A screen displays financial news as traders work on the floor at the New York Stock Exchange in New York, on April 3.Seth Wenig/The Associated Press
Pay no attention to the man in the Rose Garden.
U.S. President Donald Trump’s tariff sweepstakes succeeded in holding the world’s rapt attention, everyone squinting at their screens to see what their magic number was on the big board – Vietnam, come on down!
Investors, too, were consumed by Wednesday’s wild escalation of the global trade war, which would, if fully implemented, ensure the spread of economic hardship around the world.
But financial markets don’t believe Mr. Trump’s new tariffs will be here to stay. Rest assured, it would have been a far worse trading day if they did.
The S&P 500 index of American blue-chips ended Thursday down by 4.8 per cent. About US$2.5-trillion was wiped out from U.S. exchanges, according to Dow Jones Market data. The losses radiated out to Canadian and global stocks, as well as a range of commodities from oil to gold, and the U.S. dollar.
It was the worst single-session wipeout since the early days of the COVID-19 pandemic.
Not a good day on Wall Street, by any measure. But nothing on the scale of economic carnage Mr. Trump’s plan would unleash.
Astonishing tariff rates were announced on Wednesday, including 34 per cent on goods from China. That’s on top of previously announced levies of 20 per cent, taking China’s base rate to 54 per cent, before factoring in existing tariffs imposed by previous administrations.
Enacting all of Mr. Trump’s new duties would take the average U.S. tariff rate up to 29 per cent, Evercore ISI estimated. Last year, it was 2.5 per cent.
Now consider that the U.S. imported US$3.3-trillion of goods last year, and you start to get the sense of what’s at stake.
Economists are mostly flying blind these days. Bank of America estimated that the hit to U.S. corporate earnings could range from 5 per cent to 35 per cent. Mr. Trump has made the future unforecastable.
But a global recession this year would be a sure thing if those gigantic tariffs are put in place indefinitely.
It takes a lot to tip the entire world economy into a serious downturn. Only twice in the past 20 years have we seen shocks big enough to do the trick: the pandemic and the global financial crisis of 2008-09.
The worst trading days in those episodes saw U.S. indexes fall by 10 to 12 per cent.
Within the U.S., Mr. Trump seems to be doing his best to make stagflation – the dreaded combination of inflation and recession – a reality. On both counts, the economic indicators are turning in the wrong direction, fast.
The President’s hope is that a rewriting of the rules of global trade will lead to a domestic manufacturing renaissance. The crucial question of the moment: Is Mr. Trump really willing to torpedo the American economy to do so? Or is this more of his relentless brinkmanship?
Wednesday’s stunt reeks of the latter.
Consider how the new tariffs were calculated. They aren’t based on tariffs other countries have imposed on the U.S. Instead, they are derived from trade deficits, punishing countries for exporting more to the U.S. than they import.
Why the White House’s math on country tariffs doesn’t add up
China’s trade deficit of US$291.9-billion, for example, is 67 per cent of the goods it exports to the U.S. Divide that by two, and you get a 34-per-cent tariff.
The math is idiotic, and it somehow leads to tariffs on remote islands inhabited only by penguins. Meanwhile, Lesotho, one of the poorest countries in the world, is facing a tariff of 50 per cent.
Does this seem like the kind of carefully crafted plan worth sacrificing the U.S. economy for?
“The magnitude of damage [these tariffs] could cause to the U.S. economy makes one’s rational mind regard the possibility of them sticking as low,” Bhanu Baweja, chief strategist at UBS Investment Bank, wrote in a note to clients.
Eventually, Mr. Trump will have to dial back his trade aggression in order to stabilize the U.S. economy.
“Time is not on the President’s side, with every day that passes revealing more wounds in the U.S. economy and rising inflation fears,” wrote CIBC deputy chief economist Benjamin Tal.
Mr. Trump’s willingness to gamble with the economy thus far clearly has financial markets on edge. U.S. economic vulnerability is arguably the force keeping sheer panic at bay.