U.S. President Donald Trump speaks during a cabinet meeting at the White House in Washington, on April 10.Nathan Howard/Reuters
Euphoria over U.S. President Donald Trump’s global tariff reprieve faded on Thursday as the reality of his escalating trade war with China once again rattled financial markets and stoked fears of a broad economic downturn.
Mr. Trump’s decision to pause steep tariffs on dozens of countries for 90 days had sparked a historic stock market rally on Wednesday. This went into reverse on Thursday after the White House confirmed that its latest tariff increase on most Chinese goods would bring the total tariff rate to 145 per cent, higher than the 125 per cent widely reported the day before.
The S&P 500 fell 3.5 per cent, while the Nasdaq Composite gave up 4.3 per cent. Bond markets sold off, pushing the U.S. 10-year treasury yield back up to 4.4 per cent.
The churn in financial markets reflects broader uncertainty created by Mr. Trump’s push to remake the global trading system and to isolate China, the world’s second-largest economy, which could have major ramifications for global commerce, finance and consumer prices paid by households around the world.
China is now an outlier in facing extremely high U.S. tariffs. But most countries are still being hit with a baseline 10-per-cent tariff, as well as a range of industry-specific levies, forcing companies to rethink their supply chains.
The pause on tariffs does not affect Canada, as the country was not subject to the new U.S. tariffs announced last week. But it is still facing levies on goods that don’t comply with the continental free-trade agreement, as well as sectoral levies on automobiles, steel and aluminum.
On Thursday, Prime Minister Mark Carney indicated that Canada’s retaliatory tariffs on American goods would stay for now despite a warning on Wednesday from U.S. Commerce Secretary Howard Lutnick that the White House may take countermeasures against Canadian goods. “We have been subject to a series of direct tariffs that are still in place,” Mr. Carney told reporters.
He announced that he would be chairing a meeting of the cabinet committee on Canada-U.S. relations and national security on Friday morning.
While Mr. Trump and officials from his administration have boasted that many countries have reached out to negotiate, he suggested on Thursday that if the U.S. is not able to reach deals at the end of the 90 days, the high levies would be on the table again.
His strategy in his administration’s escalating trade war with China is not clear. When he was asked about next steps he said: “Well, we’ll see what happens with China. We would love to be able to work a deal.”
As the world reeled from his tariffs, Trump discovered the limits of power
Even with the pause on what Mr. Trump called “reciprocal” tariffs on many countries, the size of the tariff increase on Chinese goods, combined with China’s importance as a U.S. trading partner, means America’s average tariff rate will remain well above 20 per cent. That’s the highest level since the 1930s and far higher than around 2 per cent when Mr. Trump took office.
Economists warned on Thursday that the global economy remains in a precarious spot. Simon MacAdam and Neil Shearing of Capital Economics estimate that even if most countries are able to negotiate a deal with the Trump administration and keep their tariff at the baseline 10 per cent, global GDP would still be around 0.4 per cent lower in two years’ time than in the pre-tariff scenario.
“If deals aren’t reached, pauses expire, and the US partially reverts to its Liberation Day tariffs while maintaining around 145 per cent tariffs on China, then the hit to global GDP would be closer to 1 per cent,” Mr. MacAdam and Mr. Shearing wrote in a note to clients.
China and the European Union have signaled that, amid uncertainty in the United States, they are looking for partners, including one another. China’s Commerce Ministry said in a statement on Thursday that the country and the EU have discussed strengthening their trade co-operation.
The ministry said that in a video call on Tuesday, China’s Commerce Minister, Wang Wentao, spoke with European trade and economic commissioner Maros Sefcovic about reviving trade talks and launching negotiations on electric-vehicle price commitments. That conversation came before the U.S. ratcheted up levies on China.
“The new U.S. tariff policy is incentivizing our partners to reduce dependence on the US market and diversify,” said Wendy Cutler, vice-president at the Asia Society Policy Institute and former a U.S. trade negotiator.
“China will try hard to woo our partners away from Washington. Europe has its own challenges with China, so any agreement on co-operation going forward will likely be limited and not preclude the EU from taking measures against Chinese imports and investments using its toolbox.”
On Thursday, the European Union said it would pause retaliatory tariffs on some U.S. imports the bloc had announced days earlier.
“We took note of the announcement by President Trump,” European Commissioner Ursula von der Leyen wrote on X.
“We want to give negotiations a chance. While finalising the adoption of the EU countermeasures that saw strong support from our Member States, we will put them on hold for 90 days.”
She said that if negotiations are not satisfactory, the bloc’s countermeasures will kick in.
Mr. Lutnick, the U.S. Commerce Secretary, warned Wednesday that the White House will be watching to see whether Canada removes its countertariffs and noted that the United States hiked tariffs on China after it retaliated.
“If Canada decides to keep their retaliatory move, which I would suggest, having watched how it went with China would be a really, really bad choice,” Mr. Lutnick told reporters.
While Canada got off lightly in Mr. Trump’s latest round of tariffs, it remains at risk if the U.S. economy tips into a downturn.
“As the dust settles on a volatile week, Canada has gone from the second largest target of tariffs imposed to-date to the lowest target,” Royal Bank of Canada economists Claire Fan and Nathan Janzen wrote in a note to clients.
“That will help the prospects for Canadian exporters, but it’s little consolation if the growth in the U.S. economy (still by far the largest destination for Canadian exports) slows significantly.”
With a report from Steven Chase and Reuters
Editor’s note: A previous version of this article incorrectly identified Howard Lutnick as the U.S. Treasury Secretary. He is the U.S. Commerce Secretary.
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