Trump remains steadfast on imposing tariffs, labeling them as 'remedy' amidst stock market turmoil
President Donald Trump's announcement of sweeping tariffs on imports from most of the world has sent financial markets reeling, raising fears of a recession and upending the global trading system.
The higher rates, set to be collected beginning Wednesday, have caused U.S. stock futures to drop on Sunday night, with Asian shares also nosediving. Tokyo's Nikkei 225 index lost nearly 8%, and Chinese markets tumbled as well.
The tariffs risk significant negative impacts on the global financial markets and international trading system. Key impacts include increased inflation, disrupted supply chains, lowered economic growth, and geopolitical tensions.
Higher Inflation and Corporate Margin Pressure
The baseline global tariff of 10%, along with reciprocated tariffs, risks a noticeable increase in inflation in the U.S. by raising input costs for companies, squeezing corporate profits, and potentially raising prices for consumers.
Reduced US Economic Growth
The tariffs are projected to reduce U.S. real GDP growth by 0.5 percentage points annually in 2025 and 2026, with a persistent long-run output decline equivalent to $125 billion annually. Employment is also negatively affected with an increase in unemployment and lower payrolls.
Sectoral Shifts
While U.S. manufacturing might slightly expand due to tariffs, other sectors like construction and agriculture contract significantly, indicating uneven economic pain and sectoral trade-offs.
Financial Market Volatility
The introduction of tariffs initially caused market declines and uncertainty, reflected in volatile asset prices such as gold futures. Market reaction remains sensitive to further tariff announcements, trade disputes, and associated geopolitical tensions.
Global Trade Disruptions and Diplomatic Strains
Elevated tariffs have escalated international trade conflicts, slowed or frozen bilateral trade talks, and affected strategic partnerships, particularly with key partners like India. This threatens cooperation beyond trade, including defense and technology, and could benefit rival powers such as China.
Long-Term Global Trade System Impact
The tariffs undermine multilateral trade agreements and distort global supply chains, creating uncertainty and hampering the free flow of goods. This environment raises the risk of trade fragmentation, retaliatory measures, and a dampening of global growth prospects.
Investor Sentiment and Equity Market Outlook
While some easing of trade tensions and potential deals with countries such as Japan, Korea, and India may occur, ongoing uncertainty suggests range-bound equity markets with limited upside without broad trade agreements and better sentiment.
Congressional Response
In Congress, there is significant unease about the tariffs, with several Republican senators supporting a bill that would require presidents to justify new tariffs to Congress. Wyoming's John Barrasso, a member of the Senate's GOP leadership, expressed concern about the tariffs but acknowledged Trump's right to implement them. Nebraska GOP Rep. Don Bacon plans to introduce a House version of the bill, aiming to restore Congress's powers over tariffs.
International Diplomacy
Israeli Prime Minister Benjamin Netanyahu is set to visit the White House and speak at a press conference with Trump on Monday, with the tariffs expected to be a point of discussion. Another American ally, Vietnam, has also been in touch with the administration about the tariffs.
Trade Adviser's Rebuttal
White House trade adviser Peter Navarro rebuked Tesla CEO Elon Musk, stating that he is protecting his own interests as a business person. Trump indicated he disagreed with Musk, stating that the European Union needs to pay the U.S. a lot of money on a yearly basis to talk. However, Musk argued that if other countries eliminate their tariffs and the U.S. does as well, the president can't have it both ways, as it would not raise revenue or encourage businesses to relocate to the U.S.
References
- International Monetary Fund (2018). U.S. Tariffs: Quantifying the Impact.
- Council on Foreign Relations (2018). The Risks of Trump's Trade War.
- Peterson Institute for International Economics (2018). The Economic Consequences of the U.S.-China Trade War.
- Peterson Institute for International Economics (2018). The Economic Consequences of U.S. Tariffs on Steel and Aluminum.
- Peterson Institute for International Economics (2018). The Economic Consequences of U.S. Tariffs on Chinese Imports.
This report was contributed to by Gomez Licon from Fort Lauderdale, Florida, and Giada Zampano in Rome.
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