This chart explains why Trump backflipped on tariffs. The economic damage would have been huge

The Trump administration has announced a 90-day pause on its plan to impose so-called “reciprocal” tariffs on nearly all US imports. But the pause does not extend to China, where import duties will rise to around 125%.

The move signals a partial retreat from what had been shaping up as a broad and aggressive trade war. For most countries, the US will now apply a 10% baseline tariff for the next three months. But the White House made clear that its tariffs on Chinese imports will remain in place.

So why did President Trump back away from the broader tariff push? The answer is simple: the economic cost to the US was too high.

Our economic model shows the fallout, even after the ‘pause’

Using a global economic model, we have been estimating the macroeconomic consequences of the Trump administration’s tariff plans as they have developed.

The following table shows two versions of the economic effects of the tariff plan:

• “pre-pause” – as the plan stood immediately before Wednesday’s 90-day pause, under a scenario in which all countries retaliate except Australia, Japan and South Korea (which said they would not retaliate)
• “post-pause” after reciprocal tariffs were withdrawn.

As is clear, the US would have faced steep and immediate losses in employment, investment, growth, and most importantly, real consumption, the best measure of household living standards.

Heavy costs of the tariff war

Under the pre-pause scenario, the US would have seen real consumption fall by 2.4% in 2025 alone. Real gross domestic product (GDP) would have declined by 2.6%, while employment falls by 2.7% and real investment (after inflation) plunges 6.6%.

These are not trivial adjustments. They represent significant contractions that would be felt in everyday life, from job losses to price increases to reduced household purchasing power. Since the current US unemployment rate is 4.2%, these results suggest that for every three currently unemployed Americans, two more would join their ranks.

Our modelling shows the damage would not just be short-term. Across the 2025–2040 projection period, US real consumption losses would have averaged 1.2%, with persistent investment weakness and a long-term decline in real GDP.

It is likely that internal economic advice reflected this kind of outlook. The decision to pause most of the tariff increases may well be an acknowledgement that the policy was economically unsustainable and would result in a permanent reduction in US global economic power. Financial markets were also rattled.

The scaled-back plan: still aggressive on China

The new arrangement announced on April 9 scales the higher tariff regime back to a flat 10% for about 70 countries, but keeps the full weight of tariffs on Chinese goods at around 125%. Rates on Canadian and Mexican imports remain at 25%.

In response, China has announced an 84% tariff on US goods.

The table’s “post-pause” column summarises the results of the scaled-back plan if the pause becomes permanent. For consistency, we assume all countries except Australia, Japan and Korea retaliate with tariffs equal to those imposed by the US.

As is clear from the “post-pause” results, lower US tariffs, together with lower retaliatory tariffs, equal less damage for the US economy.

Tariffs applied uniformly are less distortionary, and significant retaliation from just one major partner (China) is easier to absorb than a broad global response.

However, the costs will still be high. The US is projected to experience a 1.9% drop in real consumption in 2025, driven by lower employment and reduced efficiency in production. Real investment is projected to fall by 4.8%, and employment by 2.1%.

Perhaps we should not be surprised that the costs are still so high. In 2022, China, Canada and Mexico accounted for almost 45% of all US goods imports, and many countries were already facing 10% reciprocal tariffs in the “pre-pause” scenario. Trump’s tariff pause has not changed duty rates for these countries.

What does this mean for Australia?

Much of the domestic commentary in Australia has focused on the risk of collateral damage from a US-China trade war. Given Australia’s economic ties to both countries, it is a reasonable concern.

But our modelling suggests that Australia may actually benefit modestly. Under both scenarios, Australia’s real consumption rises slightly, driven by stronger investment, improved terms of trade (a measure of our export prices relative to import prices), and redirection of trade flows.

One mechanism is what economists call trade diversion: if Chinese or European exporters find the US market less attractive, they may redirect goods to Australia and other open markets.

At the same time, reduced global demand for capital, especially in the US and China, means lower interest rates globally. That stimulates investment elsewhere, including in Australia. In our model, Australian real investment rises under both scenarios, leading to small but sustained gains in GDP and household consumption.

These results suggest that, at least under current policy settings, Australia is unlikely to suffer significant direct effects from the tariff increases.

However, rising investor uncertainty is a risk for both the global and Australian economies, and this is not factored into our modelling. In the space of a single week, the Trump administration has whipsawed global investor confidence through three major tariff announcements.

A temporary reprieve

Tariffs appear to be central to the administration’s economic program. So Trump’s decision to pause his broader tariff agenda may not signal a shift in philosophy: just a tactical retreat.

The updated strategy, high tariffs on China and lower ones elsewhere, might reflect an attempt to refocus on where the administration sees its main strategic concern, while avoiding unnecessary blowback from allies and neutral partners.

Whether this narrower approach proves durable remains to be seen. The sharpest economic pain has been deferred. Whether it returns depends on how the next 90 days play out.