Trump's Tariff U-Turn: What Happened and Where Do We Go From Here?

Trump’s new retaliatory tariffs took effect early Wednesday morning. They had been announced a week prior and sent markets tumbling on increased recession fears and massive amounts of uncertainty. I wrote a recap of that situation here.

However, they only stayed in place for a few hours.

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Trump’s U-turn

Around 1:30 pm (EST) on Wednesday, Donald Trump posted on Truth Social that he would pause all retaliatory tariffs for 90 days because more than 75 trade partners had reached out to make new deals rather than retaliate. With China being the only exception. On the contrary, China got slapped with additional tariffs, ending the week with a total rate of 145%.

The EU responded by pausing its planned countermeasures for 90 days as well with Ursula von der Leyen saying that the European Commission wants to give negotiations a chance.

Although the new 10% baseline tariff remains in effect, investors cheered the plot twist. The S&P 500 and Nasdaq Composite rallied 9.5% and 12.2% respectively. It was the latter’s second-best day in history, only surpassed by a +14% jump in the middle of the 2001 bear market.

Many people are speculating that the market crash in equities and US treasury bonds in particular was part of the reason for Trump’s U-turn. However, it’s still unclear exactly what made him change his mind.

Another interesting wrinkle in the story is that the news seemed to get “leaked” already on Monday, causing the Nasdaq to rally 10% in half an hour before giving most of it back when the Trump administration called it “fake news”.

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The China situation

While the tariffs have just been paused and things can re-escalate at a moment’s notice, it’s fair to say that the actual “trade war” is for now being fought on just one front: US vs China.

The two nations went tit for tat throughout the week and raised tariffs multiple times. The US now has a 145% tariff rate on Chinese imports while China has added 125% in the other direction. China’s central bank also asked state lenders to reduce dollar purchases.

However, both parties have indicated that they don’t plan on increasing tariffs further from here and even showed some willingness to make a deal.

On Saturday, the Trump administration even announced that it would exempt phones, computers, chips, and other electronic devices and components from the 145% retaliatory tariffs. This is seen as a big win for US tech companies, including Apple which makes more than 80% of its products in China.

Even with a deal, however, China may need to step in and boost its slowing economy. Even before this week’s massive escalation, China was reportedly considering front-loading monetary stimulus to mitigate the effects of tariffs. Additionally, strategists began speculating that China would devalue the yuan by 15 - 30%.

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What’s next?

Trump’s tariff regime is probably far from over. The 90-day pause buys trade partners some time to negotiate and gives investors some relief. It is just a pause, however.

Hopefully we will begin seeing trade deals get announced. And hopefully they will include very low or no tariffs. If this begins happening in the near future, I believe markets will get back on track and continue to rally.

On the contrary, if we begin seeing headlines about failed negotiations and retaliatory tariffs getting reactivated, we may get right back into bear mode.

And these are of course just the first dominos to fall. Next, we’ll need to figure out the longer-term consequences and how central banks will react, particularly the Federal Reserve.

Will the tariffs actually cause inflation to spike while also slowing the economy, the feared “stagflation”, which puts the Fed between a rock and a hard place?

Or will they put such a dampener on consumer spending that prices will fall in parallel with economic activity, causing a regular recession that the Fed can combat by slashing interest rates?

For now, I’m watching for trade deal headlines regarding all of the countries that had their tariffs paused this week, as well as China. I also expect more volatility, although perhaps less pronounced than what we say this week.

I’ll close on that note and just list some of the record moves we experienced in just the first three days of this week:

• Mon: The Chinese Hang Seng index plummets 13.2%, its largest single-day drop since 1997.
• Tue: The S&P 500 posts largest intraday reversal in history, dropping more than 5.5% from a gain of 4% to end the day down by 1.6%.
• Wed: The Nasdaq rallies more than 12% for its best day since 2001 and its second-best day ever.
• Wed: The S&P 500 sees its third-best day since WWII, rallying 9.5%.
• Wed: Apple posts its best day since 1998 with a 15% jump.
• Wed: US stock exchanges record their highest trading volume in history with more than 30 billion shares traded.

Curious to see what next week will bring!