What can we learn from the trade deals the USA has agreed with the UK and China?

In the last week, the Trump administration has managed to calm the trade war by agreeing provisional deals with the UK and China.

Starting with China first because it's economically more important, here is a graph of how US tariffs applied to China have changed since Trump came to power:

source

So US tariffs started the year at 10% and have ended up at 30%, just 4% below what the "Liberation Day" level announced on April 2nd.

Chinese tariffs on US goods have gone from 8% in Jan to 10% now.

Though the administration has said this is for 90 days, it's likely they'll settle at this level permanently.

Recall what happened on Liberation Day: markets tanked and China retaliated with a 34% tariff of their own. But Trump's shennanigans subsequently, raising tariffs on China to 145% matched by Chinese retaliation of 125%, threatened both Chinese factories which started closing down, and American small businesses which started filing for bankruptcy.

Having had their expectations anchored to 145% and looked into the abyss, the same markets who were horrified by 34% are happy with 30% now. 30% was probably the landing zone all along...

In addition, businesses wee forced to look at their supply chains - most haven't reshored, but they have diversified across the globe.

The deal with the UK was also interesting. Tariffs on British cars were reduced from 27.5% to 10%, matching the 10% Britain puts on US cars. The deal on beef was symmetrical; 0% on 13,000 metric tonnes from the US to Britain and Britain to the US.

The universal 10% tariff from the US to Britain remained. This is higher than the average 6% the UK applies to the US, but Trump softened this by reducing tariffs on British steel to 0%.

So a balanced deal, which is appropriate as on average the US and UK have balanced trade (currently the US has a $12 billion trade surplus).

Conclusion

It's now clear that the goal of this is not reshoring but revenue raising. Most countries raise revenue via VAT or a sales tax at a rate of about 20%. The USA has no VAT and no federal sales tax (some states have a sales tax in the 6% to 8% range which is low).

It's clear that the Trump administration is looking to raise revenue to close the deficit. But they've concluded it would be too difficult to introduce VAT or a national sales tax at the level required (an average of 20%) as tantrums from domestic interests would have been epic.

So they've gone for a tariff on imports. It'll range from 10% for countries like the UK with balanced trade, to 30% for countries with vast surpluses like China. It'll average out to 20%. Coincidently, that's what a VAT regime would charge.

Anyone thinking the tariffs will go back to the 2.5% they were in January is pipe dreaming.