The U.S. is moving to blow up the global trading order it built, ushering in an uncertain new era.
President Trump's highly anticipated announcement represents a high-stakes gamble to transform a global economic relationship that Trump for decades has said ripped off the U.S. -- even as the American economy had emerged from the pandemic as the envy of its rich-world peers.
The president's moves raise the specter of a stagflationary shock that increases prices while putting more economies, including the U.S., at risk of recession.
Trump stunned markets by announcing a suite of tariff hikes on major trading partners, including 20% for the European Union and 34% on China. The tax on imported goods, which also includes at least a 10% across-the-board increase on all countries, will raise overall weighted-average tariffs to 23% -- the highest in over 100 years -- from 10% before the announcement and 2.5% last year, according to JPMorgan Chase.
Economists said Trump's policy shift, if it isn't rolled back, could rival President Richard Nixon's 1971 decision to overturn arrangements created by the U.S. and its wartime allies during World War II, when Washington had agreed to exchange dollars for gold at a rate of $35 an ounce.
It would mark "probably the biggest attempt to fundamentally reshape the tax-trade structure in the U.S. since Nixon took us off the gold standard in the early 1970s," said Michael Gapen, chief U.S. economist at Morgan Stanley.
Gapen said his bank had been advising clients that markets were too complacent about the risks of bigger and broader tariffs, but Wednesday's announcement "was more expansive than even we thought."
The president's mercurial and chaotic rollout of his trade plans, which already have included 20% tariffs on China, 25% tariffs on auto imports and 25% tariffs on Canadian and Mexican goods that aren't covered by an existing trade agreement, has chilled business investment and consumer sentiment.
"They just announced a major tax hike, mostly on the corporate side, but as with most corporate taxes, they will be translated into higher prices to the consumer. And you don't grow an economy with higher taxes," said Steven Blitz, chief U.S. economist at GlobalData TS Lombard.
The tariff increases announced Wednesday are particularly drastic because they don't have exemptions for the two-thirds of imports that normally come in duty-free, such as coffee, tea and bananas, which aren't produced in significant quantities domestically, said Douglas Irwin, a trade economist and historian at Dartmouth College.
They will cover a far wider array of goods than during Trump's 2019 trade war with China. Nike produces half of its shoes in Vietnam, which faces a 46% tariff. A web of consumer-electronics makers across China, Taiwan and South Korea will face tariffs of at least 25%. The tariffs exempt oil, gas and refined products.
The tariff hikes raise the risk of a sharp hit to consumers' inflation-adjusted incomes that could tip the U.S. economy into recession this year, said Diane Swonk, chief economist at KPMG. The suite of tariffs announced amounted to a "worst-case scenario" relative to expectations in the run-up to the announcement, she said.
Moreover, it isn't clear how trading partners will respond, meaning uncertainty could remain elevated for some time to come. "If the goal is to get firms to relocate here, this doesn't accomplish that, because you don't know for sure in three to five years, by the time you build a plant, will the tariffs still be intact," said Swonk.
Tariffs could bring in new revenue but at a potentially steep cost to financial markets. Lofty asset prices over the past two years have reflected investors' bets that the U.S. economy was well positioned relative to its peers, given advances in technology and the prospect for an elusive "soft landing."
Trump inherited an economy with steady growth and a declining rate of inflation but vulnerabilities from a frozen housing sector, cooling labor market and richly valued stock market.
Trump has long regarded trade deficits as a sign of economic weakness. But in the Trump administration's attempts to narrow those deficits, foreign countries could reduce their purchases of U.S. Treasury securities or have less surplus capital to park in American stock, real-estate and private-debt markets.
"The real pain from this event will be the breaking down of the capital flow agreement that we had with the rest of the world," said Blitz. "This idea that you can break trade, and not break the capital flow side, is a fantasy."
If the tariffs remain in place for a prolonged period of time, inflation using the Federal Reserve's preferred gauge could rise from 2.5% in February to 4.4% at the end of this year, according to economists at UBS. They see inflation declining after that, to 3% by the end of 2027.
By Nick Timiraos
Why Trump's Tariffs Sank the Dollar --- Worries that long-term U.S. growth will fade could matter more for the currency than the mechanical impact of levies
While President Trump has always claimed to want a weaker dollar, the consensus among investors was that his policies would strengthen it. Turns out he was right, but perhaps in the worst way.
