Auto tariffs further dent U.S. exceptionalism

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President Trump’s announcement yesterday of a new 25% car tariff is possibly the administration’s most disruptive trade action yet.

Due to take effect on April 2nd, the tariffs will have a large impact on the largest auto exporters to the U.S, which imported around $220 billion of passenger cars last year.

Mexico, Japan, South Korea, Canada, and Germany exported 2.5 million, 1.4 million, 1.3 million, and 430,000 vehicles to the U.S. in 2024, respectively.

The auto sector is a linchpin of the global trade architecture and central to these countries’ export bases. Economists estimate that Germany could lose up to 0.6 percentage points of GDP over two years, with similar effects in Japan and Mexico.

Small wonder then that markets have reacted negatively to the news, with broad equity indices trading lower in Mexico, Japan, Canada, and across Europe.

The S&P 500 is also down, partly owing to the impact that U.S. consumers are likely to face from more expensive foreign- and domestically-made cars alike.

Domestic carmakers will face rising input costs, as the Trump administration will also apply the tariffs to engines, transmissions, powertrain parts, and electrical components.

Moreover, U.S.-linked automakers Ford, GM, and Stellantis will face further costs on the cars they manufacture in Canada, Mexico, and China and then export to the U.S.

Yet this latest salvo in the trade war may only be a prelude to the “big one” of reciprocal tariffs that Trump has said he will announce on April 2nd.

So much for US exceptionalism?

The car tariffs are only the latest in a series of self-harm to the U.S. economic juggernaut, with Trump policies having sent the American exceptionalism trade into reverse.

U.S. exceptionalism has been predicated on superior growth. Yet in recent years outsize fiscal deficits and a generational surge in AI capex explain much of the U.S.’s economic outperformance.

With Europe poised to ramp up its own spending plans and China demonstrating via its DeepSeek model that it is very much in the AI race, it is less clear how much of an economic edge the U.S. really has.

This narrative is a major reason why the dollar index and the S&P 500 have both weakened in today’s early trading and also since January 31st.

And DXY and SPX may react similarly to Trump’s April 2nd “Liberation Day” trade policy announcement.

However, historically, these two don’t tend to drop simultaneously for long periods of time:

Not so fast: retail investor bearishness as a contrarian indicator

The combination of policy uncertainty and a less-compelling growth story is driving some institutional investors away from the U.S. Case in point, Bank of America has significantly pared back its U.S. equity allocations this March.

Retail investors, on the other hand, have bought the dip, with $67 billion in U.S. equities and ETF purchases in Q1-2025 - which is nearly as high as Q4-2024.

Some professional money managers view sentiment as a contrarian indicator, with this perspective suggesting that retail investor bullishness may precede further market declines.

Yet overall retail sentiment actually appears to be deeply negative, despite the strong retail inflows: the American Association of Individual Investors’ weekly survey shows a remarkably bearish mood.

The last two times AAII bearishness reached these levels was in June-September 2022 and in March 2009.

The one-year S&P 500 returns from September 22nd, 2022 and March 5th, 2009 were 14.96% and 66.8%, respectively. The latter marked a recovery from the Global Financial Crisis.

Yet as Fed Chairman Jay Powell recently stated, he doesn’t know anyone with a lot of confidence in their forecast right now.

Although gold is still up in today’s trading, the yen is down along with sentiment around Europe’s upcoming defense spending push, leaving investors with ever fewer places to hide as the trade war ramps up.

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