Photo credit: www.cnbc.com
Traders operate on the floor of the New York Stock Exchange in New York City on April 4, 2025.
With President Donald Trump’s administration’s previous tariffs thought to be a manageable concern for the markets and the economy, recent developments have shifted that outlook dramatically.
What transpired was far more alarming than anticipated, surpassing even worst-case theories that suggested the U.S. might impose reciprocal tariffs against its trading partners equivalent to what they enforce on American goods.
Ideally, such a scenario would have triggered negotiations aiming for mutual agreements that would facilitate a new direction for global trade. The focus would have been on resourcing American jobs while reducing reliance on inexpensive foreign imports and excessive government expenditure.
Concerns about this path primarily revolved around a potential spark in inflation and a minor deceleration in economic growth.
However, the reality has unfolded into chaos across economic, market, and geopolitical landscapes.
This tumult began after Trump’s news conference in the Rose Garden following the market’s closing, during which he expressed his commitment to “pry open foreign markets and break down foreign trade barriers.”
The strategy detailed was to impose 10% tariffs on all U.S. trading partners starting Saturday, alongside personalized rates for 60 additional countries to take effect a week later. This rapid shift was poised to escalate the effective U.S. tariff rate from an average of 2.5% to over 20% in a flash.
For context, this adjustment could mark the highest tariffs levels seen since 1910, surpassing even the infamous Smoot-Hawley tariffs from 1930, which many economists argue exacerbated the Great Depression. This move underscores Trump’s robust anti-globalist stance and maximalist approach to protectionism, which has triggered heightened apprehension on Wall Street.
Immediate Responses
If the president was testing global resolve, the initial outcomes were definite. In retaliation, China implemented 34% tariffs on American goods, while European Union leaders are contemplating their responses. Additionally, the tension with Canada and Mexico will necessitate careful navigation during upcoming negotiations regarding the United States-Mexico-Canada Agreement.
Market reactions were swift and brutal, with stocks plummeting in a dramatic two-day sell-off. This downturn even pushed the Nasdaq Composite, a benchmark for many influential tech companies, into bear market territory.
Economists were astounded by the simplistic calculations that underpinned the newly announced tariffs. Reports indicated that the administration devised these tariffs by dividing the trade deficit with individual nations by the total value of U.S. exports, a method failing to accurately reflect actual trade barriers.
The Center for Strategic and International Studies observed that the formula disproportionately affects high-deficit trading partners, not necessarily targeting those with the most restrictive trade practices. “In short, the formula provides rough justice at best, blunt force at worst,” concluded their analysis.
Market Reactions
Investors reacted by offloading assets across the board, opting for bonds as a safer alternative amid the turmoil. This drastic uncertainty left many questioning the viability of future earnings predictions.
In a theoretical best-case scenario, Trump might anticipate that other nations engage in tariff reductions, leading to market openings for U.S. goods. However, this would necessitate significant restructuring of an economy where consumer spending constituted 68% of activity in 2024, amid a staggering trade deficit of $903 billion.
Despite the chaos, there were some nascent discussions for trade agreements. Trump boasted of a “very productive call” with Vietnamese leaders, suggesting a potential reduction of tariffs to zero if a deal is reached with the U.S. Additionally, he hinted at renewed interest in negotiating with China regarding TikTok to help ease escalating tensions.
“ONLY THE WEAK WILL FAIL!” Trump declared boldly on social media.
While the market did not entirely collapse, it faced a staggering loss of approximately $6 trillion, with the Dow Jones Industrial Average experiencing its most rapid decline, over 3,900 points in just two days.
Fed Chairman Jerome Powell disappointed investors hoping for relief from the Federal Reserve, stating that the more stringent tariffs would likely harm growth and increase inflation. He affirmed the central bank’s intention to maintain current interest rates, dampening hopes of support amidst market turmoil.
Jeremy Siegel, a finance professor at the Wharton School, characterized these tariffs as “the biggest policy mistake in 95 years,” labeling it a “self-inflicted wound” and a misstep that should have been avoided.
Nevertheless, analysts from Stock Traders Almanac remain cautiously optimistic, suggesting that such market corrections typically evolve into full-fledged bear markets only a third of the time.
This outlook, however, is contingent on a president exhibiting a commitment to his current stance, amidst declarations that his “policies will never change.” Such steadfastness, while appealing to Trump’s base, has proven a source of significant concern for the market.
Source
www.cnbc.com