The US going down a slippery slope

POST-LIBERATION Day, and after allowing the 90-day window to negotiate with the rest of the world, the day of reckoning was finally here as several nations were given their “number”, as far as the imposition of reciprocal tariffs is concerned, just before the July 9 deadline.

So far, 24 nations have received their revised reciprocal tariff rates, including Malaysia at 25%.

Of the 24 countries, Malaysia, Brunei and Japan saw an increase in the reciprocal rates by one percentage point; the Philippines had its rate raised by three percentage points to 20%; Canada was slapped with a 35% rate; while Brazil’s reciprocal rate was increased multiple times to 50% from 10%.

Five countries saw no changes to their April 2 tariff rates, while 13 others saw reductions ranging from 1% to 26%.

The biggest winner so far has been Vietnam, with its rate dropping from 46% to 20%.

For the 24 countries, the average tariff rate is 29% – almost a threefold jump from the 10% reciprocal rate imposed during the 90-day negotiation period.

For the rest of the world, US President Donald Trump is now mulling a tariff rate between 15% and 20%.

What negotiations?

While many nations, including Malaysia, have taken proactive steps to negotiate with the United States on the final reciprocal tariff rate, it was rather disappointing to see that Trump, at the end of the day, was just as brutal as he was when he imposed the reciprocal tariff rate back on April 2.

His recent comments that the United States “can do whatever we want, we could extend it, we could make it shorter” were telling.

He further said, “I would like to make it shorter. I would like to just send letters out to everybody, ‘Congratulations, you’re paying 25%’.”

Comments like these from a sitting US president are most unwelcoming and detrimental to foreign relationships.

Trump’s reciprocal tariffs are nothing but bullying tactics to make deals, and even if nations have bowed their way to Washington, it does not seem to have had any impact on the final reciprocal tariff rate.

In essence, we have scaled back the clock to April 2, when markets were spooked by Trump’s reciprocal tariff rates, but perhaps to a lesser magnitude, as the rates are much

lower than the original rate but higher than the 10% imposed on most countries during the 90-day truce period.

For Malaysia, the new 25% tariff rate was nothing but an arbitrary number that had little to do with any negotiations.

While Washington has flagged trade barriers and non-tariff barriers, it is ironic that the United States also has similar barriers and continues to impose them, like the new 50% tariff on copper imports.

What’s next?

The global economy remains on the edge, and for the United States, it is no different.

The final first-quarter gross domestic product number, which showed the US economy contracted more than expected, is a reminder that things will get worse as imported inflation, coupled with a weaker dollar, makes its way to American shores.

It would not be a surprise that the US Federal Reserve (Fed) will still maintain its key benchmark rate, as its mandate to uphold price stability and employment remains paramount – no matter what Trump thinks.

For the rest of the world, the new reciprocal tariff rates are a mixed bag, although in some cases lower than before, but higher than the 10% rate that market watchers were expecting.

An institution

The Fed is an institution, and even if President Trump is bent on replacing Jerome Powell, it is not as easy as it seems.

Although the chair of the Fed is nominated by the president and must be endorsed by the Senate, they are not the sole decision- maker when it comes to US monetary policy.

The Federal Open Market Committee (FOMC), which has 12 members, reviews economic and financial conditions, determines the appropriate stance of monetary policy, and assesses the risks to its long-run goals of price stability and sustainable economic growth.

Although the chair of the Fed is also the chair of the FOMC, the decision to alter US monetary policy rests with all 12 members.

The fact that the market relies heavily on the famous dot plots gives us the confidence that members of the FOMC vote independently and are data-dependent when it comes to rate moves.

Tariffs are taxes

While Trump continues to believe that tariffs “imposed” on the rest of the world are a form of “punishment for taking advantage of the United States”, the reality is that they act as a form of taxation on US consumers (for consumption goods that are imported) and businesses (for capital goods), which then becomes an added cost of business.

In other words, consumers are the ultimate payers of tariffs, and it can only come in the form of higher prices.

With the weaker dollar, imported inflation means US consumers will take a double hit, causing the US core personal consumption expenditure to remain elevated in the months or quarters ahead.

Not unexpected

For May 2025, when the full 10% reciprocal rate was in place for most nations, the United States collected US$22.8bil in tariffs alone.

Based on a total imported goods value of US$277.7bil,

the collected tariffs suggest an effective US tariff rate of about 8.2%.

Despite the tariffs, the United States is unlikely to be able to address the elephant in Trump’s room – the US trade deficit, which increased to US$604.2bil for the first five months of this year, up from US$449.7bil for the same period in 2024.

So, what is the purpose of these tariffs? Anyone?

Or is the United States just going down a slippery slope, as seen in how the dollar has tanked so far this year – down more than 10% and counting.

Although the Trump administration reckons that it will collect a huge amount in tariffs this year, the reality is that tariffs will not address the country’s ballooning trade deficits, high public debt and, worse, the rising debt servicing costs due to elevated inflationary pressures that will kick in once the final tariff rates are set for all countries.