How Donald Trump Crushed the Stock Market

As President Donald Trump golfed in Florida over the weekend, his hefty new tariffs, which target everywhere from China to the Falkland Islands, started to go into effect, and businesses began to react to them. Jaguar Land Rover, the Anglo-Indian automaker, announced it was pausing shipments to the United States. The American company Howmet Aerospace, which builds parts for airliners made by Boeing and Airbus, also said it may halt sending products that are affected by the new duties.

On Wall Street, where stocks plunged by about ten per cent on Thursday and Friday, analysts and investors prepared for more selling. The widely followed VIX index, a measure of expected volatility, has risen to levels not seen since the early days of COVID. Financial markets often overreact, but this Trump slump is perfectly rational and explicable. Tariffs are taxes on goods, and imposing them reduces over-all buying power in the economy. On Friday, Jerome Powell, the chair of the Federal Reserve, noted that the new tariffs are “significantly larger than expected,” so the “same is likely to be true of the economic effects, which will include higher inflation and slower growth.” It is very unusual for a Fed chairman to say out loud that an Administration’s policies are bad for the economy. Also on Friday, JPMorgan Chase, America’s largest bank, predicted a recession later this year, despite the fact that the Labor Department’s employment report for March showed solid growth. “We now expect real GDP to contract under the weight of the tariffs,” Michael Feroli, the bank’s chief U.S. economist, wrote, in a note to clients.

To some extent, investors are simply anticipating the negative impact that slower growth, or an outright slump, will have on corporate profits. But there is more to it than that. Many people on Wall Street are also suffering from buyer’s remorse. From August to December of last year, the market rose by about twenty per cent. Investors, analysts, and business executives bought into the notion that a Trump Presidency would boost an economy that was already growing faster than the rest of the developed world, with a very low jobless rate. After the election, Jamie Dimon, the C.E.O. of JPMorgan Chase, said bankers were “dancing in the street.” They were also willfully ignoring Trump’s long record of recklessness in his own business dealings and his repeated pledges to upend the global trading system, on which he has now followed through.

In recent years, policy analysts on the left and the right have advocated a retreat from the hyper-globalization that reigned from roughly 1990 to 2016, and which had harmful side effects, including a hollowing out of many industrial regions, and a dependency on fragile global supply chains. Trump’s first term, in which he imposed tariffs on certain goods, including steel, aluminum, and washing machines, and on a much wider range of products from China, marked the end of the free-trade era. The Biden Administration left in place the tariffs that Trump had imposed on China and supplemented them with an ambitious industrial policy designed to boost the industries of the future, including green energy, E.V.s, and semiconductors. Although Trump dismissed these policies as the “Green New Scam,” some conservatives, such as those associated with American Compass, a think tank founded in 2020 by Oren Cass, a former aide to Mitt Romney, supported elements of them. (In an article for the Financial Times last year, Cass referred to “the essential role of public financing, subsidies and procurement in spurring innovation and production at scale.”)

But, even if these developments marked a cross-party revival of what some have termed “neo-mercantilism”—the strategic use of state power to shape trade relationships for national advantage—Trump’s new tariffs constitute a radical departure from previous policies, including his own. Rather than applying to countries that impose specific trade barriers on U.S. goods, they target any nation that runs a trade surplus with the U.S., regardless of how that surplus may have arisen. The arithmetic formula that the Administration used to determine its tariff rates simply takes the bilateral surplus in goods from a given country, divides this figure by the amount of goods imported from that country, and multiplies the resultant fraction by a half. Comically, it also includes some Greek symbols to make it look scientific, but nowhere does it include the level of tariffs that the country imposes on U.S. goods.

In other words, these are not “reciprocal” tariffs. Reciprocity involves an equal give-and-take. According to the World Trade Organization, the European Union imposes tariffs of five per cent on foreign goods, on average; Japan imposes tariffs of four per cent; and Cambodia imposes tariffs of nineteen per cent. Under Trump’s policy, the tariffs on goods from these places are twenty per cent, twenty-four per cent, and forty-nine per cent, respectively. As CNBC’s Steve Liesman noted online, Trump “straight up lied when he said the US is now charging tariffs at half the rate other countries charge.”

Immediately after Trump announced his tariffs, I noted that they represent not neo-mercantilism but a resurgence of the absolutist approach adopted during the sixteenth and seventeenth centuries by European mercantilists who viewed any trade deficit as an evil. In addition to affecting established industrial powers, including China, Japan, and the E.U., the tariffs also hit Asian economic success stories, such as Vietnam and Bangladesh, and impoverished African countries, such as Lesotho and Malawi. The main reason that Lesotho runs a trade surplus with the United States has nothing to do with trade restrictions; it is because of poverty. With a per-capita annual income of less than a thousand dollars a year, Lesothans can’t afford to buy very many iPhones or Caterpillar trucks. And the new tariffs are threatening one of the country’s main sources of income: factories that make textiles for Levi’s and other Western companies.

Trump’s avowed goal is to re-shore American factories and boost manufacturing employment in the long run, but will it work even on its own terms? In making multibillion-dollar capital investment decisions, such as building a new plant in the United States that could operate for decades, companies need to be pretty sure about the future. With Trump, the only certainty is that things could change. Another factor to consider is that many imports are components for domestically produced goods, and slapping tariffs on them raises the costs to American firms that rely on these parts. A Federal Reserve Board study of the tariffs that Trump imposed on China in 2018 found that, when this factor was taken into account, the duties didn’t lead to any increase in manufacturing jobs. In fact, they led to a reduction of 1.4 per cent.

Trump’s new tariffs are so high and wide-ranging that estimating their ultimate impact, assuming they stay in place, would be largely guesswork. We do know for sure that they represent an unprecedented shock to the economy, and they are being accompanied by policies that run directly counter to the goal of promoting American economic dominance. Guided by Elon Musk and his DOGE colleagues, the Trump Administration is busy making cutbacks at the National Science Foundation and National Institutes of Health, which finance basic scientific research on which American businesses rely for their product development. It’s also cancelling grants for clean-energy projects and undermining investments in E.V. manufacturing by, for example, reversing the Biden Administration’s rules on reducing tailpipe pollution. Last week it withdrew funding for a federal program that promotes technical progress and productivity growth at small and medium manufacturing companies across the country. If this is mercantilism, it is mercantilism gone mad.

In recent history, Brexit represents the only comparable act of economic self-harm. But the fallout from the U.K.’s vote, in 2016, to withdraw from the European Union was largely limited to its own inhabitants. This is different. Since the Second World War ended, the U.S. has been the global economic hegemon. While acting in its own interest, sometimes ruthlessly, it has taken the view that promoting international trade and development will ultimately benefit Americans as well as people overseas. The Trump Administration has now formally abandoned this leadership role as a champion of open trade, but it hasn’t stopped there. At least in the short run, it has committed to a policy of inflicting damage not only on itself but on the rest of the world, too, including some of the poorest countries. That’s bad in its own right, but it’s also bad for business. No wonder markets everywhere are tumbling. ♦