IT IS starting to look like one of the largest self-inflicted wounds the US has ever suffered.
The broad S&P 500 – the measure of US economic expectations and the cornerstone of millions of retirement accounts – fell almost 12 per cent in the first two sessions following the White House’s unveiling of sweeping tariffs on Wednesday (Apr 2).
US President Donald Trump has stoutly defended his actions, saying their intention is for the long-term health of the world’s largest economy.
But by almost all counts, “Liberation Day” has been nothing but a catastrophe.
Even the springtime idyll of the White House’s Rose Garden made for an eerie setting for what amounted to an attack on what Trump described as “friends and foe”, adding that “in many cases the friend is worse than the foe”.
As soon as Trump stepped up to the podium, it was clear that the tariff plan was his baby, duties he had tasked his economic team with imposing for his own inscrutable reasons.
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Commerce Secretary Howard Lutnick is the man who rebuilt Cantor Fitzgerald, one of the most formidable brokerages on Wall Street, from the ashes of the World Trade Center following the Sep 11 attacks in 2001.
On that fateful day in the roseate sunshine, he was reduced to the role of a student in Trump’s primary-school class.
Trump instructed Lutnick to bring up the chart showing the level of tariffs and, once Trump had finished with his lecture, he instructed him to scurry up to the podium to retrieve the chart again.
As for the contents of Lutnick’s chart, economists said that it was “worse than the worst-case scenario”. The scope of the tariffs, which was based on estimates of other nation’s trade barriers, including a range of duties and foreign-exchange practices, was stunning.
The stock market had crept up in advance of the unveiling, as traders bet the US would show some restraint, and keep tariffs in a range of between 10 and 25 per cent, while making many exemptions.
Instead, Trump turned the screw on every nation and every industry, with universal tariffs as high as 50 per cent.
New world order
Since the Cold War, the US had led a system of global capitalism, in which some nations such as China, Germany and Vietnam were exporters of hardware, while others, including the US, the UK and Singapore, were centres of software and services.
With one barely legible chart, Trump had thrown it all out. His true motivation, long a mystery to many economists, finally became clear.
Trump was retaliating against trading partners because trade deficits had been his first political cause, going back to the rise of Japan as an exporter in the 1980s.
In addition to this personal vendetta, the US president wanted to repay the auto workers who switched sides from the Democrats to the Republicans. He was doing it to save their factories, long unable to compete with Japanese and European imports.
Financial markets immediately grasped the new world order.
US equities were the biggest losers, and the more US-focused the business, the bigger the loss. The S&P 500 crashed, racking up the biggest two-session loss since the Covid-19 pandemic.
The Nasdaq Composite index of tech stocks and domestic-focused Russell 2000 index of small caps sank deep into bear-market territory, more than 20 per cent below their recent peaks.
The US dollar – for decades the ultimate safe haven in financial markets – slid against the yen, the euro, and other emerging rivals.
“Stop or I’ll shoot myself in the foot” was how former Treasury secretary Larry Summers had described Trump’s tariff threats earlier this year. Fulfilling those threats, Trump opted for a rapid-fire machine gun and blew the foundations of the US to smithereens.
“Without Trump taking active steps to reduce tariffs over the next three to six months, we are likely to enter a downside scenario, including a meaningful US recession and lower equity markets,” said Solita Marcelli, chief investment officer at UBS Global Wealth Management, in a note to clients.
Less than a month before Liberation Day, Federal Reserve chairman Jerome Powell had extolled the virtues and resilience of the US economy.
The US had continued to grow, Powell noted, through the wave of post-pandemic inflation, through the rate-hike cycle and even through a burgeoning second wave of inflation. Trump saw an ailing economy that needed intervention; Powell saw a healthy patient that fiscal authorities should leave alone.
In the wake of the tariffs, economists at brokerage JPMorgan Chase warned that Liberation Day has made a US recession more likely. The tariffs will drive up prices for all American imports, a toxic brew for a consumer-driven economy.
That will likely be the final straw for a resilient American economy after a half-decade of pressure on household finances.
Even Texas Senator Ted Cruz, among the most vigorous pom-pom shakers in Trump’s cheerleading Cabinet, criticised the tariffs, warning they presented a risk to Republicans’ congressional majority.
Not everyone was appalled by Trump’s move, however. Treasury Secretary Scott Bessent noted that the tariff levels were “a ceiling, not a floor”, hinting that the Trump administration was hoping to force trading partners to the negotiating table.
China has already retaliated with 34 per cent tariffs on US goods, and many other countries are likely to follow suit soon.
At this stage, it is unclear whether the slap in the face on Liberation Day will induce any form of goodwill in these negotiations.
