tariffs that point to further decoupling of the U.S. and Chinese economies, finding ways to strengthen opportunities for trade and investment within North America will be critical. A successful review of USMCA will be needed if the U.S. is to restore confidence in North America. Recent U.S. tariffs on Canada and Mexico are relatively targeted, but agreeing on autos will be critical if the USMCA review is to succeed. Moreover, these tariffs raise new challenges, including the impact of circumvention from China and potentially from other countries that are likely to face higher U.S. tariffs. Fortunately, there are various paths to reaching a successful USMCA review that can achieve the dual goal of both increasing manufacturing and successfully competing with China. The question is whether the U.S. is willing to take it.

To read the full research as published by the Brookings Institution, click here.

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U.S. Tariff Outcomes Dependent on Trading Partner Responses

U.S. tariff policy has historically shifted among competing goals: providing revenue, protecting domestic markets and opening foreign markets to domestic producers. These goals are unlikely to be achieved simultaneously. Modern models applied to the U.S. reveal that tariffs can enhance consumer welfare via terms-of-trade gains, a costly externality on foreign partners, but only if those partners don’t retaliate. Thus, potential consumption gains for U.S. households and businesses depend on policy choices and strategic responses from trading partners.

Tariffs are an economic policy tool that attempts to balance competing goals such as raising government revenue, protecting domestic industries by restricting market access and enforcing international trade reciprocity.

However, historical evidence from the U.S. shows that achieving these three goals simultaneously is typically not feasible, requiring policymakers to prioritize one or two of them. This prioritization has historically shifted in response to varying economic and political contexts.

Understanding how tariffs affect the economy is crucial for informed policy analysis. Research reveals that tariffs can increase government revenue but only to a certain extent. In the U.S., maximum revenue is achieved at a universal 70 percent tariff rate if no other country reacts. That level declines to 30 percent if other countries respond with reciprocal tariffs.

A 25 percent tariff can enhance domestic consumption if revenue is rebated and terms of trade shift favorably, offsetting some of the import price increases. However, this advantage disappears if retaliatory tariffs are imposed, emphasizing the need for careful balancing when designing any tariff policy. In the 2018–19 tariff episode, targeted tariffs appeared to cause economic distortions across sectors and countries by altering the relative prices of goods. This illustrates the complex and varied effects of such policies.

Tariffs and government revenue

Tariffs have historically served three main purposes: generating government revenue, protecting domestic industries and facilitating (non-discriminatory) foreign market access. Collectively, these objectives are known as the three Rs of tariff policy: revenue, restriction and reciprocity. As detailed by Dartmouth professor Douglas Irwin, U.S. tariff policy has shifted its focus among these goals over time.

Originally, tariffs were the federal government’s principal source of income, particularly before the implementation of modern income and payroll tax systems. Throughout the 19th century and into the early 20th century, customs duties were the primary contributors to federal revenue. This reliance was largely due to the lack of alternative federal income sources, making tariffs a central element of U.S. tax policy by necessity.

Efforts to diversify U.S. government revenue sources began in 1862, during the Civil War, to fund war expenses. Those efforts coincided with the introduction of excise taxes as a major income source. The constitutional basis for federal income taxation was solidified with the ratification of the 16th Amendment in 1913, the same year the Federal Reserve was established to stabilize the banking system and ensure a secure monetary system.

The introduction of payroll taxes in 1935 under the Federal Insurance Contributions Act during the Great Depression aimed to fund Social Security (the Social Security Bill was also signed into law in 1935), further reducing fiscal dependence on tariffs. These alternative revenue sources were significantly scaled up during World War II. Since then, the federal government has primarily relied on individual income and payroll taxes for funding, with only a marginal contribution from customs duties.

Tariffs and protectionism

Historically, the “restrictive” R of tariffs has fulfilled dual roles: protecting nascent domestic industries and combating unfair trade practices such as dumping, the practice of exporting goods at artificially low prices to seize market share or undercut competitors. These protective measures were common during periods of economic nationalism and mercantilism when governments actively defended domestic producers. Over time, however, tariffs also became strategic tools in negotiating improved trade conditions and furthering other international policy objectives.

By the late 19th century, tariffs were applied to a declining number of imports, and their importance as a government revenue source waned, especially following the introduction of universal income taxes in 1913. Despite protectionist spikes—the last of which in the U.S. was the Smoot-Hawley Tariff Act of 1930, which likely worsened the Great Depression—the trend of diminishing reliance on tariffs persisted.

After World War II, the U.S. pushed for greater global economic integration, moving from high, targeted, country- and sector-specific tariffs to reciprocal trade agreements, leading to the establishment of the General Agreement on Tariffs and Trade and later, the World Trade Organization.

Underlying this strategic shift toward lower tariffs was the belief that liberalizing trade would result in sizeable shared global economic benefits, commonly referred as gains from trade, fostering economic growth and ushering in a new era of globalization. The transition was also supported by the development of a more predictable rules-based international trade system, along with declining transportation costs, advancements in shipping containerization and other technological improvements that helped establish global supply chains and deepen economic integration.

While global tariff rates have generally remained low, the U.S. and other nations occasionally employ targeted, strategic tariffs on specific sectors or countries to address economic challenges or to support negotiations. Until recently, most trade barriers tended to be non-tariff, ranging from national security concerns and regulatory differences in consumer protections to language barriers and the time costs associated with shipping.

Tariffs and foreign trade

Persistent U.S. trade deficits began in the post-Bretton Woods era. These deficits raise questions about potential underlying U.S. economic weaknesses or, conversely, reflect the strength of an economy capable of attracting foreign investment to finance high levels of consumption and investment. 

Tariffs in this context add complexity to the discussion. Proponents argue that tariffs protect faltering domestic industries and reverse trade imbalances by curbing imports and boosting local production. They often present these measures as crucial for defending against unfair foreign competition (dumping) or as part of a broader strategy for re-industrialization and reshoring through import substitution.

Critics counter that tariffs increase costs for businesses and consumers, potentially disrupting deeply integrated global supply chains. Moreover, they argue tariffs hinder U.S. domestic investment financed by foreign savers, ultimately constraining economic growth. Historically, tariffs have not consistently rectified trade deficits. During both the gold standard period in the first half of the 20th century and the Bretton Woods era, the U.S. experienced prolonged periods of trade surpluses despite substantial variations in tariff rates, challenging the idea that tariffs alone can effectively address trade imbalances.

The role of tariffs in trade and re-industrialization policy in the U.S. is contingent on broader structural shifts, including uneven sectoral productivity growth and evolving consumption patterns. Chart 4 illustrates this evolution in the U.S., showing how technological advances initially boosted agriculture’s productivity, allowing labor to transition to more productive manufacturing industries.

As these manufacturing industries matured, automation decreased the need for labor even as output grew. Over time, rising incomes shifted consumer expenditures from necessities to manufactured goods and ultimately to services. This phenomenon is described by Engel’s law: As income rises, the share spent on food declines, a pattern that increasingly also applies to manufactured goods in high-income economies. This shift into services consumption, coupled with relatively slower productivity growth in the service sector, led to a gradual increase in both service employment and output.

As the U.S. manufacturing sector grew and sought new markets to leverage economies of scale, American trade policy shifted. Initially focused on keeping foreign competition out, the policy gradually moved toward opening access to foreign markets for domestic manufacturers, fostering greater trade reciprocity. The U.S. began to experience persistent trade deficits precisely after manufacturing peaked in the 1960s, as the economy increasingly shifted toward services and became more dependent on imported goods consumption.

Research by University of Minnesota’s Professor Timothy J. Kehoe and colleagues links sectoral productivity disparities and shifts in consumption to foreign borrowing associated with persistent trade deficits, suggesting the decline in manufacturing employment is largely due to productivity differences rather than trade imbalances alone. This implies that even if the U.S. corrects its trade imbalance, employment in the goods-producing sector may continue to decline. Today, however, the increasing tradability of services introduces a new and dynamic dimension of international engagement worth considering.

The terms of trade mechanism

Another aspect to consider regarding tariffs is how they change terms of trade, defined as the ratio of export prices to import prices. This relative price describes how much a country can import and consume for each unit it produces and exports. If the terms of trade improve—meaning the value of exports rises relative to imports—a country can acquire more goods from abroad for each unit produced and exported, thereby benefiting domestic consumers. Large countries such as the U.S. are generally not price-takers in international markets and can influence their terms of trade, even through tariffs. Thus, as shown by MIT professor Arnaud Costinot and UC-Berkeley professor Andrés Rodríguez-Clare, U.S. tariffs can adjust the relative prices between domestic exports and foreign imports, affecting both the external competitiveness of U.S. producers and also the pass-through of tariffs into U.S. consumer prices.

Consider, for instance, the U.S. imposing a 10 percent tariff on sneakers from Mexico, which were originally purchased duty-free for $100 a pair. Given the availability of similar products from other countries and the U.S. as the primary export market, Mexican producers might feel compelled to reduce the pre-tariff price to $95 to regain some competitiveness amid the reduced U.S. demand from higher after-tariff prices. This price adjustment is typically achieved through several means: lowering real wages or other production costs and tightening profit margins. Additionally, potential currency depreciation triggered by decreased demand for Mexican pesos as dollar-denominated export revenue declines can help offset some of the tariff’s adverse effects on Mexican producers by propping up U.S. demand.

After a 10 percent tariff is introduced, the total cost of a pair of sneakers to U.S. consumers rises to $104.50, which is below the anticipated $110 if pre-tariff terms of trade had remained. Additionally, the U.S. Customs collects $9.50 from the tariff, which could be refunded to consumers, effectively reducing their expense back to $95—cheaper than the pre-tariff price of $100. This results in a net benefit for U.S. consumers through improved terms of trade, but at the expense of Mexican workers who may face wage cuts and job losses. While the U.S. can manipulate terms of trade through tariffs, this acts as an externality for trading partners such as Mexico, imposing economic burdens they did not choose and cannot control.

