One week after President Donald Trump’s extensive global tariff overhaul, markets both in the U.S. and internationally are reeling.
The administration’s so-called “Liberation Day” — on which Trump announced Executive Order 14257 — sent global markets into a tailspin in response to so-called reciprocal tariffs that imposed a minimum 10% tax on all U.S. imports, with few exceptions. Imports from 57 countries and entities face the possibility of even higher tariffs rates, ranging from 11% to 50%, and an effective 104% on Chinese imports.
Though Trump announced that he would hold on implementing the reciprocal tariffs for 90 days — excluding those from China — on April 9, the reversal did little to calm global markets. Minutes from the Federal Reserve's March session, released on April 9, showed that Fed policymakers were finding it difficult to curb inflation and promote growth.
"Participants assessed that uncertainty around the economic outlook had increased, with almost all participants viewing risks to inflation as tilted to the upside and risks to employment as tilted to the downside," the minutes stated.
Laura Veldkamp, Leon G. Cooperman Professor of Finance & Economics at Columbia Business School, noted that while "economists don't agree on much ... almost every economist agrees that high tariffs are terrible economic policy." She added that high tariffs lead to stagflation — a combination of high inflation, stagnating economic growth, and high unemployment.
The Fed is unlikely to lower interest rates in the near future, according to Veldkamp, since if the Fed raises rates, they constrain inflation, but depress demand, likely triggering a recession. On the other hand, if the Fed keep rates low, inflation can rise.
"Usually responsible Fed chairs err on the side of keeping inflation low. Their primary responsibility is price stability," Veldkamp said.
Brett House, a macroeconomist and professor in CBS’s Economics Division, told Los Angeles’ KCAL News that consumers would indeed see slower economic growth and price increases as a result of the tariffs “almost immediately.”
“We tend to see prices being changed by importers quickly in response to both the prospect and the reality of tariffs,” House said, adding that it was “virtually impossible these tariffs would help the American economy in the short run or the long run.”
In the U.S and globally, equity markets have been on a volatile rollercoaster ride, jumping on any sign that the proposed tariffs could be postponed or negotiated lower, and dropping again as the White House has doubled down on its trade policies and worries have spilled over into bond markets. According to House, the sell-off in public markets doesn’t bode well for medium-term economic growth.
“I don’t expect to see a leveling off in equity prices anytime soon. They are still priced at levels that are commensurate with strong growth in the year ahead and the policies we just saw delivered by the White House are set to lead to the first White House-induced recession that we have seen in the postwar era,” House said.
House told Bloomberg that global markets’ recent overall decline reflects a “growth negative” economic environment and that the tariffs would hurt households, businesses, and global economic stability.
“Whether we go into recession or not, the key thing is growth is going to be much lower than has been priced in markets to this point,” House told Bloomberg.
Trump’s escalation of his tariff war with China, along with retaliation from other trading partners, means that market volatility is likely just beginning, according to House. China’s top leader, Xi Jinping, said on April 7 that Trump’s latest threat of tariffs against China was akin to “blackmail” and that the country would fight back–and it has by imposing first a 34% and then an 84% tariff rate on American imports, as well as tightened controls on strategic exports. In response, Trump promised to raise tariffs on Chinese exports to 125%.
If the Trump administration does come to an agreement with U.S. trading partners to lower or remove tariffs, the global economy rebound will be “slow” according to House. That is due to uncertainty among investors who may fear the implementation of future tariffs or other unpredictable policy changes.
In past statements, Trump has also promised that tariffs inflicted on the U.S.’s trading partners, coupled with broad deregulation, would do much to reduce the country’s trade deficit and encourage domestic manufacturing. However, according to House, Trump overstates the size of U.S. bilateral trade deficits with other countries. Additionally, House explained, the overall U.S. trade deficit can’t be reduced through tariffs: it can be cut only by a decision by the U.S. to save more and finance a greater share of its investment domestically..
In an interview with Columbia Business Insights, House noted that lower-income households and businesses will be most impacted by the White House’s taxes and higher prices. As the costs of imported goods and services increase, production becomes less efficient, increasing prices for everyone. But the burden of these increased costs tend to fall most heavily on working Americans and small businesses.
