How Trump’s Tariff Implementation Sparked Stock Market Chaos

Prior to Wednesday, President Donald Trump’s tariffs were anticipated to pose a challenge for markets and the economy, albeit a manageable one.

That notion has been proved incorrect.

Instead, the situation has unfolded into something more detrimental than the previous worst-case scenario, which envisioned the U.S. imposing “reciprocal” duties on its trading partners corresponding to the tariffs imposed on American exports.

In an ideal situation, that would have sparked negotiations leading to agreements that everyone could accept, as part of Trump’s vision to reshape global trade, bring American jobs back, and transition the U.S. from reliance on inexpensive foreign imports and excessive government expenditure to a manufacturing-driven economy.

Concerns regarding that scenario pivoted on potential inflation spikes and a marginal slowdown in economic growth.

What has actually transpired, however, is widespread economic, market, and geopolitical turmoil.

This chaos initiated with Trump’s Rose Garden press conference on Wednesday after market hours, during which he enthusiastically declared his plans to “open foreign markets and dismantle trade barriers.”

The strategy: Impose 10% tariffs on all U.S. trading partners beginning Saturday, with tailored rates for 60 additional countries commencing in a week. In an instant, the effective U.S. tariff rate was poised to leap from 2.5% to over 20%.

For context, such an increase could mark the highest rate since 1910, surpassing even the catastrophic Smoot-Hawley tariffs of 1930, widely believed by economists to have contributed to the Great Depression, underscoring Trump’s extreme anti-globalist and aggressive protectionism that exceeded Wall Street’s most pessimistic expectations.

Immediate Reactions

If Trump was attempting to intimidate the global community, he undoubtedly lost the initial round.

China responded with 34% tariffs on all goods, leaders from the European Union are also contemplating counteractions, and the strained relations with Canada and Mexico will necessitate reconciliation during upcoming USMCA negotiations.

The markets reacted harshly to the news, resulting in a significant two-day sell-off that pushed the Nasdaq Composite, a collection of prominent Silicon Valley firms that Trump had been courting in the early days of his second term, into bear market territory.

Economists were left astounded by the rudimentary calculations that stepped into the tariff design. Essentially, the administration, which the Washington Post reported was finalizing the plan just three hours before its announcement, merely divided the trade deficit with individual nations by the total U.S. export value to create “reciprocal” tariffs that don’t seem to deliver on their promise.

According to the Center for Strategic and International Studies, this formula “penalizes higher-deficit trading partners from which the United States imports a lot and buys little from, rather than targeting those with the most restrictive trade policies.”

“In summary, the formula provides at best, rough justice, and at worst, blunt force,” the center asserted in its analysis.

The Market Reaction

Investors reacted by offloading everything except bonds. After all, how can anyone determine a fair price for future earnings when the ability to predict those earnings has become nearly impossible?

In the most favorable scenario for Trump, other nations will engage in negotiations and ease tariffs, thereby opening their markets for U.S. products and granting the U.S. access to theirs. Nevertheless, this would necessitate a significant overhaul of an economy that in 2024 derived 68% of its activity from consumer expenditure and recorded a trade deficit of $903 billion.

Notably, there were some preliminary negotiations.

Trump reported on Friday via Truth Social that he had a “very productive call” with To Lam, the leader of the Vietnamese Communist Party, who allegedly agreed to eliminate tariffs entirely if an agreement could be achieved with the U.S. Moreover, Trump expressed renewed interest in negotiating with China over TikTok, a pivotal element in easing rising tensions between the two nations.

“ONLY THE WEAK WILL FAIL!” Trump declared Friday afternoon on Truth Social.

Although the stock market certainly didn’t collapse during the week, it did relinquish approximately $6 trillion in value as the Dow Jones Industrial Average plummeted by over 3,900 points in a two-day period, an unprecedented event.

Investors who were hoping the Federal Reserve would step in faced disappointment on Friday when Chair Jerome Powell indicated that the unexpectedly stringent tariffs would hinder growth and, even more crucially, elevate inflation. Powell reiterated that the central bank would maintain its current interest rate policy, quashing any immediate hopes for a “Fed put” to cushion the impact of the market’s turmoil.

“I believe this is the largest policy blunder in 95 years,” stated Wharton School professor Jeremy Siegel on Friday during an appearance on CNBC. “This is a self-inflicted wound. It was an unforced error – it was entirely avoidable.”

Nonetheless, analysts at the Stock Traders Almanac do not foresee an impending full-blown bear market, noting that corrections like the current one only transition into bears about one-third of the time.

However, this prognosis relies on a president who has remained obstinate in his stance, affirming on Friday that his “policies will never change.”

This unwavering determination may resonate with Trump’s supporters, but it is precisely this characteristic that is currently alarming the market.

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