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Geopolitics
America’s tariff shock: Why trade deficits now mean penalties, not ‘unfair policies’
The United States has finally abandoned traditional trade diplomacy in favor of a formula-based tariff regime that penalizes bilateral trade surpluses. For firms with cross-border supply chains, the implications extend far beyond cost – this is a systemic shift with far-reaching consequences for their commercial footprint.
On 2 April, the United States introduced what is arguably the most far-reaching shift in its trade policy since the early 20th century. The measures – anchored in a new executive order – are triggered by a determination that large and persistent US goods trade deficits are a national security risk. In response, the administration has imposed substantial tariff increases on imports from more than 60 countries.
Unlike earlier interventions targeting specific nations or products, this approach is generalized and mechanistic. The scale of a country’s trade surplus with the United States now determines the tariff level it faces. A baseline 10% additional tariff applies to nearly all trade partners; for some, the increase is markedly higher.Switzerland faces a 31% rise in import taxes, while Vietnam’s adjustment reaches 46%. According to the White House, the average tariff hike among deficit countries is 45%; worldwide the hike is 41%.
This development represents a clear break with the past. It turns out that, rhetoric notwithstanding, tariffs are no longer calibrated in response to alleged unfair trade practices or strategic threats. Looking through the smoke and mirrors, the additional tariffs are based on a mathematical formula driven entirely by bilateral trade imbalances.
The new tariff system marks a sharp break from decades of trade norms.
Rules-based trade, set aside
The new tariff system marks a sharp break from decades of trade norms. In the past, the US worked within the framework of the World Trade Organization, where members agreed to treat all partners equally under the Most Favored Nation (MFN) rule. That principle has now been pushed aside.
According to the executive order behind the 2 April announcement, the global trading system was built on three flawed assumptions:
- That US leadership on opening markets would be matched by others.
- That global liberalization would raise incomes and consumption shares abroad, increasing demand for US exports.
- That trade openness would prevent long-term US trade deficits.
The current US administration argues that none of those outcomes materialized. Instead, it sees the current system as producing unfair trade patterns that weaken American manufacturing and expose critical supply chains to foreign risks. This, it argues, justifies a new policy grounded on security grounds. For the Trump administration, economic security is national security.
“The White House argues that when countries suppress domestic consumption or keep their markets relatively closed, they hurt American exporters.”
A new definition of fairness
The 2 April move also redefines what the US means by “fair” trade. The administration no longer accepts equal treatment as good enough. What it wants is reciprocal results – balanced trade.
That means countries that benefit from a trade surplus with the US will face automatic penalties. Tariffs are not framed as punishment but as a built-in correction mechanism. The White House argues that when countries suppress domestic consumption or keep their markets relatively closed, they hurt American exporters. The 2 April move is framed as restoring balance – not just asserting leverage.
No privileged partners
Even US allies are not spared. Countries with free trade agreements (FTAs) – including South Korea and Australia – are still subject to these new tariffs. Most fall into the trade surplus category and now face increases well above the 10% minimum.
Only Canada and Mexico are partially exempt, somewhat protected under the updated USMCA deal – which is scheduled for review in 2026. But even America’s neighbors remain subject to a previously announced 25% tariff, depending on whether they meet other onerous conditions. Ironically, despite these high base tariffs, Canada and Mexico may soon face lower tariffs when exporting to the USA than countries in other parts of the world.
The new rules aren’t uniform – they’re selective, and that demands a much more detailed view of global supply chains.
Sector carveouts show strategic priorities
Some sectors are exempt from yesterday’s tariff hikes. Steel, aluminum, autos, and auto parts were already targeted in earlier measures. The 2 April changes spare industries seen as economically or strategically vital – including pharmaceuticals, semiconductors, energy products, copper, lumber, and certain critical minerals.
The logic is twofold: to avoid adding to inflation in key sectors, and to support US self-sufficiency in industries deemed essential to national security. But these exemptions also add complexity. Companies will need to rethink exposure not only by country but by product line. The new rules aren’t uniform – they’re selective, and that demands a much more detailed view of global supply chains.
Production plans just got more complicated
Companies are already contemplating the implications for their global commercial footprint.
Southeast Asia is particularly hard hit. Vietnam, which had become a top destination for manufacturers looking to diversify beyond China, now faces the steepest tariff hike of any major economy. Thailand, Indonesia, and the Philippines aren’t far behind. The message is clear: shifting production out of China into nearby economies no longer guarantees tariff relief. Goodbye China+1 strategies in Southeast Asia.
Malaysia, hit less hard, could benefit from factory relocation in the short term. But across ASEAN, multinationals will now need to rethink where they operate – not just based on cost but on market access to the US.
Europe also sees internal disruption. The United Kingdom, facing only a 10% tariff hike, may find itself in a relatively strong position, especially compared to the EU’s flat 20% increase. Switzerland, facing a 31% hike, may see some protection through its pharmaceutical and gold exports, which are exempted – but other sectors will feel the impact. Balkan economies, previously promoted as cost-effective bases for US exports, are now significantly less attractive.
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Retaliation risks and unpredictability
With more than 60 countries affected, retaliation is almost certain. The European Union, Japan, and India have signaled they’re preparing responses – but not all may follow through. What’s unclear is whether those will be targeted at the US or will restrict import from countries across the board. Either scenario could trigger a new phase of tariff escalation.
Adding to the uncertainty is the question of how often tariffs will be recalculated. The formula used by the US is public, but the timetable isn’t. For firms with significant US exposure, this creates a floating risk – their costs could rise overnight, driven not by policy change but by changing trade flows.
There’s also debate about the underlying logic. The administration argues that low consumption in surplus countries hurts US exporters and workers. But that link is contested. A country can have a low share of consumption in GDP and still import heavily from the US. The economic connection isn’t as straightforward as the policy suggests.
What business leaders should do now
The new US tariff regime demands the attention of senior executives and corporate boards to:
- Reassess global manufacturing and sourcing decisions. Tariff exposure is now a live issue – and North America, despite higher base rates, may now offer more stability than other regions.
- Conduct detailed scenario planning. Firms need to model the impact of tariff changes, possible retaliation, and second-order effects such as exchange rate movements or disrupted demand.
- Bring trade strategy into the boardroom. What used to be a regulatory or compliance matter now demands executive attention. The cost of inaction is too high.
A turning point for global trade
This isn’t just another chapter in trade tensions – it’s a rewrite of the rules. The US has moved from treating trade deficits as symptoms to treating them as threats. Tariffs are no longer tools of negotiation; they are instruments of correction.
More broadly, the 2 April policy marks a rejection of the old global consensus: that open markets, shared rules, and international institutions would produce fair and sustainable outcomes. That belief has been replaced by a new doctrine – one that prioritizes self-reliance, sees imbalance as danger, and treats reciprocity not as a goal but as a demand.
The assumptions that underpinned global trade for the last 30 years no longer apply. For business leaders, the implications are clear: policy is no longer shaped around alliances or diplomacy. It’s generated by formula – and the formula lives in Washington.
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