The economic impact on U.S. consumers depends on how the U.S. government redistributes the tariff revenue through mechanisms such as tax cuts or direct refunds to consumers. The overall effect on U.S. consumers hinges on balancing potential real income losses from higher prices against the gains from tariff revenue. This terms-of-trade mechanism demonstrates that tariffs have complex impacts beyond trade and industrial policy, with significant fiscal and redistributive effects.

The Laffer curve of tariffs

The potential for generating additional tariff revenue for the government hinges on how import values respond to tariff changes. While imposing tariffs may initially boost duty revenue—offsetting any reduction in import volume—excessively high tariffs can drastically decrease import volumes, eventually leading to a revenue decline. This phenomenon is depicted by the revenue-maximizing tariff Laffer curve, which identifies an optimal tariff point for maximizing duties.

However, the revenue-maximizing tariff rate may not coincide with the rate that maximizes domestic consumption. That requires accounting for terms-of-trade effects (balancing real income losses for consumers against tariff revenue increases for the government) into an alternative consumption-maximizing Laffer curve.

For the U.S. Laffer curve calculations, it is assumed that all tariff revenue is rebated back to consumers. With unilateral and uniform tariffs imposed by the U.S. across all sectors and trading partners, research by SMU associate professor Michael Sposi and colleagues indicates U.S. consumption-equivalent customs duties peak with a tariff rate of just over 70 percent. Their estimates are derived from a model that considers trade in intermediate and final goods and services among all 50 states and the seven largest U.S. trading partners. By contrast, to enhance U.S. consumption by more than 0.5 percent, a more moderate tariff increase of about 25 percent is optimal. 

In scenarios of reciprocal tit-for-tat retaliation, any U.S. tariff increase beyond 1 to 2 percent would reduce U.S. consumption by depressing domestic real wages through decreased global demand for U.S. products and more restricted access to foreign markets.

Some economists advocate increasing tariffs by more than the optimal 25 percent consumption-maximizing increase—and even beyond the 70 percent revenue-maximizing increase, while still generating equivalent amounts of government revenue. They push for higher tariffs as an industrial policy aimed at bolstering domestic manufacturing through import substitution. However, imposing significant tariffs could provoke retaliatory actions from trade partners, potentially escalating into a trade war and causing widespread economic damage that could negate any consumption gains for U.S. consumers. In fact, under retaliatory scenarios, U.S. consumers will face consumption losses except at very low tariff rates of around 1 to 2 percent or less (like those prevalent for much of the post-World War II era).

Interestingly, in scenarios of 25 percent tariff increases with tit-for-tat retaliation from all trading partners, Mexico experiences a consumption loss of 1.6 percent and Canada a loss of 1.1 percent. These losses soften the more severe negative impacts expected in the absence of retaliation, which are about 1.8 percent for both countries. These figures suggest that, unlike the conventional view for small open economies, retaliation is not always self-defeating and might alleviate some of the losses for United States–Mexico–Canada Agreement (USMCA) countries from the U.S. tariff hike. That’s in part due to the countries’ status as large and deeply integrated trading partners of the U.S. and the assumption of a coordinated global response.

Even under those conditions, however, there exists a threshold beyond which sufficiently high U.S. tariffs render universal retaliation more damaging than no retaliation at all. Moreover, achieving such a coordinated response is difficult, making unilateral retaliation less attractive than a negotiated trade deal or accommodation. This scenario echoes the lessons of the Smoot-Hawley Tariff era and similar protectionist policies of the 19th century, which also incurred substantial economic costs. Trade wars tend to result in losses on all sides, underscoring the dangers of escalation.

The distributional impacts of tariffs

Even under the most favorable scenarios for the U.S., tariff increases have uneven impacts across the country, resulting in clear winners and losers. These effects are shaped by factors such as education, employment status, geographic location and the economic profiles of individual states.

For instance, a hypothetical unilateral 25-percentage-point increase in tariffs on all sectors and all countries without retaliation could shift U.S. consumption patterns, ranging from a 0.8 percent decrease to a 2.3 percent increase across states, with an average national consumption gain of more than 0.5 percent. States that rely on import-dependent sectors such as mining may benefit from reduced foreign competition, which boosts local market share. Conversely, states with export-driven industries, particularly those in the Northeast, the East Coast and parts of the Midwest, might suffer from decreased global demand and higher costs for intermediate goods.

Retaliatory tariffs further complicate trade dynamics, leading to an overall decrease of almost 1 percent in U.S. consumption. Again, the impact of a 25-percentage-point tariff increase with retaliation is unevenly distributed across states, with those more reliant on exports experiencing the sharpest declines (nearly 3 percent). However, even under those conditions, some states may still increase consumption by more than 2.5 percent in the face of retaliation. This scenario underscores the differential effects of tariffs across U.S. states, highlighting the significant regional disparities in how trade policies impact local economies.

Where do we stand now?

Before the 2018–19 trade war, U.S. tariffs were relatively stable and low, averaging about 2 percent on a trade-weighted basis. The highest tariffs were predominantly in the textiles and agriculture sectors, which experienced higher average rates than other industries. Due to the North American Free Trade Agreement, updated to the USMCA in 2020, Canada and Mexico were largely exempt from these higher tariffs.

Conversely, U.S.-produced goods faced significantly higher tariffs abroad, particularly in emerging and developing countries. Despite USMCA exemptions, U.S. agricultural and food exports still encountered high tariffs in Mexico and Canada, with exceptionally steep tariffs—exceeding 50 percent—in China. This disparity highlights the challenges U.S. exporters face in international markets.

The trade war escalated anew in March 2025, with the U.S. applying a 25 percent tariff on goods from Canada and Mexico, later adjusted to exclude USMCA-compliant items, and intensifying tariffs on Chinese imports by 10 percent and then up to 20 percent.

Additionally, in April 2025, the U.S. applied a uniform increase of 25 percent on steel and aluminum for all trading partners. Subsequently, a new tariff schedule was introduced with higher rates targeted at countries running large bilateral trade deficits with the U.S.

The resulting import-weighted average tariff increase was estimated at 41 percentage points; but, under a subsequent reciprocal tariff policy, only about half of those increases were implemented, with changes ranging from no adjustments for Canada and Mexico to an additional 34 percent increase for China while applying a minimum 10 percent tariff across the board. These increases, while not uniform across countries, approximate on average the earlier examined flat 25 percentage point rise.

(Shortly thereafter, however, a 90-day pause on tariff hikes above the 10 percent minimum was granted to facilitate negotiations, resulting in a first agreement with the U.K., while retaliatory tariffs from China escalated sharply but have since been scaled back amid renewed trade talks.)

The response from most affected countries in terms of retaliation remains uncertain, as does the application of exemptions except in the case of China, which chose tit-for-tat escalation. While the inconsistency of response complicates exact impact calculations, the prior analysis primarily illustrates the terms of trade mechanism by which tariffs affect revenue-generation and aggregate consumption. Therefore, the flat tariff scenario provides a valuable reference point for broadly assessing the potential effects of sizeable tariff hikes, illustrating the trade-offs posed by such policies, regardless of final tariff rates.

Looking ahead

Navigating the complexities of tariff policy involves balancing three critical objectives—revenue, restriction and reciprocity—often creating a policy trilemma known as the impossible trinity. Prioritizing one goal can inadvertently undermine the others. For instance, maximizing government revenue through high tariffs can conflict with the goals of maintaining open foreign markets for U.S. goods and securing reciprocal trade concessions. These high tariffs may restrict imports excessively, harm industries that depend on foreign inputs, escalate trade tensions and provoke damaging retaliatory actions from trading partners, as evidenced by historical episodes such as those during the Great Depression .

Additionally, using tariffs to protect domestic industries can lead to market inefficiencies and resource misallocation. This trilemma poses a significant challenge for policymakers striving to develop effective trade policies that use tariffs judiciously. While higher tariffs might benefit certain sectors and encourage some firms to relocate production to the U.S., the broader economic impacts—including effects on consumer prices, consumption and global supply chains—are also ambiguous and can intersect with other economic and policy goals.

Moreover, these policies carry implications for redistributive fiscal policy. Gaining a deep understanding of the nuanced historical impacts of tariffs and the mechanisms through which they operate is crucial for crafting trade policies that minimize economic distortions, anticipate interactions with other policy priorities, and strike a balance between the protective and revenue-raising functions of tariffs and the advantages of reciprocal free trade.

To read the full research as published by the Federal Reserve Bank of Dallas, click here.

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How the China Trade Shock Impacted U.S. Manufacturing Workers and Labor Markets, and the Consequences for U.S. Politics

Overview

In the early 2000s, manufacturing-intensive communities in the United States entered a period of economic upheaval that would reshape their labor markets over the next two decades. China’s dramatic rise as the world’s leading exporter of manufactured goods, abetted by receipt of Permanent Normal Trade Relations from the United States in 2000 and accession to the World Trade Organization in 2001, exerted immense pressure on manufacturing in the United States and many other high-income countries. Entire industries—textiles, furniture, and home electronics among them—struggled to compete with surges of low-cost imports.

In the United States, the China trade shock accounts for approximately one-quarter of the decline in manufacturing jobs between 2000 and 2007. Although the aggregate loss of U.S. manufacturing jobs attributable to China’s changing competitive position in those 7 years—approximately 1.5 million to 2 million manufacturing jobs lost—is modest relative to the overall size of the U.S. labor market, these impacts are highly geographically concentrated, meaning that they loom large in places that specialize in producing the goods in which China rapidly gained global market share.

