Could Trump’s tariffs be Europe’s Liberation Day?

Trump's Liberation Day Tariffs, announced on 2 April 2025, imposed unprecedented tariffs on imports from over 180 countries with a minimum baseline tariff of 10% applied to most goods and higher "reciprocal" tariffs on several countries - such as an additional 34% on imports from China (at the time writing increased to 125%) and 20% on European imports. The latter was subsequently postponed for 90 days. 

Many have been affronted and shocked by the apparent erratic and bazooka-like manner in which these have been implemented - and the rudeness with which Trump seems to be tearing up old trade partnerships. Economists and politicians have lambasted these as being irrational, destructive and irresponsible. Warnings of a global recession have been sounded.

While Trump's assault on free trade does indeed up-end the global economic order that has been in place since 1971 when Nixon took the US $ off the gold standard, the Liberation Tariffs are not as irrational and crazy as many have made it out to be - Yanis Varoufakis describes it as a masterplan. 

Most economists have evaluated these as economic instruments to protect US domestic industries, create local jobs and earn tax revenue. These are however, not the main motivation. The main motivation stems from the USA's fundamental problem is that its relative size of world GDP is declining, making it progressively more difficult to sustain its role in providing the world with a reserve currency, the US Dollar 

Because of the unique status and privilege of having the world's reserve currency the demand for dollars is continually rising, which causes an overvalued dollar, a US trade deficit, and the countries with a trade surplus with the US are changing these bank liabilities into assets by purchasing US Treasury Securities to the rest of the world - the EU has more than US$ 9 trillion invested in US financial markets. Thus, the global system makes it cheap for the US to import and fund government debt. 

As a result, both the US trade and fiscal deficits have been soaring since the 1970s, to the extent that, with a trade deficit of more than US 1 trillion and national government debt of more than US$ 36 trillion, it is clear that the current global system is unsustainable from the US point of view. 

Therefore, a depreciation in the US dollar, and a reduction in its current account deficit and government debt, are needed. This is what the Liberation Day Tariffs are really all about. 

Many have claimed that the tariff hike has no basis in economic theory. However, the economic theory of optimal tariffs suggests that the optimal welfare-enhancing tariff for the US is 20% on imports (see Costinot and Rodriguez-Clare, 2014, in the Handbook of International Economics). Before the Liberation Day Tariffs, the average US tariff rate was less than 3%. It has been estimated that after the Liberation Day hike, the average US tariff rate will be around 22% - hence, around what standard international economic theory suggests is the USA's welfare maximising tariff rate. A more recent study estimated the optimal tariff rate for the US at 25% of imports, find that, barring retaliation such a uniform tariff on all US trade partners will improve both US welfare and the trade deficit. 

Opponents of the tariffs hope however that the Liberation Tariffs will lead to a domestic electoral backlash, resistance from the US's powerful financial industry who benefits from rising stock market prices, that Trump will backtrack due to the administrative burdens it will impose, or that the tariffs will be declared illegal. Other countries will undoubtedly retaliate against these tariffs, diluting the benefits for the US. Clearly, the Liberation Day Tariff shock is a risky strategy. It stands a high chance of failing, and Trump has already retreated by extending the imposition of reciprocal tariffs by 90 days.

While Trump's gambit may fail this time, the underlying motivation for the US to change the global system will not change. Even if a Democratic administration comes into office in the future, they will be under the same pressure to change the global trading system, even if not in such a surprising, rude, and risky manner. The post-1971 global trading system is gone for good. 

This may not be all bad news for Europe. It is also shackled by the dysfunctional global trading system built around the dollar as reserve currency. For decades, it has run trade surpluses with the US and invested trillions of the surpluses back in US financial products, depressing local investment and wages and helping to fuel the financialisation of the US and its twin deficits. Europe has been stagnating as a result. A different - multipolar - global order with a less dominant US dollar, however painful it may be over the short term, offers the opportunity to revitalise. 

Europe has already changed old budget rules to allow greater spending on its industries, is seeking alternative trading partners, has started deregulating, and has realised that obstacles on intra-EU trade need to come down fast.

Greater reliance on the domestic market for growth bodes well for wage increases and will result in shorter supply chains, which is good for decarbonisation, a lower external material footprint. Ultimately a more fragmented and slower growing global economy will slow down the world's ecological overshoot. And according to Ember, the tariff war may increase the demand for renewable energy. 

Perhaps in the future 2 April 2025 will come to be seen as Europe's liberation day.

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