Insights

Liberation Day

April 4, 2025

Liberation Day should have been named Liquidation Day.

The Trump administration introduced a two-tiered system of tariffs that includes a base 10% tariff on all imports and incremental tariffs applied on a country-by-country basis. Few (definitely not us) were expecting this much, particularly outside of China. We had anticipated tariffs on certain industries - steel and aluminum, autos – where such measures are common, and on those countries with other significant trade barriers for US companies. The only relative bright spot, for now, is the continuation of exemptions for trade with Mexico and Canada under USMCA.

The reciprocal nature of the tariffs suggests that some may move lower after negotiations, but it appears that tariffs will be much higher and more broadly based than anticipated. The effective tariff rate could be as high as 25%, compared to expectations in the low single-digits as Trump took office. This returns tariffs to levels from a century ago (the Smoot-Hawley Tariff Act of 1930). The first version of the 1930 Tariff Act passed in the House in 1929 and was narrowly approved by the Senate the following year. Soon thereafter, a petition signed by 1,028 economists was presented to President Hoover, begging him to veto the bill. Goaded on by his party, he signed despite his own misgivings.

The Smoot-Hawley Tariff didn’t cause the Great Depression, but it is generally considered to have contributed to its length and depth. It certainly failed to protect American jobs and farms.

It is possible that this time, tariffs could turn out to be bargaining chips that somehow get America a better deal. The stock market’s reaction indicates that investors have grave concerns about this approach.

Upheaval in financial markets reflects increasing uncertainty, as well as growing expectations of a recession here and abroad. Risks that had been considered to be unlikely now are now much more likely. Stock prices are adjusting accordingly. Though it’s incredibly painful, the market is in the process of finding a level that accounts for these risks. If today’s prices reflect significant tariffs remaining in place and a weakening economy, then that reality shouldn’t elicit further price adjustments. Of course, there are always worse scenarios. However, if Trump negotiates lower tariffs, then recession may be avoided and markets will soldier on.