While economists anticipated manufacturing workers in heavily China-shocked locations to encounter some difficulties in adjusting to changing labor market conditions over the course of their careers, the extent of the disruption and the slow and faltering pace of adjustment proved far more severe than expected. The economic distress brought on by the China trade shock reshaped the lives of U.S. workers and families in trade-exposed regions along multiple dimensions. Earnings for low-wage workers fell. Children became more likely to live in poor, single-parent households. And deaths of despair among working age-adults—primarily due to drug overdoses among men—increased.

The profound economic and social consequences of the China trade shock shaped U.S. political preferences and electoral results. Across the country, trade-exposed regions became more likely to elect politicians from the right wing of the Republican party, often at the expense of moderate Democrats. The same trends are evident in European countries, where local exposure to Chinese import competition similarly favored nationalist and isolationist parties.

This essay provides an empirically grounded perspective on how the China trade shock of the early 2000s shaped the evolution of trade-exposed local labor markets in the United States during the ensuing two decades, from the onset of the 21st century to the year prior to the COVID-19 pandemic of 2020. Much of the extant research on the China trade shock focuses on the first decade of the 2000s, when China’s goods exports to the United States and other high-income countries surged. Chinese exports to the United States stabilized (at high levels) after approximately 2010, however, thereby affording a sufficient time window to characterize how trade-exposed local labor markets and workers adapt to changed circumstances.

Examining changes in the labor market composition of communities affected by the China trade shock alongside the evolving prospects of their incumbent workers, relative to less affected communities across the United States, provides economic context for understanding how individual experiences of globalization may contribute to the rise in right-wing populism. To provide this long-term perspective, we draw on annual worker-level data on earnings, employment, and geographic movement from the U.S. Census Bureau’s Longitudinal Employer-Household Dynamic data, which we augment with data from several other sources.

These data facilitate two vantage points for understanding the adaptation of U.S. workers and their local labor markets to the China trade shock. The first characterizes how trade-exposed places adapted, meaning how employment, industrial structure, and earnings evolved in these locations. The second characterizes how trade-exposed people adapted, referring to paths of employment, earnings, and the geographic and sectoral mobility of workers who were employed in highly exposed labor markets in the year 2000. These two perspectives suggest distinctly different conclusions about the nature and extent of the recovery from the shock.

The first key finding of our study—and an unexpected one—from the perspective of places is that starting approximately one decade after the onset of the China trade shock in the early 2000s, trade-exposed local labor markets began to recover robustly. This recovery was enabled by the entry of a demographically distinct set of workers from the previous groups of incumbent workers. These entrants were disproportionately younger (under age 18 at the time of the shock onset), female, U.S.-born Hispanic, foreign-born non-Hispanic, and college-educated workers.

These new local labor market entrants disproportionately flowed into nonmanufacturing employment, typically into low-wage sectors with lower earnings than the manufacturing industries displaced by the China trade shock. This rapid, post-2010 transformation of the industrial and demographic structure of trade-exposed labor markets arguably reflects a manifestation of what the economist Joseph Schumpeter termed “creative destruction.”

The second key finding, from the vantage point of people, is that we find no similar worker-level dynamism. Although employment in manufacturing drops steeply and persistently in the two decades after the China trade shock, this contraction is due to the decline in workers entering manufacturing, not due to greater mobility out of manufacturing jobs by incumbent workers to other labor markets or sectors.

Indeed, only a small share of incumbent manufacturing workers moved to nonmanufacturing jobs, while another subset of these workers simply exited the labor market altogether. The majority, however, remain in manufacturing until retirement, albeit with diminished earnings growth. And opposite to the widely held expectation that incumbent workers in trade-exposed places would relocate to growing labor markets elsewhere, we instead find reduced outmigration of incumbent workers, perhaps reflecting the difficulty of relocating their households under economic duress.

Seen from the perspective of incumbent workers—particularly, U.S.-born, noncollege, White males, who are heavily overrepresented in manufacturing—the adjustment therefore looks static and largely unsuccessful, as another essay in our series also explores. These workers age in place as the labor market changes dramatically around them.

In short, labor market adaptation to the China trade shock appears generational. Incumbent manufacturing workers remained largely frozen in the declining manufacturing sector in their original locations, while a fresh set of workers—mostly younger, demographically distinct, and, in many cases, immigrants—entered employment in nonmanufacturing sectors of these local economies. At the level of local labor markets, this looks like a long-run adjustment, but it is easy to see how the dynamic of incumbent manufacturing workers slowly adjusting to living in rapidly changing places might give rise to divisive politics. We return to this point at the close of this essay.

U.S. manufacturing did not recover from the China trade shock

Manufacturing industries historically provided relatively high-paying job opportunities for workers without 4-year college degrees, whom we refer to as noncollege workers for brevity. Forty-three percent of noncollege manufacturing workers in 2000 were in the top one-third of all wage earners, as compared to only 23 percent of noncollege workers in nonmanufacturing jobs. Throughout the 2000s, manufacturing as a share of all jobs sharply declined: At the outset of 2000, manufacturing encompassed 13.2 percent of total U.S. employment. By the close of 2019, that share was 8.4 percent.

To characterize the relationship between exposure to trade shocks and labor market adjustments, our analysis reports the estimated impact of a one-unit (one standard deviation) trade shock between 2000 and 2007 (the height of the China shock, prior to the Great Recession of 2007–2009) on the manufacturing employment in U.S. commuting zones over varying time horizons. This impact is expressed as a percentage of the total local working-age populations in these commuting zones in 2000.

The role of the China trade shock in the decline in manufacturing employment is large, persistent, and cumulative. Between 2000 and 2019, manufacturing employment as a share of places’ initial working-age populations fell by an average of 1.4 percentage points per standard deviation of import exposure—amounting to the net displacement of 1 in 7 manufacturing workers. More than one-third of manufacturing workers (36 percent) were exposed to a shock of at least this size.

Economic theory suggests four main channels by which workers will adjust to adverse trade shocks. Workers will flow into and out of employment. They will flow across sectors, from manufacturing and nonmanufacturing jobs. They will flow to jobs in different labor markets that are presumably less exposed to trade shocks. And older workers will flow into retirement, replaced by young adults reaching working age. None of these four channels appear to have operated as robustly as economic theory expected in response to the China trade shock.

What’s more, the inflow of immigrant workers is the opposite of what economic theory predicts. In general, economists expect places experiencing economic duress to attract relatively few new job-seeking entrants. And in the case of U.S.-born White and Black workers, this is precisely what we find. But after 2010, trade-exposed local labor markets saw large influxes of U.S.-born Hispanic adults and foreign-born adults (primarily non-Hispanics).

Foreign-born workers, who tend to be much more geographically mobile than U.S.-born workers, tend to flow toward places with strong job growth in new, expanding industries, such as biotech, digital technology, and business and professional services. This is what occurred in the 1980s, 1990s, and 2000s. The commuting zones whose manufacturing industries had been hollowed out by the China trade shock after 2000 by and large lacked a footprint in the most innovative sectors, making them unlikely job magnets. We suspect, however, that trade-exposed places offer a “brownfield” opportunity, in which rents were low, commercial properties were readily available, and where a growing retiree population—supported by earned Social Security retirement and Medicare benefits—had substantial need for care and hospitality services.  

Our first finding is that as older manufacturing workers aged into retirement, new workers were not hired to replace them. That is, local labor markets exposed to the China trade shock did not register a subsequent manufacturing rebound. Instead, these labor markets experienced a continuous manufacturing decline through at least 2019, the end point of our sample.

A sharp decline in young workers entering manufacturing is the primary numerical contributor to the long-term decline in manufacturing employment, responsible for 56 percent of the contraction from 2000 through 2019. Among adult workers, the decline is due to reduced inflows into manufacturing employment of young, White and Black, non-college-educated men and women.

Economic theory also anticipates that workers exposed to adverse local labor market conditions would relocate to other labor markets to seek employment. For trade-exposed manufacturing workers in the first two decades of the 21st century, however, this is not what the data show. Rather than relocating to less trade-exposed labor markets, these workers became more likely to stay in their original locations. Some manufacturing workers did move, of course, to other labor markets in both exposed and nonexposed labor markets. But the geographic mobility of manufacturing workers in trade-exposed local labor markets fell, relative to comparable workers residing in nonexposed markets after the onset of the China trade shock.

Manufacturing workers’ geographic mobility in response to the trade shock also differed substantially by race and gender. In particular, the entirety of the increase in staying in trade-exposed labor markets was due to the reduced mobility of White male workers, who were and remain today the largest demographic group in the manufacturing sector.

What might explain this immobility? There are several plausible explanations. Place-based conceptions of personal identity are one explanation. Financial constraints or kinship ties that may deter workers from leaving are another. Tax-and-transfer payments, or income supports, provided to manufacturing workers, in combination with shock-induced lower costs of living may have incentivized workers to remain. The concurrent trade shock exposure of similar labor markets may also have reduced the attractiveness of moving.

Unsurprisingly, workers from other locations also became increasingly less likely to migrate into manufacturing in trade-exposed labor markets. Thus, cross-market worker migration did reduce employment in trade-exposed locations. But it did so by deterring worker inflows by even more than it deterred outflows. The movement of manufacturing workers out of the labor force contributes modestly (by about one-third) to the numerical decline of manufacturing employment. Yet this impact dissipates by 2019 so that it is not much greater over the long run in trade-exposed versus nonexposed labor markets.

