Liberation Day
By TRG Advisors on April 4, 2025
Wednesday afternoon, the Trump Administration imposed 10% baseline universal tariffs with higher levels on 60 trading partners. This was worse than expected, and the equity markets responded Thursday – the S&P 500 was off 4.84%, and the Nasdaq was down near 6%. Bonds are rallying on the “flight-to-safety” trade with the 10-year bond yield now at 4%, down from the recent highs seen in January of 4.8%. That is quite a move. Importantly, credit spreads remain tame and are well below levels seen during Covid-19 and the Great Financial Crisis.
While the tariffs are now known, the uncertainties over demand destruction and higher inflation are top of mind for investors. We estimate that if the current tariffs go into effect, it would be a 1-1.5% hit to GDP and increase to inflation accordingly and a 3-5% hit to S&P 500 earnings. Expectations for earnings growth in 2025 is 10%; there would still be growth, just less.
Retaliatory Tariffs Announced
Effective April 5th, the U.S. will impose a minimum 10% tariff on all imports. For countries that tariff U.S. goods, President Trump placed what he calls a “discounted reciprocal tariff” on the respective countries, effective April 9th. The discounted reciprocal tariff represents half of what the respective country taxes the U.S., which is the combined rate of all their tariffs, non-monetary barriers, and other forms of cheating, according to President Trump. Altogether, roughly 60 countries will have a tariff rate above 10%. Additionally, automobile tariffs took effect Wednesday evening with a 25% tariff on all foreign-made automobiles.
Scott Bessent stated that any retaliatory moves from foreign countries would only lead to further escalation. The new tariffs take the effective tariff rate to 29% – the highest level in more than a century.1 Combined, the tariffs enacted yesterday total $470 billion, equaling $620 billion when added to existing tariffs, or 2% of GDP. A full list of the new tariff rates can be seen below.
Chart 1: The New Batch of Tariffs, Visualized2
The White House clarified that the tariff rate on China comes in addition to the existing 20% tariffs on Chinese imports – meaning that the true tariff on China is 54%. Regarding Canada and Mexico, the minimum 10% and discounted reciprocal tariff will not be used on the countries. Instead, the previous orders remain in place for up to 25% tariffs on goods from the two countries in response to border control and fentanyl trafficking problems.
It is still unsure how foreign countries will respond to the new tariff rates, as well as how the tariffs will be absorbed into the U.S. economy. Early reports show that some are open to cooperation, with others fighting against the tariffs. But that said, many will feel difficulties. For instance, France’s wine and spirits industry said the U.S. tariffs will cut its annual sales by 20%.
Chart 2: The Effective U.S. Tariff Rate is the Highest in 100 Years3
It is important to know that the duration of these tariffs is unknown. It is plausible that if a country decided to quickly lower tariffs on U.S. goods, a deal could be made within days. But in the meantime, companies with strong ties to the global economy will feel pain. Apple (AAPL) and Amazon (AMZN) were down nearly 10% Thursday morning, and Nike (NKE), who in 2024 produced 50% of its footwear in Vietnam, was down over 14%.
Tariff volatility is likely to remain in the market moving forward. The thought that getting past ‘Liberation Day’ would lead to a bounce does not seem to be the case looking at today’s market moves. More questions remain, which will keep markets active, such as whether foreign countries will retaliate against the new tariffs or cooperate to cut a deal. What we do know is that the Trump administration is adamant about adjusting U.S. trade policy and seems to be willing to risk a recession to reach its final goal.
iSource: Evercore ISI. As of April 2, 2025.
iiSource: White House. As of April 2, 2025.
iiiSource: Strategas. As of April 3, 2025.