Financial markets flail in the face of America’s tariffs

On a grey afternoon outside the White House, President Donald Trump promised that his tariff plan would “Make America Wealthy Again”. The world’s financial markets took a different view. Investors were shocked by the height and breadth of the new tariffs. According to Evercore ISI, a research firm, the new levies will raise America’s effective tariff rate from about 2% to 24%, the highest for over a century. It was, as Mr Trump said, a “historic” day.

Mr Trump dropped his bombshell after the American stockmarket had closed. But the price of futures contracts on the S&P 500 index registered the shock, falling by more than 3%. Similar bets on the tech-heavy NASDAQ 100 index dropped by more than 4%. These movements suggest American stocks will tumble when the market opens on April 3rd. Owing to Mr Trump’s “declaration of economic independence”, Americans will be liberated from a noticeable percentage of their equity wealth.

The pain will be concentrated on American companies that depend on overseas manufacturing. Nike, an apparel firm, employs more than 450,000 workers across 130 factories in Vietnam, which now faces a 46% tariff. Its shares slumped by 7% in after-hours trading. Mr Trump’s plan is, of course, meant to revive manufacturing employment in America at foreign countries’ expense. But Nike’s pain is unlikely to be America’s gain. Low-margin and labour-intensive apparel manufacturing finds it hard to thrive in high-wage economies. Nor is it one of the strategic industries America’s trade warriors are desperate to bring back. Lululemon, another similarly exposed clothes manufacturer, dropped by 11% in late trading.

A handful of American stocks fared better. GM and Ford, two of America’s large carmakers, registered gains of 1% and 2%, respectively. Investors were relieved that the new tariffs will not apply to vehicles built in Canada and Mexico, the site of much American auto production, so long as they fall under the protective umbrella of the USMCA, a trade agreement Mr Trump signed with America’s northern and southern neighbours during his first term.

Outside America, the tariffs hit Asia harder than Europe. The Euro Stoxx 50 index dropped by only 2% or so in early trading and the euro gained on the dollar. Europeans had worried that Mr Trump would slap heavy tariffs on their exports in retaliation for their high value-added taxes, which he sees, wrongly, as an impediment to trade. The 20% rate he proposed was roughly in line with dismal expectations.

In Asia the tariffs were worse than even pessimists had feared. The stockmarket in Vietnam, which sells almost 30% of its exports to America, fell by over 5%. Cambodia, which faces an even steeper levy of 49%, might have suffered a similar fate, except its main stockmarket board features only nine companies. Japan’s Topix index fell by more than 3%, with Toyota and Panasonic registering even steeper falls. The damage to Japan’s big exporters might have been expected to weaken the yen. But Japan’s currency is seen as a safe haven in times of turmoil, and Mr Trump’s announcement has caused plenty of that. The yen strengthened against the dollar by over 2%.

What about China? The new 34% tariff follows an earlier 20% duty related to China’s role in the production of fentanyl, a synthetic opioid. And both hikes will presumably stand on top of the tariffs that predate Mr Trump’s return to power, including penalties imposed during his first term to punish China for stealing intellectual property. Mr Trump has also said that he will soon remove a long-standing “de minimis” provision that allowed packages worth less than $800 to escape duties on the grounds that they raise too little revenue to be worth the bother. Its disappearance will raise logistical costs and confusion along America’s supply chain. All told, the effective tariff rate on Chinese goods could now reach 65%, according to Citigroup, a bank.

Given this upheaval, the reaction in China’s markets was eerily calm. The CSI 300 index of onshore shares fell by less than 1%. Consumer electronics firms suffered, but property developers gained. The offshore yuan, traded in Hong Kong, fell by almost 1% against the dollar immediately after Mr Trump’s announcement, but then recovered ground. In the onshore market, the currency takes its cues from the central bank, which sets a daily benchmark rate. The authorities have kept that rate firm since Mr Trump’s return to power. In the morning after his speech, they allowed it to weaken by only 0.1% against the dollar. As the months pass, China may still need to cheapen the currency to help its exporters weather the tariffs. But it does not want to do anything to unnerve investors in this gut-wrenching week.

The wrench extended to commodities markets. Although Mr Trump has exempted some metals and energy products from his latest tariffs, these goods are not insulated from the broader impact of his actions on the world economy. Basic materials, which are sensitive to international trade, dipped in price. Contracts for West Texas Intermediate oil dropped by more than 2%, to just below $70 per barrel. Mr Trump’s new tariffs will not apply to copper, which is being handled under a separate protectionist initiative; still, the metal still fell by more than 2%, since it is widely used in construction, electronics, transport and other industries. Anything that hurts the global economy will hurt its price.

The impact on the world economy will also depend on how America’s Federal Reserve reacts. Tariffs could raise inflation above 4% temporarily, according to Capital Economics, a research firm. That might delay any further cuts in interest rates. But the trade shock could also force America’s economy into a sharp slowdown, obliging the Fed to come to the rescue once again. The bond market seems more worried about growth than inflation: yields on American Treasuries fell.

Although Mr Trump’s team had said tariff announcements would at least bring certainty, their full ramifications for the global economy are desperately unclear. Economists have to make guesses about the future based on data drawn from the past. But if they have to look back over 100 years for precedents, they do not have much material with which to work. “You can throw most forecasts out the door,” noted Olu Sonola of Fitch Ratings. “Many countries will likely end up in a recession.” Despite their callous arbitrariness, Mr Trump insists on calling his new tariffs “reciprocal”. “They do it to us, and we do it to them,” he explained. By sowing chaos, inviting recessions and rattling the financial markets, the new tariffs are doing it to everybody. ■