Earnings also were adversely impacted. Through 2019, earnings of trade-exposed manufacturing workers remained depressed relative to comparable workers in nonexposed locations. These outcomes, however, differed substantially according to workers’ initial earnings levels. Manufacturing workers initially in the bottom third of the U.S. wage distribution experienced a sharp reduction in employment. Workers initially in the middle third of the earnings distribution also experienced a reduction in employment, as well as an increase in their likelihood of falling into the bottom third of earnings. Workers initially in the highest third of earnings sustained a slight decline in employment, but by 2019, they essentially regained their ground relative to comparable workers in nonexposed locations.

Finally, while economic theory anticipates that trade-exposed manufacturing workers would transition to nonmanufacturing jobs, relatively few do so. This does not mean jobs aren’t reallocated within firms across sectors. Recent research documents that 40 percent of trade-induced job reallocation from manufacturing to nonmanufacturing stems from shifts within firms across locations.

Our findings indicate, however, that manufacturing workers are not reallocated in tandem with these jobs. Though trade-exposed manufacturing firms may increase nonmanufacturing employment in less-exposed locations, these expansions do not, for the most part, directly re-employ workers displaced by the trade shock.

This is ultimately not altogether surprising. Much of the job losses at these firms occurred in low-wage, less-educated areas in the South, where production work was concentrated. Much of the reallocation into nonmanufacturing by these same firms occurred in high-wage, high-education areas where design, management, and marketing were concentrated.

Local labor market adjustments are generational

Although the employment and earnings prospects of workers who were initially employed in 2000 in trade-exposed labor markets declined, the labor markets in which they are located began to reconstitute in the first decade after the initial onset of the China trade shock. More specifically, increases in nonmanufacturing employment fully offset the numerical decline in manufacturing employment by 2013. From that year forward, employment grew more rapidly in trade-exposed labor markets, compared to nonexposed ones. Despite this rebound in the number of jobs, however, the employment-to-population ratio remained depressed in these locations as population growth outpaced employment growth.

The employment growth after 2010 stems from two tributaries. Between 2001 and 2019, trade-shocked labor markets received steadily increasing inflows of workers who were already of working age (18 and over) in the year 2000 but not employed in the United States. As it turns out, these workers were largely immigrant adults who disproportionately found their first U.S. jobs in trade-exposed labor markets.

The second tributary of new workers—and the most significant driver of long-term growth in nonmanufacturing employment—was the entry in trade-exposed labor markets of young adults who reached working age approximately a decade after the initial shock in 2000. Many of these new entrants were U.S.-born Hispanics, but approximately one-quarter are immigrants.

By contrast, the entry of U.S.-born White workers into trade-exposed labor markets fell sharply after the onset of the China trade shock, both in manufacturing and nonmanufacturing industries. The net increase in employment of young labor market entrants thus reflects a dramatic rise in inflows of U.S.-born Hispanics and immigrants, primarily non-Hispanic immigrants, offset in part by declining inflows of U.S.-born White workers. Also noteworthy is that women and college graduates were substantially overrepresented among these new entrants.

Although the employment levels of U.S.-born White workers in trade-shocked areas remained largely unchanged between 2000 and 2019, their share of employment in these locations dropped while their average age rose (due to a decline in both the entry and exit of workers in this demographic group). Simultaneously, inflows of younger U.S.-born Hispanics and immigrant workers rapidly reshaped the demographic composition of local workforces.

Job quality in trade-shocked places declines

While manufacturing employment in trade-exposed local labor markets declined continuously after 2000, growing nonmanufacturing employment more than offset these losses from 2010 forward. The retail, health care, and education sectors experienced the largest employment growth, particularly in retail grocery, physician’s offices, Kindergarten-through-12th grade education, and restaurants.

As trade shocks remade the industrial composition of trade-exposed labor markets, the gender composition of employment shifted markedly. Despite the overrepresentation of men in manufacturing, trade-induced losses in manufacturing were equally sizable among men and women. But the growth in nonmanufacturing employment had a distinct gender skew: Women’s employment in nonmanufacturing rose by 1.54 percentage points per standard deviation of shock exposure between 2000 and 2019, while men’s employment rose by just 0.57 percentage points. Thus, more than three-quarters of net employment growth in trade-exposed labor markets reflected an increased employment of women.

In the three largest growth subsectors—retail, health, and food and restaurants—women’s employment increased by more than twice that of men. One proximate explanation for this pattern is that the sectors leading the employment recovery were all disproportionately female, though of course men entered these sectors as well. The rise in female employment was disproportionately driven by the entry of adult female immigrants.

Since post-shock employment increases were disproportionately concentrated in traditionally low-paid service-sector industries, it is no surprise that the wage structure in trade-exposed labor markets shifted toward lower pay. Almost all trade-induced job losses in manufacturing are accounted for by a loss of middle and upper-third jobs. Conversely, almost all employment gains in nonmanufacturing are accounted for by bottom-third and (secondarily) middle-third jobs. As such, approximately two-thirds of overall employment growth in trade-exposed labor markets between 2000 and 2019 is accounted for by rising employment in the bottom third of the earnings distribution.

In summary, the post-shock labor force in trade-exposed local labor markets as of 2019 consisted of two distinct groups: a new generation of workers who found employment in low-paid jobs concentrated in the service sector and a cohort of long-term incumbent manufacturing workers whose employment and earnings did not rebound from the manufacturing trade shock that began at least a decade earlier. Despite the eventual rebound in overall employment, the employment-to-population ratio remained depressed, low-pay jobs replaced high-pay jobs, and there remained groups of long-term economic losers in trade-exposed places.

Trade shocks, tariffs, and the U.S. political landscape

By reshaping employment and opportunity, perceptions of the China trade shock may also recast political preferences, including support for right-wing populist candidates and parties. As seen above, White non-college-educated males, a core constituency of President Donald J. Trump, experienced particularly adverse employment outcomes post-shock. For incumbent manufacturing workers in trade-shocked areas, declining economic prospects were closely followed by the arrival of immigrants and broader demographic shifts.

The relative decline in the prevalence of U.S.-born, White, noncollege male workers in trade-exposed labor markets is shown vividly in Figure 5. While the share of U.S.-born White workers in trade-exposed labor markets remained relatively stable in the two decades following the China trade shock, the prevalence of noncollege U.S.-born White men fell steeply—by 8 percentage points for workers ages 40 to 64 and by 5 percentage points for workers ages 18 to 39. White noncollege men thus increasingly found themselves working in more diverse labor markets alongside colleagues of different racial, ethnic, and national backgrounds.

Against this backdrop, it is natural that the Fox News Network, with its appeal to conservative voters, generally aligned against freer immigration and in favor of strengthening U.S. manufacturing and gained media share in trade-exposed markets as ideological affiliations and voting patterns of White voters shift to the right. The China trade shock’s polarizing ideological impact is directly manifest in the increased electoral success of Republicans at the expense of moderate Democrats in trade-exposed voting districts over the first two decades of the 21st century.

Investigations into the political effects of surges of Chinese import competition in Europe yield corresponding patterns. In Germany, France, Italy, and other Western European nations, local exposure to Chinese import competition induced electoral shifts to the right. These studies highlight the relevance of economic experiences, such as trade shocks, in shaping political outcomes.

Under the first Trump administration’s trade war in 2018–2019, its promised manufacturing employment growth from tariffs failed to materialize while consumer prices rose. Even though 37 percent of Republican voters agreed with the proposition that the United States is hurt more than China by tariffs, 80 percent remained in favor of tariffs in a 2019 poll. Voters in communities protected by new U.S. import tariffs also became less likely to identify as Democrats and were more likely to support President Trump in the 2020 presidential election.

In response to the increasing political resonance of trade, Republicans became more likely to interact with trade issues via China-critical communications strategies. Trade and trade policies have remained salient political issues through the start of the second Trump administration. Surging imports of critical value-added goods from China—such as electric vehicles, solar panels, and semiconductor chips—present a not insignificant risk of a second China trade shock. The political and economic consequences will depend not only on the actions of foreign exporters, but also on how the United States responds.

Conclusion

The persistent earnings losses and employment displacement triggered by the China trade shock did not just alter local labor markets—they also reshaped political behavior, as declining job prospects, demographic shifts, and foregone mobility fueled a concentrated and understandably bitter electoral response. While net employment in trade-exposed places eventually rebounded by 2019, incumbent manufacturing workers’ economic prospects did not. Trade-shocked places adapted through generational adjustments made possible by immigrants and young workers entering the labor force.

An at-first-blush appealing response to these findings, and the continuing impact of the China trade shock over the past 4 years, is that governments should invest in place-based policies that assist displaced workers to adapt by investing in their communities. As our results imply, however, place-based trade-adjustment policies carry complex targeting effects—offering stability for incumbent workers who are less likely to relocate while simultaneously shaping opportunities for new local labor market entrants.

To the extent that workers’ experiences of the economic adjustment process contribute to political polarization, place-based policies that mitigate local trade-shock-induced distress may plausibly temper its scope and trajectory. Even as the economic consequences of the China trade shock constrained the geographic mobility of incumbent workers—narrowing the physical and economic boundaries of their lives—the political reverberations of this same shock extend nationally, as concentrated disaffection becomes increasingly consequential in a polarized and closely contested electoral landscape.

China-trade-shock

To read the full essay as it was published on the website of the Washington Center for Equitable Growth, click here.

To read the full essay PDF, click here.

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Chinese Exports to U.S. Plunge Along With Smartphone Shipments.

First Impact of U.S. Tariffs

Chinese shipments to the U.S. plummeted 21% year-on-year in April as the impact of Washington’s new import tariffs started to punish the world’s largest exporter.

