Liberation Day Recap: Short-Term Pain for Long-Term... Recession?

On Wednesday, April 2, US President Donald Trump announced his sweeping tariff policy plan on what he’s dubbed ‘Liberation Day’. Ever since the event was scheduled, market participants had been speculating and trying to predict the specifics and their market impact.

Now, a few days removed, it’s safe to say that the tariff plan is perceived as much worse than feared. Let’s break it down.

‍

The tariffs

First of all, Trump’s plan includes a new 10% baseline tariff on all imports into the US. Additionally, country-specific tariffs will be added to imports from more than 60 trade partners. More on the specific rates in a moment but first, a bit of math.

The calculation

Economists’ first question when the plan was announced was how are these tariffs even calculated? Most had assumed Trump’s “reciprocal” tariffs would be just that, reciprocal. Meaning, if a given country currently had a 20% tariff on imports from the US, the US would now add a corresponding 20% tariff to all imports from that country. However, it quickly became clear that this was not the case.

Instead, the Trump administration says it considers both actual tariffs as well as other trade barriers and even currency manipulation. Essentially, the tariff rate for each country has been defined as a given country’s trade deficit with the U.S., divided by its exports, then divided by two.

That last part of the formula is Trump’s way of “being nice”, in case you were wondering. Despite that, many economists take issue with the approach. I won’t get into the weeds of why the math is messed up but rather just focus on the impact: Extremely high tariffs. Much higher than predicted.

The numbers

Based on the Trump administration’s formula, here are the new tariff rates on some of the USA’s largest trade partners:

• China: 34%
• The EU: 20%
• Vietnam: 46%
• Taiwan: 32%
• Japan: 24%
• South Korea: 26%
• India: 27%
• Thailand: 37%
• Switzerland: 32%
• Cambodia: 49%

It’s worth noting that these are added to any pre-existing tariffs. In the case of China, for instance, the effective tariff rate will now be 54%.

‍

The response

The good

Donald Trump himself has indicated a willingness to negotiate, at least if the deal he gets is good enough. This somewhat contradicted earlier statements from the administration. Either way, some 50 national leaders have responded with calls for negotiations and a desire to reach a deal. These include:

• Trump and Vietnam’s Lam have agreed to discuss a tariff deal after Lam has pledged to remove duties on US imports.
• India is reportedly close enough to reaching a new and balanced trade deal with the US that they won’t retaliate.
• Zimbabwe on Sunday suspended tariffs on US goods.

The bad

• On the less diplomatic side, Canada slapped a 25% tax on US cars.
• China’s Finance Ministry on Friday said it will impose a 34% retaliatory tariff on all goods imported from the US.
• China also put the TikTok deal on hold after the tariff announcement.

And then there’s the mixed but somewhat promising: Ursula von der Leyen said the EU is preparing for further countermeasures if negotiations fail. She added that the EU will work toward reducing barriers, not raising them, and called for negotiation rather than confrontation.

The lack of concrete deals or backtracking from Donald Trump, combined with swift retaliation from some of the country’s most important partners, seemed to raise fears of an outright trade war and global recession on Friday.

‍

The market fallout

The market reaction was immediate and unambiguous.

• Equity markets around the world plummeted with US markets taking the biggest hit. The S&P 500 and Nasdaq lost around 11% during Thursday and Friday. The broad European STOXX 600 lost almost 8%. The Magnificent 7 alone lost more than $1 trillion in market value on Thursday.
• Treasury bond yields fell on fears of an economic slowdown with the Japan 2-year leading the way to the downside with a 25% drop. US and Euro bond yields dropped as well but did stage a significant comeback during Friday’s session. The latter could be partially due to Fed Chair Jerome Powell’s comments about the risk of rising inflation and the Fed’s desire to wait before making any further rate moves.
• Even gold, silver, and copper took a hit, although the former fell just 3.2%. Silver and copper both fell more than 12%.
• Oil fell to levels not seen since 2021 after a 12% drop during Thursday and Friday.
• Bitcoin dropped 4% immediately after the tariffs were announced but quickly stabilized and has held up since then, performing in line with gold and outperforming equities by a wide margin.
• As fear set in, the S&P 500 volatility index (VIX) spiked more than 100% to levels not seen since the yen carry trade unwinded last August and the Covid crash in 2020.

On the back of all of his, many economists, including those of JPMorgan, see significantly increased odds of a recession.

‍

So what’s next?

The days and weeks ahead are going to be extremely interesting. We’re still just seeing the fallout while different countries scramble to prepare their responses.

However, as economists and investors speculate and try to predict what will happen, here are some of the more likely directions:

1. Pessimistic: The EU, China, and other major economies retaliate with more tariffs and trade barriers, prompting even more retaliation from the Trump administration. It escalates into an outright trade war, causing higher prices for consumers around the world and a deep global recession. Central banks and governments will be forced to stimulate the economy with low interest rates, quantitative easing, and massive money printing. Although this is typically great for risk assets like equities and crypto, we could still be in trouble if the trade war hasn’t settled down.
2. Optimistic: A month from now, the tariffs will be nowhere near the levels Trump announced on Wednesday. The EU, China, India and many other major economies will negotiate new trade deals with the US, ultimately fostering a trade environment that’s even more open and cross-border than before this week. We’re already seeing some movement toward this, as mentioned above. Even Elon Musk came out and suggested a deal like this between the US and EU. The tariffs may still be enough to slow down the economy and cause the Fed to cut interest rates more aggressively than previously thought, further boosting financial markets. Trump himself called for this on Friday.

I’m personally leaning toward the optimistic version, or at least something closer to that end of the spectrum. We’ll see in the coming days and weeks how things unfold. Either way, I’m much more inclined to be buying rather than selling equities at these levels.