Tariffs, a stockmarket sell-off, a probable global recession and then what… ?

Let’s try to figure out what a probable sequence after last week’s tariff increases might be.

You’ve all seen and heard that the White House hiked tariffs on all imports between 10%, the lowest rate, and 35% for the highest, depending on the trade balance the US has with each country or region in the case of the EU.

It’s the biggest increase in tariffs decided by the biggest economic power in the world for the last 100 years.

·      Let’s take one step back :

Ever since the end of WW II, the world has opened up to global trade, beginning with the Western allies, followed by the South-East Asian countries in the 70s and 80s, where cheap but educated labor encouraged manufacturing delocalisation from the West, before extending it starting with Mexico and even more so China in the beginning of the 90s, leading the latter to become the world’s factory. Tariffs remained rather low during all this time, boosting global trade and growth all over the world. And helping emerging markets to start catching up and allow a middle class to emerge in most continents and countries with the exception of Africa and the Middle East, where the main breaks were education and conflicts.

·      A globally connected economy

This led the world to become an open market place, also allowing the expansion of common rules and regulations framing that trade, and adopted by all countries.

One of the main developments was, over time, the switch of competences and weight in manufacturing to the emerging markets and an acceleration of growth in services in the developed world.

·      What is Trump now aiming at ?

His reference is William McKinley, who, when President, at the end of the eighteenth century, increased tariffs dramatically as well, at a time when manufacturing was, together with agriculture, the bulk of nations’ wealth and global trade !

When Trump attacks imports on goods, he believes, that he will put such pressure on his trading partners, that they will invest heavily in the US to skip the tariffs AND that it will allow US companies to « reshore », that is move production back to the States.

For WHAT ?

1/ To relaunch US manufacturing… At a time when

·      Specialization means, that a US car can be built with components coming from 50 different countries !

·      The US will lack the competences needed to replace foreign suppliers, as education has moved the last generation towards other jobs and services rather than manufacturing

·      And the country is not far from full employment !

2/ To tax imports to allow for income tax cuts domestically…

The problem being that tariffs will be an indirect tax on consumers, the less wealthy being as usual, more impacted. The calculation ranges from 3500$ to 5000$ per household and year, knowing that the average household income was 80600$ per year in 2023. This means a punction of between 4,3% and 5,8% through higher costs of imported goods !

And, as effects of this kind of measures never is equally diffused, the 20-30% poorest will have to take the biggest hit of what is the equivalent of the biggest tax increase in the last 50 years…

Remember ! The consumer always pays the final cost for import tariffs…

So what are the consequences ?

1.     INFLATION : increasing costs is not only coming from the direct impact of tariffs on imported goods. It also means that some products will, after the time needed to decide to invest and set up new manufacturing capacities, be produced in the US effectively, but just because their higher import price allows to restart producing in a more « expensive » country… So all in all, the global effect will be higher prices, to the detriment of the consumer, and once again, essentially the less wealthy ones…

2.     FINANCIAL CHAOS : it came quickly after the announcement on « Liberation » day ! Global stockmarkets are down in average 12% in four days. Having witnessed 1987, 1990, 1998, 2000, 2008, it feels to me, that we’re seeing a sell-off leading to a bear market, that will most probably lead to a global recession that will arrive very fast. Financial markets hate lack of visibility and predictability. Trump offers both.

3.     TRADE WAR : Trump cannot back down now and the most probable scenario is that of a trade war, after China showed the way and increased its own tariffs on US goods the day after! We are still waiting for Europe’s answer. A trade war will imply higher friction costs, lower profitability for corporates, thus lower investments.

4.     RECESSION : together with lower investments, lower profitability will mean more lay-offs, adding to the consumers’ worries, probably a steep fall of their confidence, especially in the US and the anglo-saxon world, where peoples’ wealth is to a great extent invested in financial markets and especially equities. All of this, added to higher consumer prices…

The last big trade war was launched in the end of the 1920’s, and we know how that finished, not a recession but a deep depression in the Western world.

HOLD it, we’re not there yet !!!

There is one weapon to counter this gloomy picture, and that is the fact, that the FED and other central banks have room to lower interest rates when and if needed if only inflation does not accelerate too much…

Now, as a conclusion, I will  give a hypothetical answer to the main question WHY DID HE DO IT ?

Why did Trump and his administration take this huge risk ?

Personally, I don’t believe that he’s ever proven to be a great business man. He’s inherited the basis of his wealth, that has just had a normal growth, in line with the stock market. All businesses outside real estate and the marketing and sales of his own brand, have failed.

But that is not enough to explain this move. Trump and his administration would be very naive if they believed that his main trading partners would finish crawling to him on their knees begging for a deal… So, the « Deal making » argument is rather weak, especially now, that Canada and China have reacted in a different manner.

Let's imagine a political fiction scenario...

Could it be that Trump counts on creating such a chaos, that it leads to civil unrest, which would allow him to extend his powers over Congress and Senate ? It’s very far reached, but, at the same time, the question of the Insurrection Act that may be invoked as from April 20 is a troubling coincidence, and this is not fiction… :

On January 20, 2025, while the press focused on the optics of Donald Trump’s indoor inauguration, something far more dangerous was set in motion—off-camera, away from ceremony, and beneath the radar of a public lulled by spectacle.

Trump signed an executive order declaring a national emergency at the southern border. But the most alarming part? It gave the Department of Defense and the Department of Homeland Security just 90 days to deliver a joint report on whether he should invoke the Insurrection Act.

That deadline is April 20.

This wasn’t about immigration. It was about power.

The Insurrection Act, passed in 1807, gives the president the authority to deploy the U.S. military on American soil. That means troops in US cities. That means bypassing governors. That means suspending protest rights. That could mean the death of democratic dissent—under the false pretense of restoring “order.”

Read more about it in Newsweek’s explanation below !!

https://www.newsweek.com/insurrection-act-explained-trump-admin-deciding-whether-invoke-1807-law-2041626