The 2025 Global Tariff Wars and an Uncertain Economic Outlook

By Abdulkabir Olode-Ankirun (Research Officer for the Research & Content Team at EOTI)

Introduction

The trending topic in the international tax community is the ongoing tariff wars between China and the United States (US). Following his assumption of office on 20 January 2025, the US President, Donald Trump, promised to “tax” foreign countries to “enrich American citizens”. 

Trump’s belief in external tariffs as a way of asserting US dominance in the global trade forum is traceable to his first term in office (2017 to 2020) when he launched a trade war against China – “taxing” most of its goods in addition to threatened tariff measures against Canada and Mexico. Trump has made good on this threat in his second term in office. On 1 February 2025, Trump signed an executive order to impose tariffs on imports from Mexico, Canada, and China — 10% on all imports from China and 25% on imports from Mexico and Canada starting on 4 February 2025. While he later halted threats to “tax” Mexico and Canada, the threatened tariffs against China went into effect. As expected, China responded by imposing its own retaliatory tax measures. 

On 4 March 2025, the US launched its threatened 25% tariffs on imports from Canada and Mexico. Levy on Canadian energy was however limited to 10%. Tariffs on China’s imports were doubled to 20%. Subsequent to this, there were several tense exchanges between the countries. Further retaliatory taxes were imposed, there were partial suspension of tariffs, and the international community was left reeling in the global trade crisis that followed. The trade wars fully escalated on 2 April 2025, when the US declared a 10% baseline tax on imports across board starting 5 April 2025, as well as higher rates for dozens of nations that run trade surpluses with the US – to take effect on 9 April 2025. 

These levies included a 34% tariff on imports from China, a 20% tariff on imports from the European Union, 25% tariff on South Korea, 24% on Japan, and 32% on Taiwan. The new tariffs came in addition to previously imposed levies, including the 20% tariff Trump had announced on all Chinese imports earlier this year.

Rationale Behind Reciprocal Tariffs

The “reciprocal” tariffs are designed to impose charges on other countries equivalent to half the costs they supposedly inflict on US exporters through tariffs, currency manipulation, and non-tariff barriers levied on US goods. Some of the reasons behind the imposed tariffs include:

1. Remedying unfair trade practices by reducing the gap between the value of goods the US buys from other countries and those it sells to them.

2. A tool for accomplishing a range of key economic goals, including reviving the US manufacturing sector.

3. Reduction of income taxes on Americans by substitution through tariff generated revenue from foreign countries.

4. Higher tariffs could raise more than one trillion US dollars in federal revenue.

5. Encourage US consumers to buy more American-made goods.

6. Increased investment in the US.

7. To serve as a tool of diplomacy replacing sanctions which are considered to have been overused and relatively ineffective.

Viability 

According to Mark Wu, the Henry L. Stimson Professor of Law at Harvard Law School in the US – where he specializes in international trade and international economic law, new tariffs could impact the economy in several ways. Some include – 

• The Cost-Effect: An increase in the price of inputs, parts, and raw materials sourced from foreign counties.

• Reduction in the demand for goods, both locally and internationally, due to fear of recession, retaliatory tariffs, or because of an increasingly uncertain economic outlook.

• Shift in demand from foreign to locally made goods which would positively affect the American market.

Remarks

It can be difficult to sort through the economic effects of tariffs. They can stimulate employment by attracting investment as companies try to get around tariffs by moving factories to the taxing country. At the same time, they can provoke retaliatory tariffs that cost jobs in other parts of the economy.

When a country imposes import tariffs, domestic manufacturers don’t necessarily leap in to start making the products affected. And if the nation has no alternative domestic supply of the goods concerned, then prices of those goods can go up. 

Regardless of what the direct economic effect might be, it seems that indiscriminate tariffs have the general effect of impeding cross-border trade, creating tense international relations, and resulting in adverse spiral effects in the domestic tax landscape of the countries concerned.

Disclaimer

This commentary is not legal or tax advice to readers. Taxpayers and businesses should consult their legal and tax advisors for specific advice regarding their transactions and businesses, including compliance requirements and recourse available to them against tax authorities.