It’s been a couple of days since the Trump administration performed an about-face on its reciprocal tariff plans. The announcement sent the stock market into a giggling dance of delight. Major indices that had fallen into a major pothole climbed back up. The Dow Jones Industrial Average gained nearly 2,963 points; the S&P 500, almost 492; the Nasdaq, more than 1,800.
Some have argued that this was masterful manipulation and negotiation by Trump two days after he had said that the reciprocal tariffs were absolutely going into place and wouldn’t be paused, as Politifact documented.
Tariff Impacts Now
The good times were gone the next day, with the Dow down 2.50%; the S&P losing 3.46%; and the Nasdaq, off by 4.31%. Bond prices? The yield of the hugely influential 10-year Treasury note went from 4.01% on April 4 to 4.26% on the 8th and, at the end of yesterday, the 10th, it was at 4.40. That means the price on the 10-year has been falling, even after what was considered a successful sale by the Treasury of $39 billion of the notes.
What is occurring is highly contradictory and confusing. The CBOE Volatility Index, or VIX — a measure of near-term volatility expectations deduced by stock index option prices — hasn’t flirted with its largest recorded value. The reaction to the pandemic shutdown, shown on the left-hand side of the graph below was steeper and that during the Great Recession was worse still.
Trump had “clearly been alarmed by the financial market chaos that has followed since first announcing tariff ‘liberation day’, unleashing a slate of import tariffs on trade with the US,” said Richard Portes, a professor of economics at the London Business School in emailed remarks. “Overall, he has realized that the immediate implementation of tariffs would produce chaos and reactions that wouldn’t be easy to reverse.”
What Would Have Happened
The consequences of continuing on the path were dire in the views of some. “If the tariffs had not been put on hold, we’d see an immediate increase in inflation: 3% in the short term, up to 6% by the end of the year,” wrote Tucker Balch, professor at the Goizueta Business School at Emory University.
“Had the tariffs stayed in place, there could have been short term disruptions on supply chains,” Ali Meli, managing partner and chief investment officer of Monachil Capital Partners, told me. “There could, for example, have been spikes in prices of certain consumer goods. Also … it was becoming increasingly clear that Wall St. and hedge funds may require a bailout, which this administration finds undesirable.”
Now, for what happens after. “The relaxation of most of these tariffs will decrease those numbers, but we will still see inflation increase,” Balch said. This is at a time when most families in the U.S. have seen too great a decline in their economic power and resources over decades. It’s added challenges when they have become weakened.
The Aftermath
There’s the erosion of goodwill internationally, which can have profound economic and security implications. “If the United States, at the wave of a pen, can undo decades of negotiations and agreements, should countries find another market for their goods – or another source for their resources?” said Javier Palomarez, CEO of the United States Hispanic Business Council, in an emailed note. “The United States represents one of the largest, in terms of dollars, consumer markets in the world. However, the international community can only weather a certain amount of taxation, manipulation and uncertainty.”
And there’s the erosion of the dollar’s position in the world, as Freya Beamish at GlobalData.TSLombard writes. She said that for close to a year, the firm has seen a “serious tail risk” in which the global dollar standard might not hold. Through the imposition of the reciprocal tariffs, the dollar behaved as it has since 1973 with the establishment of the new global currency regime. On the tariff reversal, that changed and moved the world closer to a “multi-polar international monetary system” under which the U.S. won’t retain the favored status that has benefited it for many decades.