However, as Beijing was quick to point out, China compensated by selling more to its economic partners in Southeast Asia. In a striking coincidence, Chinese exports to the ASEAN bloc of countries increased by the same number: +21%.

The decline in shipments to the U.S. is the first time that China has reported a significant harmful impact of the tariffs. In the first quarter, exports to the U.S. continued their rise as manufacturers and shipping companies rushed goods into ports before the expected duties took effect.

Eager to temper the market’s worries about a severing of the trade relationship between the world’s top two economies, diplomats are meeting in Switzerland in an attempt to secure a new agreement about trade terms. The outcome is certain to be higher tariffs than a decade ago, but officials are wary of triggering a recession.

Focus: U.S.

The focus of the April data release was, of course, shipments to the U.S. Exports to the U.S. plummeted 21% to $33 billion. The preliminary data form does not break out exports per individual country. But the biggest drop in exports among significant consumer goods was in mobile phones: Shipments dropped 20.9% to $7.6 billion. The number of handsets shipped fell 5.8% to 56.1 million. However, overall of high-tech goods rose 6.9% to $74.7 billion.

Overall exports of toys declined 5.9% to $2.9 billion. Exports of textiles rose 3.4% to $12.6 billion. Exports of mechanical and electrical products jumped 10.5% to $190.6 billion.

The Asian Solution

Overall, China’s exports to the rest of the world increased 8.1% to $315.7 billion, raising the country’s hopes that its mighty export economy can survive an onslaught of protectionism. The U.S. currently has tariffs of 145% on Chinese imports.

Where will all this excess capacity no longer going to U.S. markets be going? Exports to ASEAN countries rose 21% to $60.4 billion. Imports increased 3.5% to $33.2 billion. The biggest jump was in shipments to Indonesia, which rose 37.5% to $7.8 billion. Exports toVietnam increased 23% to $17.2 billion. Sales to Thailand rose 28.1% to $9.3 billion.

Lu Daliang, a Chinese government spokesman, said that “all-round co-operation with neighboring countries continued to deepen and economic and trade relations became increasingly close.”

Rest of the World

It’s not just Asia. There are many other markets targeted by companies manufacturing in China, many of which are not Chinese. Exports to Africa ballooned 25.9% to $18 billion. Imports from Africa increased 22.3% to $12.4 billion. Exports to the European Union increased 8.2% to $46.7 billion. Among EU customers, there was a big jump in exports to Germany, up 20.4% to $10.4 billon. Another important market: India. Exports to that country rose 21.9% to $11.2 billion.

What China is Buying

China’s overall imports in April slipped 0.2% year-on-year to $219.5 billion. There are concerns that China’s domestic spending has been lackluster. Chinese officials have set an economic growth target of around 5%. This week, policymakers said they would cut interest rates and inject more money into the economy.

China has imposed retaliatory tariffs of 125% on imports of U.S. goods. Imports from the U.S. dropped 13.6% in April to $12.6 billion. The upshot: the trade surplus with America finally fell, a key strategic objective for U.S. leaders, to $20.5 billion from $27.3 billion.

Clearly a big part of the cut in U.S. imports was agricultural products. Purchases of soybeans fell 38.2% to $2.7 billion. Imports of grains fell 41.1% to $3.7 billion. Imports from the EU declined 16.5% to $20 billion. Imports from Germany fell 12% to $7.6 billion.

Some products with changing demand in China: Imports of high-tech products increased 9.8% to $67.6 billion. Imports of pharmaceuticals declined 11.2% to $4.1 billion.

Getting Ready for the Storm

The U.S. has allowed a 90-day pause in application of tariffs of other countries. That’s why it’s significant that Chinese exports of steel increased 13.4% to 10.5 million tons. Buyers in countries like South Korea and Vietnam are snapping up metal so they can sell to the U.S. and EU before more aggressive tariffs take effect.

TDM Insight 9 May 2025 - Chinese Exports to U.S. Plunge Along With Smartphone Shipments - By John W. Miller

To read the full insight as published by Trade Data Monitor, click here.

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Why 2025’s Q1 shocks could be the last opportunity to forge an EU master plan

Europe has been profoundly shaken by the first three months of Donald Trump’s second administration. And because of this, the EU must urgently embrace a much wider and more ambitious strategic master plan, something it has thus far failed to do.

Meanwhile, the new European Commission has begun its first full year, with the unenviable task of setting the EU agenda amongst all this turbulence. Key early initiatives indicate a focus on shoring up the EU’s resilience, competitiveness and enhancing its strategic autonomy.

However, this isn’t enough. With the rest of 2025 likely to remain tumultuous, now is the moment to assess whether the EU’s current priorities match the urgency of the challenges ahead. There have been some positive steps in the right direction – but more can and should be done.

WHY 2025’S Q1 SHOCKS COULD BE THE LAST OPPORTUNITY TO FORGE AN EU MASTER PLAN - FF

To read the publication as it was posted by CEPS, click here.

To read the PDF as it was published by the CEPS, click here.

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Global Trade: “Are We Going Bananas?” – Tariffs, GATS & Trade

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not represent the views or policy positions of the Washington International Trade Association or Foundation, or the Board of Directors or staff of either entity.

It is not the 1930s Great Depression or at least not yet again; the manufacturing sector (output has increased, yet activity has declined) has taken a stride forward since then, but currently it will likely be affected given the influence of tariffs on goods and services. Inflation is another factor to be considered when implementing tariffs and trade policy today even if it has evolved over the years to the point that it has been at least 100 years now since we are in a trade war given President Trump’s tariffs as of recent impacting “global trade,” and the overall financial system. (FDR’s “Good Neighbor Policy with regards to relations with Latin America, comes to mind now and I wondered if this is the right time to implement changes in global trade as it may affect relations with all our neighbors). Despite all, the current US trade deficit is $147.9 billion, a decrease from $155.6 billion as of this past February 2025. A negative balance of trade is never a good thing and increased unemployment would lead to other unpleasant problems.

It may not be the right time to effect global trade given the market dynamics already globally despite a strong US economy and why disturb the balance of power all over the world, but this would mean the trade deficit may not decrease or may – it’s a difficult predicament indeed. There will inevitably be an impact, changes to trade policy, and trading partner relations, the financial markets in the US have already seen an effect across asset classes, and other countries are affected as well. So, are we to go bananas over this and the changes in the balance of power vis a vi trade relations that may come to be? Tariffs and the WTO are not new in trade policy, and among trading partners this is commonplace, but trade wars are of concern as they impact everything and all aspects of economies. Tariffs are used for many reasons and the WTO has been the governing international organization for any trade-oriented disputes thus far.

Tariffs: Tariffs are implemented by Administrations for varying reasons, such as national security, raising revenues, and to boost certain goods in the market through taxation. It is all meant well policy as US governments are not corrupt typically, but the outcome is not always so pleasant, depending on what side you are on amongst developed and developing countries. The primary goal is to help one’s own country’s economic growth and competitiveness, fostering trade agreements, and protecting domestic industries and workers from unfair practices, and in a rules-based trading system thus far.

GATS & Trade: The General Agreement on Trade in Services (GATS) is a treaty of the World Trade Organization (WTO) which entered into force in January 1995 as a result of the Uruguay Round negotiations whereby the WTO was created. It aimed to promote fair and transparent rules for international trade in services. Today The United States is still a member of the WTO and one would hope the USTR negotiations with other member countries (166 under the WTO) is ongoing and conducted effectively.

The last time I checked (which was last week) “punishing 10% universal tariffs remain in place, as do 25% tariffs on autos, 25% tariffs on some goods from Mexico and Canada, and 25% tariffs on steel and aluminum, and with China specifically they are at 145%”, which all indicates more-so to a recessionary environment than not. What came to mind most importantly was the “Banana Trade Wars and the EU” episode I learned of some years ago, with regards to certain Latin American countries when the EU was imposing high tariffs on them; this began in 1993 and went on for at least 20 years. As way of discourse the backdrop and some lessons from the “Banana Trade War & the EU were as follows:

The “Banana Trade Wars & the EU”:

The “banana trade wars” was a long-standing dispute between the EU and the US (and other Latin American countries) over banana import tariffs, primarily stemming from the EU’s preferential treatment of banana exporters in African, Caribbean, and Pacific (ACP) countries. This dispute lasted at least 20 years and resolution was sought through the WTO. The EU agreed to replace its preferential import regime with a tariff-only system, where banana import tariffs would be reduced annually to €114 per tonne. In return, Latin American countries agreed to drop their complaints against the EU at the WTO and not to seek further tariff cuts in the Doha round talks.

The WTO Dispute: The dispute stemmed from the EU’s banana import regime favoring suppliers from its former colonies in the Caribbean and Africa while imposing tariffs on bananas from Latin American countries, particularly those grown by U.S. companies. This system discriminated against bananas from Latin America, which were the primary source of bananas for US multinational companies like Chiquita. The United States challenged the EU’s actions at the WTO, winning favorable rulings that forced the EU to change its rules. After years of negotiations and WTO rulings, the EU and Latin American countries reached a trade truce in 2012. The United States, along with other Latin American countries (the main countries were Colombia, Costa Rica, Ecuador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Peru, and Venezuela) filed a complaint with the World Trade Organization (WTO) against the EU’s banana import regime, arguing that it violated WTO rules, particularly those related to non-discrimination and most-favored nation treatment.

From the EU’s perspective they believed they were imposing tariffs on bananas on Latin America mainly due to protecting banana growers in its former colonies in Africa, the Caribbean, and the Pacific, and thus fulfilling its obligations to these former colonies. However, in this case controlling the supply of bananas and favoring certain countries was harmful for the Latin American countries leading to dire consequences. The US involvement was also largely due to many of the US based companies in Latin America being affected.

