On April 2, Donald Trump, the President of the United States, shocked the world by announcing drastic increases to import tariffs. The justification for this was vague and unclear. One of the goals is to bring manufacturing back to the US and to protect American manufacturers.
The equity markets reacted immediately to the announcement, falling more than 10 percent within a few days. The resulting uncertainty regarding imports and shipments and subcontracting by manufacturing companies grinding to a halt soon led the President to pause the tariffs by 90 days. China was an exception and Trump raised the tariffs on China and Chinese products further to 145 percent after China retaliated with tariffs on US products. In early May, however, there were reports of feelers being put out to start negotiations.
Fed Chair Jerome Powell said the Federal Reserve would wait for the situation and the inflation outlook to become clearer, which Trump loudly criticized, calling for Powell’s resignation. The fixed-income and foreign exchange market reacted negatively to this. The US 10-year rate rose by more than 0.5 percentage points in a day and the dollar weakened by almost 4 percent against the euro.
Disbelief sustains market’s hope for a better future
The volatility in fixed-income and foreign exchange markets prompted Trump to backtrack on his announcements. Trump’s brief silence also calmed the markets. The markets and many companies believe that Trump will have to back down on his tariffs and other demands because of the negative effects.
Completing trade negotiations by early July will also be a big challenge for the US. With many countries, the US will have to settle for some form of memorandums of understanding on trade deals. For export companies, the situation is difficult because there is no certainty regarding subcontracting and supply chains or the terms of trade deals or their permanence.
The market is confident that the outcome will be better than predicted by the negative scenarios. In any case, we will have to wait for the news on the negotiations and for hard economic data on the current situation. This wait may also help the markets stabilize, at least temporarily. By the end of the month, the markets had settled into a serene state of anticipation, and equity markets had almost fully recovered from the slump of early April.
Trump’s actions will have lasting effects
Trump’s rough handling of policy and the economy has widely undermined confidence in the US. The dollar depreciated by almost 5 percent against the euro in April and has weakened by almost 10 percent since the turn of the year. The dollar is now at its weakest level since spring 2022. Nevertheless, the dollar is still far from crisis levels. At its weakest, it was 1.5000 in relation to the euro during the financial crisis in 2008.
Global political and economic structures are now in flux, and the outcome is far from clear. What matters is restoring confidence between countries, adapting to change, and the capacity for renewal and productivity growth across countries and regions. However, constant change and uncertainty will create costs for society and businesses, creating a risk of higher inflation in the long run. In the short term, the trade war has increased the likelihood of economic risks materializing.
Table: Changes in value of key capital markets in April and from the beginning of the year
