The US Tariff Day opened a new episode this Friday in President Donald Trump's punishment of the rest of the world. The executive order signed Thursday night establishes new tariffs on 69 countries and the European Union and reaffirms a 10% floor for the rest. As in previous episodes, most notably the so-called Liberation Day of April 2, this Friday's has unleashed uncertainty about the global economic outlook. Now, the consummation of his new tariff order—which will come into effect on August 7—coincides with the first tangible signs of economic weakness in the US. The sudden increase in tariffs in large parts of the world threatens to weaken global economic growth, which was not going through a particularly buoyant period. DWS analysts believe the US economy will be the hardest hit,"as growth in sectors protected by tariffs will reduce efficiency."
As signs of a deteriorating outlook accumulate, markets, until now overly complacent about the new protectionist framework, are correcting their excesses: the week closes with falls of more than 2% in European stock markets, a decline in bond yields, and a further retreat of the dollar. UBS analysts estimate that EU growth could contract by 0.3% over the next 12 months. However, Trump's protectionism has already pushed Europe to take measures to stimulate its economy, such as Germany's fiscal stimulus plan and increased defense spending in the EU, which could mitigate some of the tariff blow.
With many details still to be finalized, only one thing is clear: the vast majority of US imports are now more expensive than they were in January, when the Republican was sworn in at the Capitol rotunda in Washington. Back then, the average US tariff was around 2.3%. Now it stands at around 18%, according to calculations by the consulting firm Capital Economics. If the tariffs imposed on each country are combined with sector-specific tariffs on products such as steel or aluminum,"the percentage will be closer to 20%, the highest since the 19th century," believes Josh Lipsky, director of the Center for Geoeconomic Studies at the Atlantic Council think tank.
The tariff blow comes at a time when the US economy is beginning to show its weaknesses. In July, job creation ground to a halt. The number of new jobs fell to 73,000, well below the 104,000 expected by the Bloomberg consensus. But what has been most revealing has been the sharp downward revision of previous data: the 139,000 jobs initially estimated for May have dropped to 19,000, and the 147,000 in June have dropped to just 14,000."This sheds a completely different light on what has been happening in the US economy following the announcements of April 2," notes James Knightley, chief international economist at ING. The weakness also extends to manufacturing.
These data reinforce the uncertainty about the real impact that the new tariff framework may have on the productive fabric and business confidence. Financial markets reacted with widespread selling. The Euro Stoxx 50 fell 3% and the S&P 500, which had been flirting with historic highs, lost more than 1%. The pressure was even more visible in fixed income: the yield on the two-year US bond fell 23 basis points to 3.7%, and that of the ten-year bond fell to 4.2%, in one of the largest fluctuations of the year. The dollar also felt the blow. The euro appreciated 1.1% to 1.15, erasing much of the ground lost in June and July.
The growing fragility of the US labor market opens the door to a more decisive response from the Federal Reserve. This week, the institution chaired by Jerome Powell opted to keep rates unchanged and avoided providing a clear roadmap for the coming months, arguing that it was still too early to decide whether the data warranted a change.
In the market, analyst firms are already anticipating a change of direction. ING experts see a likely rate cut in September, followed by two more at the October and December meetings. Meanwhile, Trump continues to intensify his political offensive against the Fed. On social media, he once again attacked its chairman:"Jerome the late Powell must substantially lower rates, now! If he continues to refuse, the [Fed] board should take control and do what everyone knows must be done," he tweeted on social media.
Trump was jubilant on Friday. With no other official events on his agenda other than a trip to his golf club in Bedminster, New Jersey, for the weekend, he asserted that the imposition of tariffs"is going very well, it's going very smoothly" in an interview with NBC television.
These statements came shortly after signing the executive order establishing a tariff floor of 10% for most countries, 15% for other states or blocs that have negotiated with Washington (the European Union, Japan, and South Korea, among others), and up to 41% for nations that are out of favor in Trump's eyes, including 39% for Switzerland—currently at 15%—or 50% for Brazil, which has not yielded to the Republican's demands that it not prosecute former President Jair Bolsonaro for coup plotting.
The US president also clarified that the tariffs that go into effect next Thursday don't necessarily have to be final."It doesn't mean that someone can show up in four weeks and say we can close some kind of deal," he noted.
Although, given the volatile personality of the White House resident, these hypothetical adjustments would not necessarily be downward. Hanging over each agreement is a sword of Damocles: the possibility that Trump could decide at any moment, and with the most unexpected argument, to raise taxes again. The terms of the agreements already concluded, including the one reached with the European Union,"are not at all clear because the texts have not been made public, and it seems likely that they could be discarded at any time at the president's whim," notes Mark Linscott, former deputy US Trade Representative and now at the Atlantic Council's Southeast Asia Center.
For now, calls for new negotiations are already underway. Switzerland, shocked by its new tariff regime and whose companies were plummeting on the stock market, is calling for talks. So is India, which has been hit with a 25% tariff and faces the prospect of even higher rates if Trump ultimately makes good on his threat to penalize Russia's trading partners for Moscow's actions in the war in Ukraine. Other countries had already planned to continue their contacts with Washington to discuss their respective tariff rates. Mexico has obtained a 90-day extension; China, the world's largest exporter, faces a deadline that expires on the 12th.
Canada, along with Mexico, the United States' partner in the North American Free Trade Area, faces taxes of 35%. A less shocking fact than it seems: 94% of its exports are exempt from this tax, as they are protected by the trilateral trade agreement. Something similar happens with Brazil: although the percentage imposed is punitive, many of its main exports to the northern giant are excluded, including oranges and airplanes.
Whatever happens, whether or not changes are on the horizon, the global trading system will now be different from the one that existed,"increasingly fragile," from the end of World War II until January 20, according to Lipsky."In a period of seven months, Trump has remade a global trading system that took 70 years to build," this expert notes. Now,"there is no going back to the old way of doing business," he believes.