WTO Ruling: In 1997, the WTO sided with the US, ruling that the EU’s banana import regime was inconsistent with WTO rules and that the EU must change its preferential policy. The EU initially resisted the WTO ruling, making superficial adjustments to its banana regime (but not reducing tariffs drastically), which the US saw as a mockery of the WTO dispute settlement process. However, after years of negotiations, the EU eventually agreed to gradually reduce its tariffs on Latin American bananas.

Then came the 2009 Geneva Agreement: In December 2009, the EU, Latin American countries, and the US reached an agreement, known as the Geneva Banana Agreement, to gradually reduce the tariffs on Latin American bananas. This agreement saw the EU commit to reducing its import tariff on bananas from Latin America in eight stages, from €176 a tonne to €114 in 2017.

The End of the Dispute: This came with the Geneva agreement formally ended the long-standing dispute, with the EU and Latin American countries signing an agreement to formally end eight separate World Trade Organization (WTO) cases. The 10 countries support and the US involvement provided support and shared interests led to end of the dispute. Going at it unilaterally would have had other outcomes, although in settling this longest-running series of disputes in the history of the WTO’s multilateral trading system that would have never been an option.

If the EU’s tariffs on Latin American bananas had not ended, Latin American banana exporters would have faced increased costs and reduced market access in the EU, potentially leading to economic hardship for producers and increased prices for consumers. The tariffs, which favored banana producers from the Caribbean and Africa, would have continued to distort the global banana market and negatively impact Latin American banana-producing countries, and there would have been further trade tensions.

The key considerations are the self-interests of countries inevitably, but keeping in mind that a world order and fairness should coexist as all economies are connected in some shape or form and economic cooperation is one way to maintain this order. This was an instrumental consideration in the case of the “Banana Trade Wars & the EU”, and in resolving it.

Ms. Sonal Patney – Banker & Author

Sonal Patney is a corporate and investment banker and author having originated, marketed, structured, executed, and closed over 100 debt and equity financings that ranged from $5M to $4B. As of October 2022, Sonal became an author with the international publishing of her book on sustainable finance debt by Europe Books – “How Should We Think About Debt Capital Markets Today? ESG’s Effect on DCM”. As a graduate of Columbia University, and New York University, she holds an MPA with a concentration in International Economic Policy, and a BA in Political Science, respectively. Her academic research has focused on emerging market countries and trade. Additionally, she has been a pro bono SCORE LI mentor for small business’ and the recipient of a mentoring award from SCORE; a member of varying nonprofit associations and a former Board member of some. She is also a “Contributor” for The Financial Executives Networking Group Journal online on capital markets topics.

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Tariffs: Estimating the Economic Impact of the 2025 Measures and Proposals

Key Takeaways

We compute the average effective tariff rate (AETR), which reflects the average tariff paid across all imports. In 2024, importers paid an estimated 2.2 cents in duties for every dollar of goods imported.
Adding 20 percent tariffs on all Chinese imports and 25 percent tariffs on aluminum and steel — measures already in effect as of March 2025 — increases the AETR to 7.1 percent. Assuming full pass-through, the cost of imports from China rises by approximately 22 cents for every dollar of imported goods.
Adding 25 percent tariffs on imports from Canada and Mexico that fall outside United States-Mexico-Canada Agreement coverage raises the AETR to 10.4 percent. Mexico’s and Canada’s effective rates rise sharply, to 15.5 percent and 11.9 percent, respectively.
Applying the 25 percent auto tariffs lifts the AETR to 12.4 percent. Tariff burdens deepen in sectors like transportation equipment, and country-level AETRs reach 30 percent for Mexico and 20 percent for Canada.
We also find that a 25 percent tariff on all imports from the European Union is added to the previous experiments, the AETR rises to 17.0 percent, the highest in the analysis.

Tariffs are taxes imposed by a government on imported goods, typically calculated as a percentage of the import’s value (known as an ad valorem tax). Governments use tariffs for various purposes, such as raising revenue, protecting domestic industries from foreign competition and influencing international trade patterns. By increasing the cost of imported products, tariffs encourage consumers to shift toward domestically produced goods, thus supporting local businesses and potentially stimulating domestic economic activity.

However, the overall impact of tariffs depends critically on how much of this cost increase is passed along to domestic consumers and producers, a concept known as pass-through. Empirical research has found that the pass-through rate is generally high (often near 100 percent), meaning that the burden of tariffs typically falls on domestic consumers and firms rather than foreign exporters.1

The economic significance of tariffs is underscored by recent data from the First Quarter 2025 CFO Survey [where] more than 30 percent of surveyed firms identify trade and tariffs as their most pressing business concern, up sharply from just 8.3 percent in the previous quarter. This rapid rise highlights firms’ heightened sensitivity to tariff-related disruptions, reflecting widespread concern among business leaders about the potential economic consequences of recent tariff proposals.

In this article, we first provide historical context on U.S. tariff policy to frame the significance of the proposed tariff changes for 2025. Next, we analyze how tariffs impact producers differently across industries due to varying reliance on imported inputs. Finally, we examine the specific implications of recent tariff proposals for all counties in the U.S.

A Bit of History on Tariffs

Historically, the U.S. relied heavily on tariffs — often exceeding 30 percent — as its primary source of federal revenue from the nation’s founding until the introduction of income taxes in 1913.

During this early period, these high tariffs also served to protect emerging industries through a strategy called import substitution. After World War II, international trade agreements like the General Agreement on Tariffs and Trade significantly reduced tariffs globally from an average of around 20 percent in 1947 to below 5 percent following the Uruguay Round in 1994. The globalization movement of the 1980s and 1990s further accelerated tariff reductions, culminating in the establishment of the World Trade Organization (WTO) in 1995. Since then, tariffs among WTO member countries have generally remained around 2.5 percent, reinforcing greater global economic interconnectedness.

The Benefits of Free Trade

Economist Greg Mankiw once noted, “Few propositions command as much consensus among professional economists as that open world trade increases economic growth and raises living standards.”

Free trade — international commerce with minimal barriers such as tariffs or quotas — promotes economic efficiency, growth and consumer welfare by allowing countries to specialize according to their comparative advantages. By removing trade restrictions, countries benefit from greater access to a wider variety of goods at lower prices, fostering increased competition, increased innovation and improved productivity. In turn, free trade expands markets, encourages the exchange of ideas and technology, and raises living standards by enabling consumers to purchase a broader selection of goods at lower prices.

Although free trade can present challenges for certain industries or workers facing international competition, its overall effect is typically positive, enhancing global economic welfare and fostering international cooperation. Economists often describe free trade as a “win-win” for countries involved.

The Backlash Against Free Trade

The recent backlash against free trade policies largely stems from the economic disruptions known as the “China shock,” a period characterized by rapid growth in imports from China following its entry into the WTO in 2001. The steep decline in manufacturing sector jobs as well as factory closures and economic hardship in many industrial regions of the U.S. have been attributed (in part) to a surge in Chinese imports,3 as well as “unfair trade practices” such as dumping and subsidization of Chinese production.4

Although consumers broadly benefited from lower-priced goods and enhanced variety of goods, the uneven distribution of economic gains and losses fueled public skepticism about globalization. The backlash reflects frustration over insufficient support for displaced workers and the uneven distribution of trade gains, highlighting the need for better policies in addressing and mitigating the adverse effects experienced by specific groups, something often overlooked by proponents of free trade. Developed economies (including the U.S.) have since faced growing pressure to provide greater support and protections for negatively affected industries and communities.

The 2018-19 Tariffs

Between 2018 and 2019, the U.S. imposed tariffs ranging from 10 percent to 25 percent on hundreds of billions of dollars of imports from China. These tariffs significantly disrupted global supply chains, increasing input costs for American businesses and raising consumer prices. The resulting disruptions contributed to a decline in manufacturing employment, heightened investment uncertainty and substantial shifts in global supply chains. Rather than returning production to the U.S., many firms responded by shifting supply chains to other countries, such as Mexico and Vietnam.5 Consequently, the expected boost in domestic production and employment was modest.

Empirical research indicates that each 10 percent increase in tariffs generally raises producer prices by about 1 percent.6 Given the increase in the average effective tariff rate during 2018-19, this translated into roughly a 0.3 percent rise in the consumer price index.

Although these tariffs provided some targeted economic benefits by increasing employment in protected sectors, they ultimately produced a net loss to the U.S. economy. A 2019 working paper found that tariffs generated approximately $51 billion (about 0.27 percent of GDP) in losses for consumers and firms reliant on imported goods, though factoring in job gains within protected industries reduced the net loss to about $7.2 billion, or roughly 0.04 percent of GDP.7

Additionally, although tariffs boosted employment in specific protected sectors, they resulted in a relative employment decline of about 1.8 percent — equivalent to approximately 220,000 jobs lost in industries heavily dependent on imported inputs — as firms faced higher production costs. When accounting for China’s retaliatory tariffs on U.S. exports and subsequent economic impacts, a 2024 working paper estimates that the total employment reduction rises to approximately 2.6 percent, equivalent to about 320,000 jobs.8

Thus, the economic effects of the 2018-19 tariffs — while beneficial for a limited set of domestic industries — resulted in a net negative outcome for the broader economy. These burdens were felt most by U.S. consumers, producers reliant on imported inputs and workers in adversely affected sectors.

The 2025 Tariffs

As of this writing (March 2025), the U.S. has introduced new tariffs, including an additional 20 percent on all imports from China and a 25 percent tariff on aluminum and steel imports from several countries. Further tariffs of 25 percent on goods imported from Canada and Mexico which are not subject to the United States-Mexico-Canada Agreement (USMCA) are scheduled to take effect in April 2025, along with potential tariffs targeting automotive imports and goods imported from the European Union (EU). These recent tariff proposals could have significant implications for industries and regional economies across the U.S., especially once fully implemented.