On Thursday, stocks tumbled in the U.S., Europe and Asia following Trump's unveiling of a raft of punishing "Liberation Day" tariffs.
What was more unexpected is that the U.S. dollar tumbled against most major currencies. The WSJ Dollar Index, an indicator based on a basket of currencies, has now lost 5.9% this year and is below where it was on Nov. 5, before its postelection rally.
This is making Wall Street analysts look pretty bad: Most were telling investors, even up to the very moment that tariffs were announced Wednesday, that protectionist policies would push up the currency. The idea was that fewer purchases of overseas goods would narrow the trade deficit and mechanically reduce U.S. demand for foreign exchange. Also, U.S. growth is outpacing the eurozone's, which has historically been dollar-positive.
Instead, speculators have swung to betting heavily against the greenback, Commodity Futures Trading Commission derivatives data shows.
The sudden unwind can't truly be about tariffs increasing the risk of recession. The dollar usually strengthens during busts as well as booms because investors seek refuge in it -- creating the famous "dollar smile."
Why did the market get it wrong? Perhaps the greenback is at such expensive inflation-adjusted levels that it was primed to fall. Or, as some investors argue, U.S. economic aggression against allies is eroding the dollar's "global reserve" status.
The latter would be a win for the administration. In 2024, Trump's chief economic adviser, Stephen Miran, stressed the need to tackle the trade deficit by penalizing foreign central banks and treasurers for parking assets in the U.S. This is in line with the view that haven demand overvalues the dollar and places an "exorbitant burden" upon the American economy.
It lacks empirical support, though, since higher official foreign purchases tend to coincide with a weaker dollar. Global dollar reserves have flatlined since 2018 as the dollar rose 16%, per International Monetary Fund figures.
A better answer, which is less flattering for Trump, is that faith in the U.S.'s long-term economic potential is fading.
Currency traders can be short-term chasers of bond-yield differentials. Over five-year periods, however, the difference in return on equity between U.S. and European stocks has shown a 70% correlation to dollar-euro moves since 2001.
This suggests a good chunk of dollar strength is due to investments that track relative growth in economic productivity -- largely driven by Silicon Valley raking in huge profits and turning the U.S. into a massive exporter of technology goods and, especially, services.
Markets might now be anticipating another structural shift. A rearmament push is fueling hopes of an economic revival in Europe, just as the U.S. growth story becomes tainted by protectionism and Chinese artificial-intelligence challengers.
Of course, China's rise itself underscores that the textbook case for free trade is flawed, and that the U.S. government should arguably also try to promote key industries.
Offshoring to cut costs has often harmed workers, created fragile supply chains and made firms less eager to innovate. Troubled industrial giants such as chip maker Intel and aerospace giant Boeing can attest to that.
The problem is that Trump's tariffs have been sudden and erratic. Wednesday's list of reciprocal tariffs on each trading partner are a case in point, since they aren't based on any calculation that makes economic sense. Such policies are probably denting corporate investment rather than inducing companies to relocate production through a targeted and phased-in approach. More than Asia's development miracles, these policies resemble Latin America's flawed experiments with "import substitution."
Yes, there could be benefits to General Motors and Ford Motor reshoring assembly jobs from Mexico.
But doing the same with all auto parts -- including low-value components such as textiles and wiring harnesses -- would just make the U.S. car industry very inefficient.
This comes atop likely retaliation by other countries and the 100% tariffs on Chinese electric vehicles inherited from the Biden era.
U.S. carmakers excel in the truck and SUV segments, where American consumers are particularly discerning. But they struggle to produce cars under $25,000, even before tariffs. Tesla, too, is a luxury brand.
If the U.S. market becomes isolated, foreign firms such as Toyota and Hyundai, which dominate budget models, may innovate less in their U.S. plants than abroad.
This is what happened to Brazil and Argentina, because their attempts to build a homegrown auto industry shielded companies from outside competition between the 1950s and 1980s. And it stands in contrast to how Japan, South Korea and China created world-class automakers by combining protectionism with the discipline of foreign markets.
Focusing too much on trade deficits overlooks the fact that the competitiveness and profitability of American tradable products have played a key role in determining the dollar's value. Right now, they are coming into question.
By Jon Sindreu
