Savio Keith – Investment Analyst
Background
U.S. President Donald Trump’s trade policy appears to be rooted in a decades-long belief that the United States has been taken advantage of by its trading partners. Since the 1980s, he has voiced this view publicly, often criticizing countries like Japan for engaging in what he considers unfair trade practices. Believing that trade deficits are evidence of this exploitation, Donald Trump has consistently promoted tariffs as a way to protect and strengthen U.S. industries and has often praised the pre-income tax era when tariffs funded the federal government. As part of his 2024 campaign, he has reiterated the idea that tariffs could generate enough revenue to reduce, and eventually replace, income taxes altogether.
Election Results and the Post-Election Period
Following the November 2024 U.S. Presidential election, U.S. equity markets surged to record highs, fuelled by optimism over the incoming administration’s stated economic agenda, including tax cuts and deregulation. Amid the early optimism, U.S. markets reached the following all-time highs:
- The S&P 500 Index hit 6,144.15 on 19th February 2025
- The Nasdaq Composite Index hit 20,173.89 on 16th December 2024
- The Dow Jones Industrial Average hit 45,014.04 on 4th December 2024
However, concerns soon arose over the President’s aggressive trade policies, especially the tariffs aimed at key partners like China, the EU, Canada, and Mexico. This ultimately sparked fears of rising inflation, a potential recession, and even stagflation.
“Liberation Day” Announcement
On April 2nd, 2025, President Trump announced his “Liberation Day” trade agenda, which included a universal 10% tariff on all imports starting April 5th. Additional punitive tariffs targeting countries with significant trade deficits were set to take effect on April 9th. The President also stated that any country that retaliates would face even higher tariffs. Interestingly, while Canada and Mexico were excluded from the newly announced tariffs, most goods covered under the United States-Mexico-Canada (USMCA) trade agreement remained exempt—except for auto exports, as well as steel and aluminium, which are governed by separate tariff policies.
As a result of the announcement, markets reacted strongly in a risk-off fashion, resulting in the steepest stock market decline since the COVID-19 pandemic began in March 2020. In the 2 days following the announcement to the close of the week:
- The S&P 500 Index declined by 10.53%
- The Nasdaq Composite Index declined by 11.44%
- The Dow Jones Industrial Average declined by 9.26%
Volatility, arguably the most influential market factor affecting investment portfolio management at present, has experienced significant fluctuations since the elections. Notably, on April 4th, in the period following the announcement, the CBOE Volatility Index (VIX) spiked sharply, closing at 45.31, its highest level since the early days of the COVID-19 pandemic in April 2020. For context, VIX readings above 30 typically indicate heightened market volatility and investor fear, while values below 20 suggest relative market stability and confidence. Remarkably, the VIX has only exceeded the 43.00 mark eight times in the past 35 years.
China’s Retaliation
As a result of the Liberation Day announcement, China was hit with a 34% tariff. This steep levy is based on the long-standing imbalance in trade between the U.S. and China, which has persisted for over two decades. In 2024, China’s exports to the U.S. exceeded U.S. exports to China by a ratio of 3 to 1, contributing to a U.S. trade deficit of US$295.4 billion. In response, China swiftly retaliated with its own 34% tariff on U.S. goods, prompting President Trump to threaten an increase to 50% unless China reversed course. In a further escalation, China raised its tariff on U.S. imports to 84%.
90-Day Tariff Pause
Shortly after, on April 9th, the White House announced a 90-day pause on the tariffs for countries that did not retaliate. However, this pause did not apply to China, whose tariff rate was raised to 145% in response to its earlier 84% levy on U.S. goods. In turn, China escalated its tariffs to 125%. Additionally, to ease the impact on tech companies, the U.S. also introduced exemptions for smartphones, computers, and other electronics such as GPUs and semiconductors, giving firms time to shift production back to the United States. The broader expectation is that the pause signals a potential shift towards de-escalation and a negotiated settlement, offering a window of opportunity for countries to strike deals. This is especially anticipated between China and the US, given the deep trade interconnection between their economies and its global impact.
