Last week, I asserted that investors were in a precarious position, because we had to determine whether the president was using tariffs as a negotiating tactic to strike better trade deals or as a permanent and punitive measure to force a reordering of global trade. The former would mean the correction in the stock market was a buying opportunity, while the latter meant the downside was far from over. We got our answer after Wednesday’s market close. No one thought that “Liberation Day” meant liberating us from more than $5.4 trillion of wealth in the two days that followed the announcement of a trade policy intending to eliminate a trade deficit that was $918 billion in 2024. That seems like an absurdly high price to pay, and there will undoubtedly be more pain this week.
Those who were expecting the worst case scenario, which I mistakenly was not, feared a 20% tariff rate across the board on all imports. This is why the initial news that they would be reciprocal with each of our trading partners, as the president had indicated earlier, was met with relief. That didn’t last long when minutes later the actual rates were displayed by the president on poster board. There was nothing reciprocal about them, which is why markets collapsed in the two days that followed. The crude method used to calculate the tariff rate was a function of dividing the trade deficit by the value of imported goods with each country and halving that percentage. These tariff rates have nothing to do with the ones other countries charge us, and they raise the current effective rate from 2.3% to more than 20% with one as high as 54% on Chinese imports.
It appears the goal is to generate enough revenue from tariffs on imports to equate to the overall trade deficit of more than $900 billion, but that money will come out of the pockets of US companies and consumers, which is an even greater price for our economy to pay than the ones investors incurred last week. Worse yet, the rest of the world is not backing down with China imposing a 34% tariff on US imports and placing export curbs on the rare earth minerals we desperately need. Canada has retaliated with tariffs on our autos, and the EU is considering countermeasures that could eliminate the trade surplus of more than $100 billion we have with them in financial and technology services. Furthermore, many of our most important trading partners are now boycotting our exports in disgust with the president’s tactics. This will only worsen the downturn everyone is expecting in economic activity if this policy remains in place. I think the question now is how much market wealth must be lost before it forces the administration to change course. I think we are close.
