Trump's Bold Tariffs: Escalating Trade War Risks

U.S. President Donald Trump has announced a series of so-called "reciprocal tariffs," far exceeding market expectations. The new tariff scheme calculates the imposed rate as 50% of the trade barriers (converted into tariff rates) that non-U.S. countries apply to American goods, with a minimum rate of 10%. As shown in the chart, most of the U.S.'s major trading partners are now facing tariffs of over 20%.

According to the executive order, a 10% reciprocal tariff will take effect on April 5, while tariffs exceeding 10% will be implemented starting April 9. Notably, the highest tariff increases were imposed on China, Taiwan, Vietnam, and Switzerland, which came as the biggest surprises to the market.

If the newly announced 34% tariff is applied on top of previous tariffs, China's average tariff rate will have surged by 54% this year, far exceeding the levels seen during Trump's first term. The key question now is how China will respond. If China chooses to devalue the yuan, it could trigger a major global risk-off event.

Should all the tariffs be fully implemented, the effective U.S. tariff rate will rise sharply from 2.4% in 2024 by an additional 22.7 percentage points, reaching 25.1%.

Markets Plunge as Trade War Fears Rise

Following the announcement, the U.S. stock market's "Magnificent 7" saw significant losses in after-hours trading, with apple tumbling over 5%. The reason is that nearly half of these companies' revenues come from outside the U.S., making them more susceptible to global macroeconomic risks compared to other American businesses. In response, Asia-Pacific markets also posted broad declines.

Additionally, traders have increased their bets on Federal Reserve rate cuts this year. The probability of the Fed cutting interest rates four times in 2025 has now risen to nearly 50%.

Is There Room for Negotiation?

The newly imposed tariffs have significantly exceeded market expectations, causing turmoil in global financial markets. However, there remains a window of time between the announcement and full implementation.

Notably, the U.S. has maintained a relatively "moderate" tariff stance toward Canada and Mexico, suggesting that Trump still views tariffs as a negotiation tool. If other countries make concessions, they could potentially receive exemptions from the tariffs.

Moreover, within Trump's administration, Scott Bessent does not hold significant influence. The final direction of trade policy will still depend on Commerce Secretary Howard Lutnick and President Trump himself.

Economists Warn of Recession Risks

Following the tariff announcement, multiple institutions have issued warnings about an increased risk of a U.S. recession. The prevailing view among economists is that the sharp rise in U.S. tariffs, coupled with potential retaliatory measures from other nations, will deliver a severe blow to the global economy.

According to prediction market Polymarket, the probability of a U.S. recession has surged to approximately 50%.

Diane Swonk, Chief Economist at KPMG, stated, "This is the worst-case scenario we feared—tariffs have significantly increased the likelihood of an economic slowdown in the U.S."

Seth carpenter, Chief Global Economist at morgan stanley, warned in a televised interview, "Tariffs are not a zero-sum game; they lead to an overall contraction in global trade."

Jay Bryson, Chief Economist at wells fargo, highlighted the Fed's dilemma: "If tariffs significantly slow the U.S. economy and push unemployment higher, the Fed would typically cut rates. However, tariffs also drive up inflation, forcing the Fed to maintain higher interest rates to control prices."

The Stagflation Threat Intensifies

A report from China International Capital Corporation (CICC) warned that the new tariffs could exacerbate the risk of "stagflation" in the U.S. economy. Companies now face two choices: raise prices or absorb higher costs. If businesses opt to pass on costs, consumers will bear the burden, leading to weaker demand and greater economic headwinds. If companies choose not to raise prices, profit margins will be squeezed, reducing hiring and ultimately slowing economic growth.

According to CICC estimates, the additional tariffs could push up the U.S. Personal Consumption Expenditures (PCE) inflation rate by 1.9 percentage points, generate $737.4 billion in additional government revenue, and reduce U.S. real GDP growth by 1.3 percentage points.

Further China Implications

It is important to note that the U.S. tariffs on China go beyond the newly announced 34%. White House documents explicitly state that these "reciprocal tariffs" are applied in addition to existing tariffs. If calculated cumulatively, the newly imposed 34% tariff, combined with the previous 20% tariff, results in a total tariff burden of 54%. Moreover, factoring in the 12% average tariff from the 2018–2019 U.S.-China trade war (Section 301 tariffs), the actual effective tariff rate on Chinese goods could be even higher.

Additionally, another White House document reveals that Trump has signed an executive order eliminating the tariff exemption for small parcels under $800. Starting May 2, packages valued under $800 will be subject to a 30% tariff or a flat $25 per item (increasing to $50 per item after June 1). This move is expected to significantly impact Chinese e-commerce giants like Temu (Pinduoduo's international platform) and Shein.