The Trump administration promised a reciprocal tariff policy on 2 April 2025, called the ‘Liberation Day’. The bad news is that the tariff rates were higher than anticipated. The stock market crashed immediately, with the S&P 500 index dropping almost 5% on the day:
Tariffs Details
Trump imposed a minimum tariff of 10% for global imports, with some countries having a much higher rate. Here are some of them:
The numbers are relatively high, with many criticizing the Trump administration for the unconventional way they calculated the amount of reciprocal tariffs they believed to be fair. Regardless, these tariffs are very high and punishing, including to the US’s major trading partners, such as China and EU countries. Canada and Mexico are exempted for now.
What drove Trump to impose these high tariffs globally?
Potential Intentions
Trump has been a major proponent of tariff policies. He implemented some tariffs several years ago during his first term. However, the scale of the tariffs we see this time is significantly higher than that of his first-term policy.
Raising Revenue And Reducing Trade Deficit
The most obvious reason is that Trump wants the US to earn more revenue and balance its trade deficit. He has been promising to cut taxes in the US, and one way to offset the loss of revenue from taxes is through these tariff policies.
The US has also been experiencing a trade deficit for decades, and Trump has repeatedly mentioned this ‘unfairness’. The reciprocal tariff is Trump’s way of enforcing a more balanced trade relationship with its trading partners.
All the above seem logical. However, Trump’s tariff rates are arguably ‘too high’ for global trade to work well. So, are there other intentions that may drive these high tariffs?
Negotiating Tool to Lower Tariffs From Other Countries
Trump is famous for his book ‘The Art of the Deal’ and is perceived as a master in business negotiation. Now that he is leading the US, many expect that he will implement his expertise to gain leverage over other nations.
Trump realizes that the US has substantial leverage with its trading partners because of the sheer size of its economy, and tariffs are one way to flex its muscles.
Many believe that Trump imposed a high tariff to force other countries to negotiate with the US to lower their tariffs on US exports to their countries.
So far, we have seen mixed responses from different countries. China has retaliated with a 34% tariff, and the EU is planning to retaliate soon. Countries like Israel, Australia, Vietnam, and Thailand seem willing to negotiate immediately.
While it is too soon to determine the outcome, successful negotiations may result in reduced tariffs for both countries, fostering stronger and fairer economic ties between the US and its trading partners. On the flipside, an escalating reciprocal tariff may cause a full-blown trade war, which could devastate the global economy.
Lowering Treasury Bond Yield
Trillions of US debt will need refinancing this year, and it will become costly at the current interest rate. Trump has repeatedly hinted to the Fed that he wants interest rates to be lower.
However, with sticky inflation and a strong economy, the Fed has been reluctant to lower interest rates. Before taking action, they wait for further data to see where the inflation and economy may go.
Many believe Trump intentionally forces the Fed to lower interest rates by cooling the economy through the tariff policies. His high tariffs may cause the economy to slow down, thus causing inflation to decline, giving the Fed everything it needs to lower interest rates. So far, it seems to be working with the 10-year bond yield collapsing:
Economic Impact
The minimum tariff of 10% and the higher tariff rates for some countries concern the global economy. The US is a major trading partner for many countries. These tariffs will significantly increase the cost of exporting to the US, resulting in lower export and import activity. Consequently, this could lead to lower economic output and a potential decline in GDP for both the US and those countries. The impact will worsen if countries retaliate further, causing trade wars.
The market has reacted, with the S&P 500 collapsing by almost 5% in a single day. Regardless of whether the tariff directly affected the company, nearly all stocks were beaten down.
Some companies, such as materials, industrials, and consumer discretionary, may be directly affected by the tariff, while other sectors, such as semiconductor, technology, and communication, may be less affected.
With the broad selloff in the market, it seems that the market is trying to price in the possible broad economic weakness resulting from these tariffs. We will continue to monitor how these tariffs will play out in the coming weeks or months. The effect of these tariffs may depend on whether countries successfully negotiate to reduce them.
What Can We Do?
Due to the uncertainties surrounding these reciprocal tariff policies, we can expect some short-term market volatility. We will continue monitoring the progress of these tariff escalations in the coming months.
As long-term investors, we must look past the short-term market volatility and focus on the long term. Due to the broader negative sentiment in the market, we may be presented with an opportunity to acquire fundamentally strong businesses at lower prices.
Stock prices can fluctuate in the short term for various reasons and may not reflect the actual value of the underlying business. However, the stock price will ultimately align with the company’s performance over the long term. This presents an opportunity for investors to purchase undervalued stocks at a discount.
What do you think of Trump’s tariffs? Are you interested in adding more positions to the US market?
If you are interested in investing in the US stock market, you may find stock brokers with access to the US markets here.
