Market Brief: Global Selloff Ensues After Trump Rips Up Global Trade Framework

Financial markets are in freefall across the planet after Donald Trump took aim at the international trading system with the most significant package of tariff increases in more than a century, threatening to inflict a third systemic blow against global growth in as many decades. The dollar is down more than 2 percent against a basket of its major counterparts, benchmark ten-year Treasury yields have fallen through the 4.05 percent threshold, and major North American equity markets are set to open more than 3 percent lower after a selloff rippled across Europe and Asia in the overnight session.

Trump’s tariff plans are far more extreme than markets had anticipated. Under the proposed measures, imports from all US trading partners will be hit with a 10-percent baseline tariff from April 9. Goods from specific countries will be subject to much larger “reciprocal” levies, with some products from China taxed at an additional 34-percent rate, Japan at 24 percent, the European Union at 20 percent. Although Canada and Mexico avoided suffering new damage, previously-announced measures against the auto sector came into play this morning, and duties on products that are not considered compliant with the US-Canada-Mexico Trade Agreement—an estimated 62 percent of Canadian and 51 percent of Mexican goods—will be tariffed. The average effective US tariff rate could climb to around 22 percent, exceeding the levels applied under the Smoot-Hawley tariff bills that helped exacerbate the Great Depression, and reverting trade barriers to levels last reached in 1909.

The global economy will almost-inevitably suffer a major blow. With tariffs set to increase substantially for many of the world’s biggest economies*—as well as its poorest—growth is headed for a structural reset, and history would suggest that supply chains will enter another period of disruption, prices will rise, business investment will suffer, and unemployment will ratchet higher. Fiscal authorities and central banks around the world will try to adopt updated versions of their Covid-era playbooks, but the reality is that conditions on the ground have changed: high inflation is a recent memory for households, budgets are already stretched to their limit, and overall market appetite for government debt is already well-sated.

But markets expect the heaviest burden to fall on Americans themselves. By our reckoning, the announced package amounts to the biggest peacetime tax increase of any kind in modern American history—summing to roughly 2.1 percent of gross domestic product—and is easily one of the most regressive taxation measures imaginable, with the most significant costs falling on people at the bottom of the income spectrum. This is seen having tremendously-deleterious effects on consumer spending, corporate earnings, investment outcomes, and gross domestic product growth, and is contributing to the reversal in American asset prices that is weighing on the dollar’s value.

The administration’s approach lacks credibility. The list of targets includes uninhabited islands occupied mainly by penguins, and the calculation used to determine the “reciprocal” tariff rates appears to have been a simple division of US bilateral trade deficits divided by import volumes and halved, with a 10-percent levy applied on countries that fall below that threshold. The White House claims the assessment was performed by its "Council of Economic Advisers,” but it wouldn’t pass muster in a first-year economics class: it assumes that all bilateral trade balances should be zero (something no serious trade economist believes), ignores services trade, takes no account of the trade barriers actually in place in any given country (relatively closed economies like Brazil will pay lower tariffs than countries that have no taxes on imported goods), and applies high rates on nations—like Australia—that run deficits with the United States.

We think a frenzied round of negotiations could see significant adjustments made in the coming days and weeks. “My advice to every country right now is, do not retaliate, sit back, take it in, let’s see how it goes,” Treasury Secretary Scott Bessent, said last night “If you retaliate, there will be escalation. If you don’t retaliate, this is the high-water mark”. It isn’t yet clear how major US trading partners will respond: those with democratically-elected leaders could choose to try bargaining Trump down before launching countermeasures yet will undoubtedly face sustained pressure to retaliate in kind, and countries like China might take a more gradualist approach, using a range of tools to tilt the playing field against the US. But domestic political pressure and opportunities for symbolic victories could combine to mean that the ultimate outcome is less drastic than it now appears.

Nonetheless, the unprecedented tidal wave of uncertainty that has washed across financial markets and the global economy looks unlikely to retreat in the near term. Volatility assumptions will stay elevated for now, and market participants should remain alert for violent dislocations in exchange rates as the world adapts to a dramatically-changed outlook.

*Note that this is a "marimekko" chart, with the tariff rate depicted on the vertical axis and the share of US imports illustrated along the horizontal axis.