"Liberation Day" sparks global market chaos
Potential winners and losers (mainly losers) from Trump's tariff sledgehammer
In this update:
Trump's simplistic tariff sledgehammer formula.
What it means for the US.
What is means for the rest of the world.
Market reactions: a summary of the turmoil.
Have pity on Gary Friedman, the CEO of RH (a.k.a. Restoration Hardware), a US retailer of furniture produced in Asia.
During the company's live quarterly earnings call, and having reported disappointing quarterly results, the size and scale of US President Trump's tariff announcement hit the newswires while Friedman was mid-sentence (bold added).
"I mean, I guess, the stock went down based on some of the numbers we reported, and then it got killed because of a - oh, really? Oh, shit, okay."
RH's share price fell 40% on Thursday.
Yes, we've just had Trump's much-touted "Liberation Day", and the size of the...er... "liberation" has been far, far larger than anyone seemed to expect.
Markets are in turmoil as the news is digested. Most things are down sharply, especially US stocks and the dollar. Below I'll cover the market impacts in more detail.
Trump has gone full trade-protectionist, and levied huge US import tariffs on almost all of the world. To be clear, the tariffs only relate to trade in goods, and not services (yet).
High import tariffs, and their effects, are something that I've witnessed personally in the 16+ years that I've lived in Argentina, which has a long history of trade protectionism.
During that time, I've bought almost all clothes, phones, laptops and toys on family trips back to England. Consumer product prices in the high-income UK were (and still are) much lower than in low-income Argentina. That because the UK has pretty open trade with Asia and elsewhere.
Meanwhile, in opposite-thinking Argentina, as well as high prices we've had lack of choice, along with low quality local substitutes (e.g. fake Lego copies).
And, by the way, what kind of evil does it take for a government to levy high taxes on kids toys? That's just mean. Especially when it comes to low income families. Tariffs hurt the poor the most.
Fortunately, "Liberal libertarian" President Javier Milei is progressively rolling back Argentina's import tariffs. This is dramatically bringing down the prices of things like new cars, clothing and electronic goods, and increasing consumer choice.
Meanwhile, the US is careening off in the other direction. Trade protectionism, and associated attempts at import substitution, are straight out of the populist Peronist economic playbook.
Such policies have always failed here (and everywhere else they've been tried). Can they really work over there?
Keep It Simple, Stupid
There's often beauty in simplicity, in the workplace or elsewhere. And beauty deserves a K.I.S.S.
Or, to expand the acronym, "Keep It Simple, Stupid".
But there are limits.
The formula used to calculate the new US tariff rates has stunned and shocked pretty much everyone that's paying attention.
It is certainly simple. Others have called it simplistic. Yet others have used stronger adjectives...
It works thus... in most cases the US import tariff rate applied to a country will be the higher of:
(a) 10% (even if the US has a trade surplus in goods with a country), or
(b) the value of the US trade deficit with a country, divided by the value of imports from that country, divided in half
For example, if the US imports $100 billion from Country X and exports $50 billion then the trade deficit is $50 billion. Dividing that into the import value gives 50%. Thus the blanket import tariff rate will be 25% for that country.
Simple. Beautiful. If not grounded in any kind of economic logic, or desire to reward friends and punish foes.
The only exception to (a) or (b) appears to relate to the 27 countries in the European Union. They will all get the same 20% tariff. What's more, formula (b) would actually have resulted in a higher tariff rate than the 20% announced.
That's favouritism! Trump clearly loves the EU after all. Although I very much doubt that EU leaders see it that way.
Also, all cars imported into the US are subject to a 25% tariff, irrespective of the country of origin (although excluding the value of any parts that originated in the US). And certain things are exempt completely from tariffs, or partially exempt. As far as I understand, those include pharmaceuticals, oil, natural gas, and precious metals such as gold, along with various other things.
The tariff formula (sledgehammer?) that's being used has thrown out some interesting results.
