Markets hate tariffs, even if Trump loves them

If there is one thing we know for certain now, it is that markets hate tariffs with the same sort of passion that US President Donald Trump loves them.

While Trump flagged his rambling tariff announcement as Liberation Day, markets universally reacted like it was sell down day.

It is not hard to see why.

After decades in which trade barriers have been falling fast and deregulated and much freer trade has produced a much wealthier and more connected world, Liberation Day marks the beginning of an unwinding for global trade away from free trade agreements and back to the bad old days of protectionism.

It is also an environment of lower trust, given that Trump effectively quashed free trade agreements that he had personally made during his last term in office.

The one thing that Trump could have produced – a bit of certainty – was also missing with the prospect of an unending range of tariff negotiations with various countries and a punishing global response of tariffs being placed on US products.

Recession chances grow markedly

The growing market consensus is that Trump’s actions have thrust us closer to a US and even globalised recession before any of the much-touted benefits of his tariffs can even eventuate.

The most bizarre thing about his long list of tariffs against “predators, scavengers and rapists” is that it is American consumers who will be paying these hefty tariffs on goods that the US needs and in many cases has no will or opportunity to manufacture itself.

Effective tariff rate of 22.5%

Estimates show that the effective tariff rate will be in the region of 22.5% which converts to an immediate tax rise of more than $1.1 trillion paid for by US consumers and companies.

This will particularly hit poorer Americans that shop at stores such as Walmart which will be rapidly raising prices of goods sent from China, Vietnam, Bangladesh and other low wage countries.

That is the equivalent of an immediate subtraction of 2.3% of GDP and that figure could be very generous when you consider the cost of reprisals and the complicated way in which tariffs will now impact the entire industrial supply chain.

According to Trump the patient has now come out of surgery and will emerge stronger and healthier but in reality the economic surgery has only been announced and the hard bit will come with its implementation.

Eggs point to the benefits and problems of international trade

One small but interesting example that emerged was President Trump’s move to import eggs from Turkey, Brazil and South Korea in an attempt to increase supplies after an ongoing US bird flu outbreak resulted in the deaths of around 170 million chickens and sky-high egg prices.

Rather than learning the lesson that imports can reduce prices and alleviate shortages, President Trump instead slapped a 10% tariff on Turkey and Brazil and a 26% tariff on South Korea.

As a result, President Trump now risks egg prices resuming their upward march as the tariffs come into effect.

US still needs aluminium

Aluminium is another great example.

Canada supplies around half of the US needs for aluminium, with Australia also filling some gaps, and the US will need several years to rebuild its own smelter capacity to become self-sufficient.

In that context, slapping a 25% tariff on aluminium imports and intensely annoying the Canadians alonng the way doesn’t look like a very good idea.

Fed can’t really ride to the rescue

With inflation set to rise solely due to the tariffs, it will be very difficult for the US Federal Reserve to stimulate the economy through lower interest rates, leaving the ball once again in President Trump’s court as he tries to prevent a looming recession with both hands tied behind his back.

Even the reassurance that President Trump will now move into negotiation mode and try to reduce many of the tariffs through individual negotiations with various countries looks like a recipe for further uncertainty and share market volatility.

While Trump held out the hope that tariffs could be reduced if trading partners take major steps to remedy their alleged economic abuses, what happens when countries retaliate with tariffs of their own such as China which has already moved to match the US tariffs?

Will anybody really care if the bully that kicked sand in everybody’s face gets a blood nose for his trouble?

Revenue promise could be empty

Trump’s promise that his “beautiful” tariffs will generate $10 trillion of revenue over 10 years totally ignores the dynamic effects of lower growth and the economic damage the tariffs cause that will shrink the US economy and greatly reduce the amount collected – along with any “negotiations” with select countries to reduce their tariff rates.

The other very real danger of the tariff war is that it will drive other countries into direct partnerships and effectively remove the US from the equation.

Already Japan, Korea, Vietnam and China have shaken hands on a trade co-operation deal and even allies like Australia which was selected for the low 10% tariff would be mad not to look to alternative markets to export in-demand product such as beef.

US debt mountain emerges

The other danger of the trade war is that it exposes US weaknesses for all to see.

The most ominous of these is the mountain of US government debt which relies on other countries buying it in the form of bonds.

As I outlined here, US government debt is projected to reach 107% of GDP by 2029, beating the level recorded at the end of World War II.

With a structural Budget deficit of around 6.4% of GDP and little sign of that being reduced in any meaningful way by the efforts of Elon Musk’s now “winding down” DOGE, is now really the time to take a flamethrower to world trade and cause major nations and trading blocs to reassess their relationships with the US?

Bonds point to bleaker future

Indeed, one of the scariest numbers coming out of the US markets after the Liberation Day tariffs were announced was not the massive tanking of share prices but the drop in the yield of traded benchmark 10-year Treasury notes to below 4%.

That move signals two things – that recession is now a bigger risk than inflation for the US and that many investors are already heading for the lifeboats and flooding into bonds.