A natural question arises: How substantial are these tariffs compared to those implemented in previous periods? To assess the impact of the proposed tariffs for 2025 relative to historical tariffs, we use a measure known as the average effective tariff rate (AETR). The AETR aggregates tariffs across various imported goods and countries into a single number. Specifically, it is computed by weighting the tariff imposed on each good imported from each country by that good-country combination’s share of total imports. For example, if the U.S. imports 20 percent of its steel from Mexico (facing a 10 percent tariff) and 80 percent from Canada (facing zero percent tariffs), the AETR for steel would be 2 percent (0.2 × 10% + 0.8 × 0%). Thus, the AETR represents the average tariff cost per dollar of imports, providing a useful metric to evaluate and compare the overall impact of tariff proposals across different scenarios and historical periods.

We construct a benchmark AETR using data from the 2024 U.S. Trade Census. We follow closely the work by Michael Waugh. The Census reports both duties (tariff revenue collected) and imports (the dollar value of goods imported) over time. The AETR is defined as the ratio of duties to imports: AETR = duties / imports.

In our benchmark scenario, the AETR is 2.2 percent. This means that, on average, the government collected 2.2 cents in tariff revenue for every dollar of imported goods. Establishing this baseline allows us to meaningfully assess the potential economic impact of new tariff proposals introduced in 2025 by comparing them to current trade patterns and tariff levels.

Because the Census data provide detailed information at both the product and country level, we observe imports and tariff revenues by country of origin and by product, classified at the six-digit level of the Harmonized Tariff Schedule (HTS). The HTS is an internationally standardized system used to classify traded goods. This granularity allows us to compute effective tariff rates at the level of individual HTS-6 products and trading partners by taking the ratio of duties collected to the value of imports for each good-country pair. This allows us to compute AETR by country of origin.

Scenario 1

The benchmark AETR of 2.2 percent reflects the tariff regime in place at the end of 2024, incorporating WTO most-favored-nation (MFN) tariffs, the China-specific tariffs imposed during the 2018-19 period, and any other tariff measures or exemptions still in effect. In Scenario 1, we simulate the impact of an additional 25 percent tariff on all steel and aluminum imports, as well as a 20 percent tariff on all imports from China.

The increase in the AETR from 2.2 percent to 7.1 percent may seem large, but it is driven by the size and composition of the affected import flows. The 25 percent tariff on steel and aluminum alone raises the AETR to approximately 4.4 percent. Although steel and aluminum represent a relatively narrow range of products, they generate a disproportionately large share of tariff revenue due to both the volume of imports and the uniform 25 percent duty applied.

According to U.S. Customs and Border Protection, Section 232 duties may not be waived due to a free trade agreement. As a result, these tariffs apply even to imports from close trading partners such as Canada and Mexico. This has a pronounced effect on the tariff burden faced by goods imported from these countries. In Scenario 1, Canada’s AETR rises from just 0.1 percent to 1.5 percent, and Mexico’s AETR rises from 0.2 percent to 2.8 percent. These are substantial increases, especially considering that Canada and Mexico account for 12.6 and 15.5 percent of total U.S. imports, respectively. The fact that Section 232 tariffs override free trade agreement provisions magnifies their impact on these key trading partners.

The additional 20 percent tariff on China further raises the AETR to 7.1 percent. While China’s share of U.S. imports has declined from 22.0 percent in 2017 to 13.8 percent in 2024, it remains a major trading partner. The uniform application of the tariff across all Chinese imports — many of which were already subject to duties — results in a substantial increase in tariffs applied to goods coming from China. As a result, China’s own AETR rises dramatically to 33.5 percent under this scenario.

Scenario 2

In Scenario 2, we add 25 percent tariffs on goods imported from Canada and Mexico that are not covered under the USMCA to the tariffs in Scenario 1. As a result, the overall AETR rises from 7.1 percent to 10.4 percent. The impact is especially pronounced for these two countries: Canada’s AETR increases to 11.9 percent (nearly 10 times higher than its benchmark level), while Mexico’s AETR rises to 15.5 percent.

The increase in the overall AETR — just over 3 percentage points — reflects the composition of imports affected by the new tariff. While approximately half of imports from Canada and Mexico fall outside the scope of the USMCA and are therefore subject to the new measure, these goods do not make up the most import-heavy segments of U.S. trade with those countries.

In contrast to Scenario 1, where tariffs targeted high-volume sectors like steel and aluminum, the newly taxed goods in Scenario 2 are more dispersed across sectors with lower aggregate import values. As a result, the effect on the overall AETR is substantial but not as dramatic as the country-specific increases suggest.

Scenario 3

Scenario 3 builds on the previous measures by adding a 25 percent tariff on all motor vehicles imports, regardless of origin. The products targeted by this policy fall primarily under Chapter 87 of the HTS, titled “Vehicles Other Than Railway or Tramway Rolling-Stock, and Parts and Accessories Thereof.” Although this policy targets a single sector, it affects imports from all major trading partners. As a result, the overall AETR increases from 10.4 to 12.4 percent — with especially sharp effects in countries that are closely integrated into U.S. auto supply chains, such as Mexico, Canada and the EU.

The largest relative increase occurs in imports from Mexico and Canada, two countries with deep integration into North American auto supply chains. Mexico’s AETR rises to 20.1 percent (a 30 percent increase relative to the previous scenario), while Canada’s increases to 14.1 percent. This reflects the fact that a substantial share of U.S. auto imports originates from these two countries, and many of those goods fall outside of USMCA exemption provisions.

The most notable new impact, however, is on the EU. Its AETR increases from 2.5 to 4.4 percent — a substantial jump driven by its status as a major exporter of passenger vehicles to the U.S. In contrast, China’s AETR remains unchanged at 33.5 percent, as autos from China were already subject to elevated tariffs under prior scenarios.

Overall, the addition of auto tariffs in Scenario 3 disproportionately affects North American and European trading partners, further raising the effective tariff burden on key sectors of U.S. imports.

Scenario 4

Scenario 4 further expands the scope of tariff measures by introducing a new 25 percent tariff on all imports from the EU. This broad application leads to a substantial rise in the overall AETR, which increases from 12.4 to 17.0 percent.

The sharp increase reflects the scale of trade impacted: The EU accounts for approximately one-fifth of all U.S. imports, making it one of the U.S.’s largest trading partners. As a result, the imposition of a uniform tariff across this volume of trade has a pronounced effect on the aggregate tariff rate. The AETR for EU imports alone surges from 4.4 percent to 29.4 percent in this scenario, one of the steepest increases observed across all trading partners in our simulations.

The calculations […] represent the immediate (“upon-impact”) effects of the proposed tariffs without accounting for subsequent adjustments that importers or consumers might make in response. For example, the significant reduction in China’s share of U.S. imports — from 22.0 percent in 2017 to 13.8 percent in 2024 — demonstrates how businesses adapted to the 2018-19 tariffs by shifting their supply chains away from China toward alternate trade partners. Similar adjustments could also occur under the new tariffs proposed for 2025. However, initially, these estimates highlight the direct and immediate economic disruptions industries and consumers could face, providing a valuable baseline to assess potential impacts before market reactions and supply-chain adjustments take place.

Average Effective Tariff Rates by Industry

By combining detailed data on imports and tariffs at the product-country level, we can estimate the overall tariff impact at the industry level. To achieve this, we aggregate tariffs using each product-country pair’s share of total industry imports as weights. Note that we do not have data on the share of an industry that relies on imports, so this calculation informs us of the impact on industries that have inputs which are most exposed to the proposed tariffs. Industries are classified according to the North American Industry Classification System (NAICS) at the three-digit level. This method provides a clear picture of tariff exposure across different industries, allowing us to compare their vulnerability under various tariff scenarios.

[…]

Although we assume full pass-through of tariffs to domestic prices, the industry’s overall cost increase is estimated to be smaller than the headline 20 percent tariff. This occurs because these industries source a portion of their imports from other countries that remain unaffected by the tariff increase.

[…] Building on the measures in Scenario 2 — which already included 20 percent tariffs on all Chinese imports, 25 percent on aluminum and steel, and 25 percent on non-USMCA goods from Canada and Mexico — Scenario 3 adds a 25 percent tariff on all auto imports, significantly affecting sectors closely tied to the automotive supply chain.

This shift is immediately visible in the jump for transportation equipment, which now faces average tariff rates above 25 percent, placing it among the top three most affected sectors. This reflects the heavy dependence of U.S. auto manufacturing on imported parts and finished vehicles, particularly from Canada, Mexico and the EU.

Fabricated metals and leather products remain at the top of the distribution — consistent with earlier scenarios — as they continue to be impacted by the Section 232 tariffs on steel and aluminum and exposure to non-USMCA trade. Apparel, textiles and electrical equipment also continue to face elevated average tariffs, due to both their sourcing from China and regional trade partners.

Sectors with relatively modest exposure include food, chemicals, agriculture and energy, which remain near the bottom of the distribution. These industries are less reliant on affected countries for imports or benefit from trade exemptions under existing agreements.

[The] most aggressive tariff package simulated […] layers a 25 percent tariff on all EU imports on top of previously implemented measures: 20 percent on all Chinese imports, 25 percent on steel and aluminum, 25 percent on non-USMCA goods from Canada and Mexico, and 25 percent on auto imports.

