Experts: Implementation Challenges, Supply Chain Paralysis Result From Tariff Changes

"I see this very much as an opening offer from the Trump administration," Shaw said at a Brookings Institution event on the tariffs the day after the seismic announcement. "I think these tariff rates will shift over time."

Most goods will face an additional 10% tariff, but, starting April 9, the EU and 56 countries' exports will face higher tariffs.

Shaw said there are two different conversations happening -- between governments, and at companies. For foreign governments, they are seeking to talk to the administration, trying to figure out what policies they could change, or what their companies' investments could be promised to get rates reduced.

Because countries might be successful at getting rates reduced, companies can't crunch the numbers to see if they should shift sourcing to countries with lower rates, or if they should expand U.S. production. She said that companies are having "a bit of paralysis in terms of investment and moving supply chains."

For instance, she said, a USMCA carve-out for goods outside the auto sector has become very valuable, when 25% tariffs are levied against non-USMCA-qualifying goods. (The order April 2 said Mexican and Canadian goods would face 12% tariffs if the current 25% tariffs are terminated, and a USMCA carve-out would continue).

Shaw said companies that never had to worry about USMCA compliance because their exports faced zero most-favored nation duties are moving to document compliance. But if they learn that meeting rules of origin would require changes to their supply chains, they're asking themselves: "Well, how long are those fentanyl tariffs going to be in place?"

"I think it’s going to be weeks and months before we have more clarity," she said.

Peterson Institute for International Economics Senior Fellow Mary Lovely, an economist and international trade expert, said that today, "the hardest job in America other than being a trade lawyer must be being a chief supply chain officer."

She said not only do they need to worry about the durability of the higher tariffs, they also have to worry about whether India's offers to liberalize its business environment for the U.S. will be followed by backsliding -- making it more expensive to produce in India as a business, and perhaps, leading to a snapback of punitive tariffs from the U.S.

"This paralysis … is going to have a cost," she said.

The panelists also talked about the government's capacity -- or lack thereof -- to handle some of the new trade compliance parameters.

For instance, the Section 232 autos tariff allows a deduction for the value of U.S. content in both exported cars and parts. This order allows a similar deduction, as long as the U.S. content is equal or greater to 20% of the total value of the imported good.

Shaw said the push to identify components, and not just the last location of substantial transformation, is something that's being used "in a way that we've never seen before."

Former Deputy U.S. Trade Representative Sarah Bianchi, who served during President Joe Biden's administration, said the last administration did push that approach for electric vehicle battery credits, when it excluded many components from foreign countries of concern.

But, she acknowledged, "I definitely think there are some implementation challenges that are very real."

Implementing the end of de minimis for Chinese goods -- which is scheduled for May 2 -- is top of the list, she said.

"Anyone who thinks all of this is going to be in place by next Wednesday … it does take longer," Bianchi said.

Lovely said there's even a problem with having enough people with enough space to negotiate with all the countries asking for relief.

"Country leaders and trade ministers are here to beg and plead and make deals … what is the administrative capacity? How is this going to work? How exactly is that going to happen?"

She said the White House declared a change will be made, but can it be done? "We already saw what happened with de minimis -- has the post office solved these problems? I don’t know."

Shaw said that governments are calling the administration to try to figure out what policies they can change to get tariff rates lowered.

Lovely said that's "quite troublesome," because she fears that the demands from the Trump administration may include contracts for inside players, like Elon Musk.

She said we're going to see "how arbitrary trade policy opens up avenues for corruption."

Lovely also said we shouldn't be calling the 10%, 20%, 24% and 48% rates "reciprocal."

"There is nothing reciprocal about this," she said. "It’s a complete misnomer."

Those tariff rates were supposed to be based on the cost of lost exports due to the combination of non-tariff barriers and tariff rates, but, the Office of the U.S. Trade Representative explained, computing the effect of tariff, regulatory, and other policies in each country is so complex that instead, they decided to compute the tariff level that would drive the goods trade deficit between that country and the U.S. to zero. (The fact that some EU countries already have a trade surplus in goods with the U.S. is not addressed.)

That formula took the trade deficit in goods, divided it by total imports from that country, and said that 25% of the cost of the tariff would be passed along as a higher consumer price, and that for every dollar of increased price, the demand would fall by 4%. The formula cited economic studies, but those studies did not find that 25% of the cost was passed on -- they found that $0.89 of $1 in tariff costs was passed on.

Then they cut that number in half. The USTR said their trade deficit calculation found that, trade weighted for what we import, the average tariff to bring deficits to zero would need to be 45%.

Lovely said the formula makes no sense. "They took the trade deficit and divided it by the exports, that wouldn’t be my algorithm," she said dryly.

She also said it won't work to end the goods trade deficit. "It could trigger a recession, in which case we would see the trade deficit will close, because our consumption will fall."

"The president has never said he wants everything made in America," Shaw added. "It’s about expanding our trading relationship with like-minded allies who treat us fairly on these other products."

Lovely said this undermines Trump's original drive to reduce reliance on China, since countries in Southeast Asia, where importers shifted for apparel, shoes and electronics, face some of the highest rates. She said moving to reduce reliance on China was a good thing, "but we just totally whacked it on Wednesday."

Shaw and Bianchi, however, defended the philosophy behind the move, if not the particulars. Both said that the decline of Rust Belt manufacturing was a social disaster, and Shaw said it's also a national security weakness.

"He’s taking a very, very, very big swing," Shaw said, but now he and his team have "got to land the plane."