Attempting to revitalize our manufacturing economy and make the United States less dependent on foreign trade, President Trump unveiled his list of global tariffs April 2nd on “Liberation Day.” The scale and scope of the shockingly high tariff levels initially slapped on our trading partners could have significant negative implications for both the U.S. and global economies. The subsequent delay to allow time for negotiations has generated considerable worldwide uncertainty and confusion.
Should a high level of tariffs be broadly implemented, the result would be a combination of slower economic growth mixed with higher inflation (“stagflation”).
Economists calculate that the average effective tariff rate on U.S. imports would rise to a level not seen since the 1930s.
The indecisiveness and turbulence alone have already increased the odds of a recession in the near term, as consumer confidence is plunging, business uncertainty is the highest ever recorded and asset prices have been volatile.
Trump has pledged to remake the global economy. His stated goal is to overturn decades of globalization and reconfigure the world’s trading rules. Trump argues that the economic pain caused by the tariffs will be short term and ultimately justified by a booming U.S. economy. He has also stated that he is open to negotiation and has delayed implementation of many of the tariffs to allow time for that process to unfold. Therefore, it’s likely that his opening salvo is partly designed to quickly bring other countries to the bargaining table to hammer-out mutually beneficial agreements.
Trade wars have no winners.
The situation with China is more unique and challenging. China relies heavily on U.S. consumers to purchase Chinese-made products, with 12% of Chinese exports bound for America. Simultaneously, the U.S. is dependent on China for 13% of its imports, which would pose difficulties in the near-term of finding alternative suppliers. Trump also has political objectives for the tariffs and China is a major supplier of some crucial minerals and commodities. As the world’s largest economies with much at stake for many years, both sides have dug in their heels. Resolving this situation will naturally be more complicated and time-consuming.
With so much uncertainty, market volatility has increased substantially, for both stocks and bonds. Following the Liberation Day announcement of much higher tariffs than anticipated, stocks plunged globally. In the U.S., the S&P 500 declined -10.5% during the following two days. Stocks continued selling off until many of the tariffs were suspended for 90 days on April 9th. Losses from the market peak less than two months earlier amounted to -18.9% before rebounding. The bond market also suffered unusually rapid and significant losses beginning shortly after the tariff announcements. In one week, the yield on the benchmark 10-year Treasury bond rose from less than 4% to 4.5% (yields rise when prices fall).
Our currency has also decreased significantly, which is very unusual to see when Treasury yields jump at the same time. The U.S. Dollar Index, which measures the value of the dollar relative to a basket of foreign currencies, declined -12% from mid-January until now.
Official data shows that a third of U.S. stocks and a quarter of the Treasury market are owned by foreigners. Global investors have been selling U.S. assets and moving the money back abroad, the opposite of the capital flows we have seen for years. American exceptionalism, the idea that the American economy was the envy of the world, has been put in question.
Frameworks for trade agreements with some nations have already been negotiated. More will likely emerge shortly. The longer the process takes, the greater the risk to the economy. Current economic data, however, remains solid.
Consumer spending hasn’t fallen significantly, layoffs haven’t spiked higher, and businesses continue to invest in equipment and supplies. Now that the initial tariff shock has been wearing off, business adjustments are starting to be implemented and plans formulated.