The result is a broad elevation of tariff exposure across most manufacturing sectors, pushing the overall AETR to 17.0 percent and significantly amplifying pressures across key industries. Fabricated metals — already heavily affected by the steel tariffs — now face an average tariff burden of over 35 percent, with leather goods and transportation equipment close behind. The auto tariff and the full coverage of EU imports drive up the average rate on transportation equipment to over 25 percent, reflecting the EU’s role as a major supplier of high-value finished vehicles and components.

Compared to earlier scenarios, more sectors are now pulled into the high-tariff range, with industry clusters like machinery, beverages and tobacco, electrical equipment, and textiles all facing average tariff rates of 18-22 percent. The inclusion of the EU broadens the reach of the tariff burden beyond China and North America and affects a wider set of capital-intensive and consumer-intensive industries.

Our analysis of AETRs indicates that manufacturing and mining industries face the highest exposure under the proposed 2025 tariffs. This finding aligns closely with evidence from the First Quarter 2025 CFO Survey […]. According to CFO responses, manufacturing firms exhibit the strongest reactions to trade disruptions: Over 50 percent of manufacturing CFOs reported actively planning to diversify their supply chains, nearly 40 percent accelerated purchases in anticipation of tariffs, and a considerable share sought alternative foreign suppliers.

Similarly, firms in construction, mining and utilities reported taking proactive measures, such as diversifying supply chains and identifying new domestic suppliers, consistent with the significant tariff exposure calculated for these industries. This consistency underscores how tariff-related disruptions are prompting tangible strategic adjustments by firms, especially within industries identified as most vulnerable by our AETR analysis.

Average Effective Tariff Rates by County

We can also estimate AETRs at the county level by combining industry-specific tariff rates with the employment share of each industry within individual counties. Specifically, we weight the tariff faced by each industry by its employment share in the county, then aggregate across all industries in each given county. While this approach is necessarily approximate, it offers a useful proxy for assessing how tariff burdens differ across regions and helps identify counties whose workforces may be most affected. The impact in this case is spread quite evenly across counties, with relatively low imputed rates.

[The] effects of Scenarios 3 illustrate the uneven geographic distribution of tariff exposure across the U.S. While the nationwide AETR rises to 12.4 percent under this scenario — driven by the addition of a 25 percent tariff on all auto imports — the local impact varies considerably depending on the industrial composition of each region.

Counties shaded in darker blue and green (indicating average tariff levels of 2-7 percent) dominate much of the country, especially in the Mountain West, Great Plains and Southeast, reflecting regions where trade-exposed sectors are less central to local economic activity. These areas are less reliant on global supply chains or major manufacturing hubs and thus feel more limited direct effects from the tariff expansion.

In contrast, counties shaded in red and orange — which face average tariff rates exceeding 10 percent — cluster heavily in the industrial Midwest, parts of the Great Lakes and some manufacturing-intensive areas of the South. These regions include major auto and parts manufacturing zones — such as southern Michigan, northern Indiana, central Ohio, and parts of Tennessee and Kentucky — where the 25 percent auto tariff hits hardest. The map reflects how deeply integrated these counties are in global automotive supply chains, especially with partners like Canada, Mexico and the EU.

Notably, Southern California and parts of the Bay Area also register higher average tariffs (4-7 percent), likely due to their significant exposure to global trade in both consumer electronics and automotive products, including imports from Asia and Mexico.

[A] map makes clear that while tariff increases are national in scope, their economic footprint is intensely local, with disproportionately high exposure in communities dependent on manufacturing and cross-border inputs. These areas may face rising production costs, disrupted supply chains and downstream employment effects if such tariffs are implemented.

[The] geographical distribution under Scenario 4 […] introduces the broadest and most aggressive tariff package in the analysis, adding a 25 percent tariff on all EU imports to the measures already in place under Scenario 3. [A] map vividly illustrates how this expansion intensifies and geographically widens the economic exposure to tariffs across the U.S.

Counties shaded in darker red and orange — which now appear more frequently across the map — signal areas where AETRs exceed 10 percent and, in some cases, reach above 14 percent. These high-tariff counties are concentrated in the Great Lakes region, Midsouth and parts of the South Atlantic, which are regions with strong manufacturing footprints and close supply-chain ties to the EU, particularly in automobiles, machinery, chemicals and fabricated metals.

Midwestern industrial centers — especially in Michigan, Ohio and Illinois — show increased intensity compared to Scenario 3, as the EU tariff hits imported inputs and finished goods from one of the U.S.’s largest trading partners. These areas are highly integrated into transatlantic trade and host production clusters that depend on EU-origin intermediate goods and capital equipment.

Meanwhile, manufacturing and trade hubs in North Carolina, South Carolina and Alabama — states with growing foreign direct investment and vehicle assembly plants — also show elevated exposure. These regions face the compounded effects of the EU tariff on top of previous measures on autos and metals.

This broadening geographic impact underscores how a full-scale EU tariff escalates tariff exposure from a mostly regional issue to a national economic concern, affecting a wide array of industries and communities. The increasing presence of mid- and high-tariff zones highlights the potential for more widespread supply chain disruption and cost pass-throughs in this most expansive scenario.

The geographic analysis of tariff exposure at the county level — which emphasizes employment composition across industries — aligns closely with recent CFO expectations about hiring in response to tariff policy. [Manufacturing] firms — concentrated in regions heavily affected by the proposed tariffs — are significantly more likely to anticipate reducing employment, with about 32 percent reporting plans to decrease hiring due to tariff concerns. Similarly, firms in construction, mining and utilities also express notable employment concerns, with nearly 22 percent expecting decreased hiring. These concerns are echoed in retail and wholesale trade, with about one-quarter of them expecting declines in hiring due to tariff announcements.

These employment outlooks from CFOs reinforce our findings that counties specializing in manufacturing and mining face heightened vulnerability, suggesting potential negative economic consequences such as job losses and reduced local economic activity in regions most exposed to higher tariffs.

Uncertainties Remain

While this study provides our best estimates of the effect of tariffs on different industries and regions of the U.S., the analysis is incomplete, and several uncertainties remain. The scenarios we presented do not incorporate proposals to impose reciprocal tariffs or additional tariffs on copper, semiconductors, pharmaceuticals, timber and lumber, and certain agricultural products. There is a high degree of uncertainty regarding which of these tariffs will be implemented, as well as their timeline and magnitude. This, in turn, generates uncertainty to consumers and firms.

By making products more expensive, tariffs may lower demand, which could affect firms. A respondent to the First Quarter 2025 CFO Survey in charge of a manufacturing firm said, “We are in the steel industry. While the tariffs will increase costs for the company, we expect most of those costs to be passed on. The bigger concern is what will the impact be on the overall demand.” Another respondent in the same sector said, “Tariffs remain an unknown that could have a large impact on our company due to both imports of our raw materials and exports of our finished product, not to mention the impact of demand on our industrial customers.”

The analysis performed in the previous sections kept everything else constant. For example, the analysis used 2024 import shares, which assumes that firms’ decisions regarding import sources remained unchanged. [Some] importers are planning to diversify their supply chains in response to proposed tariffs. However, these adjustments take time. This is illustrated by the response of a manufacturing firm in the CFO Survey: “How can we plan if we do not know what the tariff situation is for the next five years? Factory and supply chain sourcing decisions cannot be changed at moment’s notice.”

In addition, this analysis did not consider changes in investment or hiring, which could affect production and the level of imports. In that sense, the analysis is “static.” A business services firm responding to the CFO Survey said, “The impacts of tariffs constraining global trade could be very impactful to our business in cross-border payments — the uncertainty of what tariffs, how high, reciprocal or not, etc., is spilling over into spending decisions.” Around 25 percent of CFO Survey respondents were planning to reduce hiring and capital spending in response to tariffs in 2025. When focusing exclusively on the manufacturing sector, these numbers increase to about 32 percent and 29 percent, respectively. Construction, mining and utilities had a similar response.

Conclusion

The 2025 tariff proposals represent significant shifts in U.S. trade policy, with potentially large economic impacts varying across industries and regions. Our analysis highlights that the immediate tariff burden — measured by the AETR — could rise substantially, from a modest 2.2 percent in the benchmark scenario to as high as 17.0 percent under the most aggressive proposal (Scenario 4). While earlier tariffs on Chinese imports had relatively muted impacts due to shifts in supply chains, the new measures targeting Canada, Mexico, the EU and automobiles threaten widespread disruptions across key U.S. industries.

Regions deeply integrated into North American manufacturing supply chains — particularly automotive and metal-intensive industries — would bear the heaviest tariff burden under a scenario imposing 25 percent tariffs on Mexico and Canada and imports from aluminum and steel. This includes states like Michigan, Ohio, Indiana and others in the Midwest and Southeast, as well as the Pacific Northwest due to its resource-based trade ties with Canada. When tariffs on the EU and the auto sector are included, these effects are further amplified and severely affect counties heavily reliant on such imports, particularly those in transportation equipment, machinery and fabricated metals.

These concerns are echoed by business leaders, as shown by recent data from the First Quarter 2025 CFO Survey. Over 30 percent of firms now rank trade and tariff policies as their most pressing business concern, which is more than triple the share from the previous quarter. In particular, manufacturing firms are actively adjusting strategies, with more than half planning to diversify their supply chains and nearly one-third reducing their hiring plans. Firms in construction, mining and utilities also anticipate significant disruptions, reflecting the industry’s heightened tariff exposure.

Ultimately, the proposed tariffs may raise input costs, disrupt supply chains and result in higher consumer prices, potentially outweighing any targeted employment gains in protected industries. Policymakers should carefully weigh these costs against intended policy goals and consider targeted measures to support the industries and communities most adversely impacted by these tariff changes.

 To read the full economic brief as it appears on the Federal Reserve Bank of Richmond’s website, click here.

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