The major indexes were headed for one of the worst days since the COVID pandemic.
The U.S. stock market was crashing on Thursday following President Donald Trump’s plan to impose new tariffs on its trading partners.
The Dow Jones Industrial Average was down more than 1,400 points, or 3.1%, in morning trading, while the S&P 500 plummeted some 210 points, or 3.7%. The Nasdaq Composite was down abut 870 points, or nearly 5%, while the Russell 2000 index cratered roughly 120 points, or 6%.
The market were on pace for one of the worst days since the COVID pandemic.
The catalyst was Trump’s tariff announcement, which he delivered Wednesday after the market closed. Trump imposed a baseline 10% on all imports from all trading partners, starting April 5, with additional tariffs on some 60 countries that the U.S. has significant trade deficits with.
China faces additional 34% tariff
Those 60 countries include China, which has an additional 34% tariff on it. That 34% tariff would be on top of the 20% tariff that the U.S. already imposed on China, making it, effectively, a 54% tariff. Also, the European Union was hit with a 20% added tariff, while Taiwan had a 32% additional tariff. South Korea (26%), Japan (24%), Switzerland (32%), India (27%), Iraq (39%), Vietnam (46%), and Israel (17%) were also hard hit. These tariffs kick in on April 9.
For Canada and Mexico, goods that are not covered under United States-Mexico-Canada Agreement (USMCA) are subject to an additional 25% tariff, with energy or energy resources and potash imported from Canada subject to 10% tariffs. But all other USMCA goods would not be hit with the baseline 10% tariff – a bit surprising given that these countries were the original targets.
“Large and persistent annual U.S. goods trade deficits have led to the hollowing out of our manufacturing base; inhibited our ability to scale advanced domestic manufacturing capacity; undermined critical supply chains; and rendered our defense-industrial base dependent on foreign adversaries,” Trump’s order said. “Large and persistent annual U.S. goods trade deficits are caused in substantial part by a lack of reciprocity in our bilateral trade relationships … These conditions have given rise to the national emergency that this order is intended to abate and resolve.”
Recession fears grow
Charles Schwab’s Michael Townsend, managing director, legislative and regulatory affairs, wondered if this was a negotiating tactic.
“A key question is to what degree the new tariffs are a negotiating tactic, designed to encourage countries to work out better trade terms with the United States. The executive order signed by Trump specifically gives him the ability to reduce tariffs if a country negotiates or takes other steps to reduce its trade barriers,” Townsend said.
The tariff plan, along with waning consumer sentiment and other economic warning signs, will likely result in companies adjusting 2025 earnings estimates, as tariffs could squeeze profit margins, said Schwab Chief Investment Strategist Liz Ann Sonders. Further, rising recession probabilities could morph the current correction into a bear market, she added.
Michael Feroli, chief economist at JP Morgan, said in a research note that the tariff plan would raise about $400 billion in revenue, or about 1.3% of GDP. He said that “would be the largest tax increase since the Revenue Act of 1968.”
Feroli added that they could boost prices by 1% to 1.5% this year, with inflationary effects most felt in the second and third quarters, reported Newsweek.
“The resulting hit to purchasing power could take real disposable personal income growth in 2Q-3Q into negative territory, and with it the risk that real consumer spending could also contract in those quarters,” he added. “This impact alone could take the economy perilously close to slipping into recession.”
China, EU, Canada to retaliate
The plan is likely to spark an even larger trade war, as several trading partners have already announced plans to retaliate.
European Union Commission President Ursula von der Leyen said the EU is preparing countermeasures.
“There is to be no order in the disorder,” von der Leyen said. “No clear path through the complexity and chaos that is being created as all US trading partners are hit … We are prepared to respond. We are already finalizing a first package of countermeasures in response to tariffs on steel. And we are now preparing for further countermeasures, to protect our interests and our businesses if negotiations fail.”
China’s Ministry of Commerce vowed to take countermeasures and urged the U.S. to lift the tariffs immediately, reported CNBC.
“The U.S. has drawn the so-called ‘reciprocal tariffs’ based on subjective and unilateral assessments, which goes against international trade rules and seriously undermine the legitimate rights and interests of relevant parties,” a Ministry of Commerce spokesperson said, reported CNBC.
French President Emmanuel Macron called the tariffs “brutal and unfounded” and said Europe must respond “industry by industry.”
Canada and Mexico also vowed to take retaliatory measures. Canada Prime Minister Mark Carney said the country will respond “with purpose and with force,” with countermeasures set to be announced Thursday, according to CNBC.
Headwinds could continue
Investors should be prepared for some volatile few days as negotiations and countermeasures are put in place. Beyond that, there is much uncertainty.
In a research note to clients, Citigroup analyst Stuart Kaiser, head of US equity trading strategy, said the tariffs were worse than expected and he doesn’t recommend buying the dip just yet, reported Yahoo.
“The pattern of negative headlines, delayed deadlines and better-than-feared implementation seems likely to continue and the President’s announcement included the potential for rollbacks based on negotiated bi-lateral outcomes,” Kaiser wrote, according to Yahoo. “In our view, tariffs are likely to remain a repeated headwind.”
