Trumps Liberation Day tariff blitz sets world on edge

What just happened?
In a Rose Garden press conference yesterday, US President Trump unveiled a fresh blitz of tariffs against nearly all major US trading partners of note, though avoiding follow up moves against Canada and Mexico. Baseline expectations going into the event were somewhere between 10 and 15%. Instead, Trump unveiled a baseline tariff of 10% on nearly all US trading partners, and differentiated much larger “reciprocal” tariffs on countries that have run large, persistent trade deficits. By one calculation, the weighted average for these new tariffs based on the mix of imports into the US is some 19%, and the overall weighted tariff levels including the previously announced Trump tariffs is some 29%, according to Rabobank’s Michael Every. These are the highest US tariff numbers since the notorious Smoot-Hawley tariffs of the 1930’s, which had higher nominal levels than these “Liberation Day” tariffs, although the effective impact could be even greater for the latter because of the complexity of modern day supply chains.

Examples of the new reciprocal tariffs:

• China: 34% (this is on top of the 20% already announced, so 54% total now)
• EU: 20%
• Japan: 24%
• South Korea: 25%
• India: 26%
• UK: 10%
• Bangladesh: 37%
• Vietnam: 46%

The market reacted poorly to the Liberation Day tariff announcements, with risk sentiment cratering and US equity market futures heading south in a hurry, about -3% as of early European hours the next day. Companies heavily impacted by the specific structure of the tariffs were down even more heavily. Apple was down some 7% in late trading yesterday as it manufactures so much of its iPhone in China and has moved some production to India, which will now be subjected to a large 26% tariff. Nike was down some 7% and Amazon was down 6%. Elsewhere, the US dollar was sharply weaker as the market figures that this raises the risk of a US recession and as global investors may continue to allocate their portfolios away from US equities on this news. The Japanese yen rose sharply as US treasuries rallied, taking US interest rates sharply lower as the market prices in more easing from the Fed this year and for the heightened recession risks.

Why is Trump doing this?
You can read the White House’s own rationale for imposing these tariffs here.  That text is a rather long run-down of the Trump talking points about other countries taking advantage of the US. But it does get to the heart of the problem for the US – that it no longer produces enough domestically and that its finances are in bad state – both a significant danger for US national economic security.

Another way to position this is as a critical inflection point driven by the Triffin Dilemma. This is a crisis that eventually arises when a national currency – in this case the US dollar – is also used as the primary currency for global reserves and in trade. The problem develops over time as the US, to provide the world with US dollars, must run persistent large trade deficits and budget deficits (the latter to provide reserve assets in the form of US treasuries). Over time, the imbalances build to such a degree that confidence in the stability of the US dollar erodes as the country fears that the US public finances have been destabilized via massive accumulation of debt. This is on top of the “hollowing out” effects of the US economy from its overvalued currency as other countries, especially China, use mercantilist policies to build their economies via an export-driven manufacturing base and suppress their currency’s value.

The Liberation Day tariffs are a way to announce to the world that the US is no longer going to play ball with the current global economic regime, short-circuiting everything without yet providing any answers on what is to replace it. It is something that has been a long time coming and yesterday was a real crystallization moment for the lurch toward a new world order, one that is not yet well defined.

What happens from here?
US Treasury Secretary Scott Bessent tried to put a hopeful spin on things after hours yesterday, saying that the numbers Trump announced were “the high end of the number”, provided no retaliation follows from the targeted countries. So theoretically there is room for a softening of the US stance from here if some kind of “dealmaking” kicks in – for example, some countries offering to change their current policies or offering more investment in the US in exchange for leniency on the US tariffs or even the reduction of their own tariffs against US goods – though in many cases, these countries may not have any significant tariffs against the US, they just don’t import much relative to how much they export. (The “reciprocal” tariffs were calculated based on a simplistic formula of (US imports-US exports)/US imports on target nation and then divided by two. There was a 10% as a baseline, even for countries that don’t run a trade surplus versus the US.)

But there are certainly further negative risks from here – especially if major US trading partners retaliate with their own measures. The most salient risk is the indication that the US is aiming for a dramatic bifurcation of the global economy in singling out China with the large 34% tariffs on top of the 20% tariffs already announced – amounting to an eye-watering 54% total tariff level. Additional secondary tariffs on China are also possible if the US follows through on imposing tariffs for any importers of Venezuelan oil  (additional 25%) and eventually Russian oil as well (threatened but not yet imposed). There was an additional announcement yesterday from the White House that it would seek to tariff “de minimis” packages from China that are valued at under USD 800 by 30% or USD 25 per item on May 2, to rise to USD 50 per item at minimum on June 2. Additional rules require the registration of each package to ensure that payment is received, etc. This is clearly aimed at completely shutting down the import of small retail items from the likes of Chinese online retailers Shein and Temu.  From here, China’s response on all of the above bears watching.

What will markets do from here?
There are still so many uncertainties, the chief being how US trading partners respond to this blitz of new tariffs.

• Equities: Short term, if we settle into dealmaking mode rather than retaliation mode, we could see some stabilization in the equity market price action. But over the medium term we are more likely to continue to see US equity market underperformance and even an ugly bear market should the US lurch into a recession, one that is now a much greater risk if these tariffs stick . Other countries risk bear markets as well, if less profoundly so, dependent on the scale of trade war escalation.
• US Treasuries: This raises the risk of a US recession, so US yields could be set to drop as the Fed will cut more than previously expected – possibly 125 basis points this year if US unemployment rates rise in coming months. The market is currently only priced for just over 80 basis points of easing for the 2025 calendar year. Longer term US yields are a question mark – a US recession should mean yields are set to fall much further, but if the Republicans in the US follow through with big tax cuts or other measures that worsen already very large US budget deficits, the ability for yields to fall further may be limited.
• Currencies: This is very negative for the US dollar as these Liberation Day tariffs will reduce the appeal of US assets as US deficits to the rest of the world fall and less money is recycled into US equities (just after US “exceptionalism” in global equity weightings and valuations was at a massive historic extreme). This is on top of the US recession risks. Japanese yen could continue to rally as Japanese investors repatriate assets amidst weak global markets and as falling global yields increase the yen’s relative appeal. Japan’s leadership may see the yen as a negotiating tool in attempting to ease the terms of the US tariffs (seeking a stronger yen). The EUR could be set to break higher toward 1.1500 and beyond versus the US dollar as Germany is set to open for massive fiscal expansion to fund infrastructure and defense spending. There is also increasing talk of more EU joint debt issuance which encourages euro strength.
• Gold: continued upside pressure in general as markets see gold as a safe haven asset, although this a quite mature trade at this point, and if market liquidity turns poor, volatility is a risk.
• Commodities: growth dependent commodities like industrial metals and energy could come under fire in the short term, but the commodity complex is likely to outperform equities in the medium to long term.