As mentioned, the EU will get slapped with 20% tariffs. But the UK, as a delayed benefit of Brexit, will only suffer a 10% tariff.
However, the US actually has a goods trade surplus with the UK. So should the UK now impose a blanket 10% tariff on US goods, using the "logic" of the US formula?
China gets 34%, to be added to a pre-existing 25%. In anticipation of extra tariffs on China, many US businesses started moving product sourcing to other countries that were deemed less at risk, such as Vietnam, Bangladesh, or India. But those countries just got slapped with tariffs of 46%, 37% and 26% respectively. So plans may have to be re-thought.
Perhaps certain countries in the lowest 10% bracket will benefit, on a relative basis, with more companies setting up production there for export to the US. These include the UK, Brazil, Singapore and Argentina.
(Most of the rest in the 10% bracket are very poor and/or unstable countries in Africa, which are unlikely to be attractive manufacturing locations. This group also includes Afghanistan. Because, you know, everyone loves the Taliban.)
Switzerland got hit with a 31% tariff. Which presumably means American buyers of luxury Swiss watches will be paying a lot more in future. (And I'm guessing that most of Switzerland's US trade surplus that lead to this relates to exports of pharmaceuticals and perhaps gold bars. Drugs and bullion are exempt from tariffs, but still included in the country-level tariff calculation.)
Sticking with luxuries, American buyers of diamond jewellery get hit too, after high tariffs were imposed on places such as Lesotho and Botswana, where a lot of diamonds are mined. Bad luck if you're about to get engaged. Even small African countries are a major threat to American economic hegemony, apparently.
Which highlights an interesting point.
This tariff strategy, in theory, is about import substitution. Namely, making more stuff inside the US and importing less from overseas. But even the greatest business person in the world will not be able to mine diamonds in a country that has none in the ground.
It's a similar situation for other products that the US can't produce, or that it makes no sense to attempt. Bananas and coffee are two examples. But both will now be more expensive for US consumers.
And does it really make sense to "re-shore" low value-added textiles industries from places like Bangladesh? Is it the American dream to have such low-end jobs again?
The answer is almost certainly not. Which means Americans will just end up paying more for clothes, and other low-end, low-tech imported goods.
Overall, who will the winners and losers be in all of this? Well, there's a lot of noise and detail to work out still. And the goalposts are moving, since there may be retaliation, and then escalation.
But what follows are some initial thoughts on how this could affect firstly the US, and then the rest of the world. At the end is a summary of what has happened in the markets, across many assets.
Inside the US
Tariffs are a tax on consumers, and thus Trump just hiked American taxes. Some have described this as a back-door Federal sales tax. This is a regressive tax that hits the poorest the hardest.
Assuming static levels of imports, investment bank JP Morgan estimates that the tax raised would be $400 billion a year. That implies an additional average tax burden of $1,150 per year for each American man, woman and child. Ouch.
In reality, the additional tax revenue will be a bit less, since presumably imports will fall. That's because prices will be higher, consumer budgets will be stretched, and people will buy fewer things.
Whatever the final amounts, the new tariff tax revenue will take a chunk out of the current US fiscal deficit. However, many believe that Trump plans to cut corporate and/or personal income taxes. So the net benefit may be fleeting.
Tariff rates won't increase retail prices by the same percentages. That's because tariffs are levied in the import prices of goods, which are later marked up to cover the costs of distribution and retailing, with some kind of profit margin at the end. Also, exporters to the US may trim prices a little to prop up volumes. But most of the absolute dollar tariff amounts, per unit, are still likely to show up in retail prices.
This is inflationary. I've seen estimates that it could increase US CPI by 1-1.5% in the first year.
Due to higher prices for imported goods, local producers will have room to jack up their own prices and remain competitive in the market. This would also be inflationary.
To the extent that production shifts to the US, production costs are likely to be higher in many cases than where those products are currently made. This will also be inflationary.
The US consumer has an over-abundance of choice, so product shortages are unlikely to be felt for many years. However, the ratio of quality to price is likely to deteriorate over time, to some degree.
