The New US Tariff Regime Will Have Its Greatest Impact in Developing Countries

Yesterday, President Trump announced a sweeping change to US trade policy, imposing tariffs larger than those enacted under the Smoot-Hawley Tariff Act that helped deepen the Great Depression. US markets are responding based on the implications for US business and consumers. But the consequences for some developing countries are even more dire.

As a member of the World Trade Organization, the United States typically charges the same tariff rate to all its trading partners, regardless of their tariff rates. The administration has upended that rule, implementing a formula that sets US tariffs on a country’s imports equal to the US trade deficit with that country divided by US imports from that country—or 10 percent, whichever is higher.

This is bad news for the US and its major trading partners. But the biggest impact on quality of life will be in developing countries that account for a small part of the US trade deficit. Eleven newly tariffed countries see exports to the US worth more than 10 percent of their GDP. Collectively they account for about 9 percent of US imports. These countries include Guyana, Cambodia, Vietnam, Nicaragua, Thailand, Honduras, and Lesotho (see the table below).

Some developing countries, particularly in East Asia, have achieved remarkable growth rates and reductions in extreme poverty over the past 30 years, largely through export-led industrialization. The apparel industry has played an important role in that growth, and demonstrates the potential stakes. The US imported just shy of $80 billion worth of clothing in 2023, making it the world’s largest apparel export market. About two-thirds of that came from Asia, and while China was the largest exporter, six other Asian nations were among the top 10 suppliers, representing 45 percent of exports. About 3 percent of Vietnam’s GDP in 2023 was apparel exports to the US: firms including Nike and American Eagle have invested in factories in the country.

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Note: Calculated using USITC Import and Export Data for 2023 combined with MFN rates from the WTO at the HS6 level.

For people working in the apparel industry, the conditions are harsh, but the wages these jobs offer represent a real opportunity, particularly for women. In Bangladesh, for instance, the average worker makes roughly $5 a day, $10 in purchasing power parity terms. That daily wage is below the hourly minimum in most US states, but for many, the jobs are a ticket to the global middle class. Women make up nearly half of the workers in Bangladesh’s garment and textile industry (a low rate for the region), pulling many into the labor market in a society that stigmatizes women working generally: apparel manufacturing is a key source of independence and savings.

Even the significant tariffs the administration is putting in place won’t make the US competitive in apparel manufacturing. US Bureau of Labor Statistics data from 2023 implies that the average American with a 40-hour-a-week job cutting and sewing apparel made $127 a day, more than 20 times what an average worker in Bangladesh would make. But the tariffs will surely dampen the demand for clothes and shoes made in Asia, shuttering factories and putting people out of work.

To see the capricious nature of the new tariff regime, look at data on actual tariff rates in Vietnam and Bangladesh. A simple average of the tariff rates charged on US imports measured at the HS6 level of product detail (the most detailed classification offered under the WCO’s harmonized system) would imply that under reciprocal tariffs, the US could justify a 9 percent reciprocal tariff on goods from Vietnam. When weighting by the value of imports, this drops to 4 percent. For Bangladesh those numbers are 14 and 4 percent. That suggests on March 31, US and Vietnamese reciprocal tariff rates were already nearly even and, if anything, the US was already charging far more to goods coming in from Bangladesh than the reverse. But the new tariffs weren’t calculated using any measure of real trade barriers, and so Vietnam is hit with a 46 percent tariff and Bangladesh 37 percent.

Note: Calculated using USITC Import and Export Data for 2023 combined with MFN rates from the WTO at the HS6 level.

There will be trade diversion and substitution, and so you (really) can’t go from these raw trade numbers to any immediate estimate of GDP loss—that will have to wait on modeling. One early estimate is that the medium-run impact on Vietnam’s GNI will be around a 1 percent decline. But suffice it to say a tenfold rise in tariffs on exports that currently account for a considerable proportion of GNI is not good economic news.

While global trade links are of huge importance to US prosperity, they are even more so to small, poor countries. They need to import a wide range of goods they don’t produce, from vaccines to trucks. But they also need to export to global markets. Those markets provide the scale of demand that that allows for expansion, specialization, and the productivity gains that bring rapid development. Some economists, including Harvard’s Dani Rodrik, argue (and we might partially agree) that the manufacturing export-led model is not what it used to be, but it is still a powerful force for development in some countries including Vietnam and Bangladesh, and the tariff structure is almost perfectly designed to stymie it—the stated intent of the tariffs is to result in a bilateral trade balance of zero.

This administration is cutting assistance flows that will increase US trade deficits with small, poor countries and then punishing those same countries with higher tariff rates. Meanwhile it appears set on reducing migration flows that foster both trade and investment links as well as providing remittance income. It is hard to imagine a set of US policy shifts worse for global development prospects.

Note: GNI: https://data.worldbank.org/indicator/NY.GNP.MKTP.CD; New tariffs: https://x.com/RapidResponse47/status/1907541343250878752(converted to excel by Chat GPT); US import data by country and current tariff: https://wits.worldbank.org/CountryProfile/en/Country/USA/Year/LTST/TradeFlow/Import/Partner/by-country/Product/Total#