Trump’s tariffs, first presented as a show of economic strength, are now revealing their consequences. Framed as a bold attempt to rebalance trade, the initiative destabilised international markets. Stock exchanges from New York to Shanghai plunged, with investors reacting not just to the economic impact of tariffs but to the profound uncertainty they represent.
Pedro Catarino, senior investment advisor and board member of Euroconsumers Invest, says, "At the heart of the panic is a lack of clarity. “Are these measures meant to bring factories back to the US, curb deficits, or simply negotiate leverage for unrelated geopolitical goals?" See Pedro's complete analysis of the volatile financial scenario and what we recommend to investors in this new economic paradox.
EC Invest (ECI): How did tariffs cause so many losses in global stock markets?
Pedro Catarino (PC): The announcement of US tariffs on various imported products negatively impacted most economies and harmed global trade. Initially perceived as a tactical bargaining tool by the US, tariffs quickly escalated trade tensions between economic blocs, creating global uncertainty. Markets reacted violently due to increased uncertainty regarding growth prospects, inflation, and interest rates. Investors typically avoid unknown and volatile environments. Currently, conditions remain unstable.
ECI: What is the possibility of tariffs leading to a US recession, and what would be the global consequences?
PC: April 2 marked a significant shift in global trade dynamics. The US's inward turn was expected, but the extent to which it would sacrifice success was unclear. Could these measures boost industrial employment in the US? Possibly. However, the industrial sector alone doesn't define US global leadership.
The US's true strength lies in innovation, risk-taking, attracting global talent, and leading tech companies. By focusing on protecting domestic goods production, the US risks losing valuable competition and impacting innovation and quality of life through costlier, less efficient products.
Trump's trade war creates confusion due to unclear objectives. His goals include increasing tax revenues to reduce the public deficit and financing tax cuts. He also aims for factories to return to US soil, reducing imports and trade deficits—contradicting his revenue goals. Trump's aggressive trade stance may be leverage for other negotiations, such as market access for US products or managing the high dollar value.
While negative impacts on global economies are certain, the exact severity remains unclear due to ongoing negotiations and rapid shifts. The possibility of inflation or global recession is premature. Mitigating this trade conflict requires political will from all sides, a condition not yet met.
ECI: Which countries are more vulnerable to a crisis, and what can we expect?
PC: Donald Trump's tariffs start at 10%, which is described as a reciprocal "light" tariff. His approach involves taxing countries at 50% of their tariffs on US products—a questionable formula due to complexities in measuring various trade barriers. The 10% tariff is an entry fee for market access to the vast US economy, with higher tariffs for countries considered restrictive.
Asia faces the harshest impact, particularly China, with a new 34% tariff added to the existing 20%, totalling 54% (even more recently - see below). While this may be negotiable due to China's leverage, the impact on other Asian countries is severe.
Negotiation outcomes are uncertain; Trump's decisions appear absolute unless met by exceptional offers. Less developed countries lacking negotiating power must seek relief, while developed countries face challenging discussions. Trump rejected the EU's proposal to eliminate all tariffs, for example.
China then retaliated, imposing tariffs on US imports. Trump then dramatically increased total tariffs, heightening recession risks. Although recent actions delayed some tariffs, uncertainty and economic damage persist.
Trump's strategy risks damaging relationships with key allies and trading partners. Favouritism toward Russia also adds to geopolitical tensions. The US's "America First" policy might unintentionally expedite America's shift from being the largest global economy.
ECI: How can investors protect their money?
PC: Following April 2, global markets experienced their steepest decline since the 2020 Covid crisis. Asian markets saw their worst drop since 1997. Despite a partial rebound on April 9, losses persist.
Initially, investors sought refuge in bonds, driving interest rates on secure debts downward. Even gold's appeal declined, with many investors preferring liquidity due to heightened uncertainty. Is such an extreme strategy wise? Probably not. Selling everything amid market turmoil is rarely beneficial.
Investors should avoid rushing to find immediate bargains. Instead, leverage high interest rates to build a bond portfolio and cautiously enter equity markets in stages over several months. Those already invested should remember that investing is long-term; maintain regular contributions, diversify portfolios, and stick to your strategy during volatility. Now is not the time to panic.