Tariffs will be levied according to country of origin, which often means percentage allocations of content according to global supply chains. Also, some goods may have exempt content that's originally sourced from the US (such as car parts in vehicles assembled in Mexico). Determining the correct tariff rates for each product could be complex. This might mean the need for a huge new workforce in US customs to monitor goods. It could also lead to bureaucratic delays at the border for goods shipments.
There could be a new crime wave in the import business. The obvious example is an increase in smuggling, to avoid tariffs. Perhaps less obvious to many is the potential for corruption in the gatekeepers at ports, and in customs offices, who might approve lower tariff rates in return for kickbacks from importers. Both smuggling and corruption at customs were a big deal in Argentina before Milei came to power.
Importers are likely to start scouring the world to find products from countries in the lowest 10% tariff band. This would offset the goal of trying to reduce the US's trade deficit.
Reciprocal tariffs from other countries could damage US exports, also offsetting Trump's goal to reduce the trade deficit.
Even if companies start producing more in the US, it can't happen overnight. Factories take years to design, get permission, and construct. In the meantime, goods prices will simply be higher.
Assuming success with re-shoring, this will require a lot of labour. The US employment market is already quite tight, and people need training in new roles (since most manufacturing requires skills). This may cause wage inflation, which is also inflationary for prices in general.
On the other hand, assuming lower volumes of imported goods sold, there will be job losses in the distribution chains that deliver those goods to end consumers. Whether these can be replaced with new jobs in the domestic manufacturing and supply chain is a moot point.
Even manufacturers based in the US could see major disruption to their global supply chains, such as having to source from lower tariff countries to keep costs down.
US stocks fell hard (see more details below). There a risk that leveraged investors, such as hedge funds and many retail investors, start getting big margin calls from their brokers. If they can't stump up the cash then they become forced sellers. This sort of situation has the potential to create a self-reinforcing market crash.
Trillions of dollars now sit in index funds. If investors start pulling out then fund managers have to sell some of all the stocks in the index. That brings prices down across the board, even for companies unaffected by the tariffs or their consequences. This also has the potential to contribute to a self-reinforcing crash.
(Back in January I wrote "Make America Cheap Again", which talked about how expensive the S&P 500 index is, and how the high valuations aren't justified by past performance of the underlying companies, when taken in aggregate at the index level. Anyway, Trump's tariff policies are currently doing a good job of fulfilling the sentiment in the title. If it carries on like this, there may well be some great bargains on offer in the not too distant future.)
Now let's turn to possible impact on the rest of the world.
Outside the US
US import tariffs are obviously bad for exporters to the US. But, as the US retreats from global trade, countries representing the other 80% of the world economy may take steps to increase trade between themselves. Just recently, Japan, China and South Korea (not usually the best of friends) announced that they are re-opening free trade talks (see here for more).
Governments must be mulling how to respond to the US tariffs. There may be retaliation, which would hurt US exporters. But then there could be escalation, with the US imposing even higher tariffs.
So far this trade tussle is confined to goods. The US is a big exporter of services, so places such as the EU may decide to go after that (e.g. the big tech companies). However, the US has the trump card, which is its dollar privilege. Specifically, threatening to restrict foreign bank access to, or lock them out completely from, the dollar clearing system in New York, which pretty much all international banks rely on heavily.
If fewer goods are sold into the US then there will be a glut of products in world markets. This could lead to price discounts as producers seek to shift stock.
This would be deflationary, and could lead to lower central bank policy interest rates in many countries than would otherwise be the case. That would stimulate those economies, also potentially their stock and bond markets, and house prices.
Individually, or in organised campaigns, there is potential for boycotts of American things in other countries. That could include not just goods made in America, but also anything with an American brand (including also services), even if produced outside the US.
I'm sure there's a lot more that I'll think of in time. But those are the main effects that I came up with today. Now I'll turn to the market reactions, and what they imply.