The Trump Slump begins

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Trump’s “Liberation Day” tariff announcement on April 2nd will live long in the memory of investors, economic policymakers, and American households, as will April 3rd’s market disruption.

As I’ve written previously, the S&P 500 and the dollar don’t usually move in the same direction.

Yet looking at weekly returns for the first eleven weeks of Trump 2.0 - including through April 3rd - reveals that five of those weeks have seen SPX and DXY decline simultaneously.

This suggests that the rotation away from U.S. equities and fears over U.S. Treasuries as a safe haven is real - and could be long-lasting.

A crude calculation

Set to go into effect on April 9th, the tariffs will affect 72 of the U.S.’s trading partners. Mexico and Canada were spared, partly because they are already subject to 25% tariffs on goods supposedly non-compliant with the USMCA agreement. The measures also excluded Russia, due to ongoing sanctions.

The formula that the administration used to calculate the new tariffs is merely the trade balance divided by the country’s exports to the U.S., divided by two.

This is why some poor countries such as Cambodia and Lesotho, which have no use for importing high-value U.S. products, face U.S. tariff rates of around 50%, which will surely harm their clothing-led export sectors.

Yet their bilateral trade surpluses with the U.S. are minimal: $9.6 billion and $234 million, respectively.

The EU, on the other hand, faces “only” 20% in tariffs, despite its $236 billion goods surplus against the U.S.

The calculation fails to capture the scale of the trade balance by, say, U.S. GDP or overall U.S. goods imports.

Moreover, excluding services from the calculation conveniently ignores that the U.S.’s overall bilateral trade deficits are much lower in some cases, as with the EU, at around €60 billion.

Reason for concern

Input-output analysis shows that the “face value” of the U.S.’s foreign production exposure to imports is much less than the total - or “look-through” - supply chain vulnerability to each trading partner.

The chart below depicts the share of the U.S.’s total industrial inputs sourced from China. At face value, only 0.5% of these inputs come from China.

But analyzing upstream supplier-to-supplier relationships shows that around 3% of U.S. inputs come from China directly and indirectly, i.e. directly via a third country.

This discrepancy between face value and look-through exposure holds for other major U.S. trading partners.

As such, the U.S. tariffs will apply multiple times across value chains, since many goods move from country to country before arriving in the U.S.

Hence the price rises on such imported goods for U.S. buyers could be enormous.

A further real-economy consideration is that for any jobs brought “back” to the U.S., many more depend on foreign imports: that ratio is 80-to-1 for steel production.

For the time being, however, today’s non-farm US payrolls print for March has far exceeded expectations, pointing to U.S. labor market resilience, despite government layoffs and tariff-fueled policy uncertainty.

The big picture

Trump’s economic team, led by Scott Bessent and Stephen Miran, has stated that the purpose of tariffs is to re-industrialize the U.S.

Hence the exclusion of services from the “Liberation Day” calculations.

They have also noted that the tariffs are part of a negotiating strategy towards a “Mar-a-Lago Accord.”

This would have preferred trading partners retain access to the U.S. market and military protection in exchange for:

• A) pegging their currencies at a higher value to a weakened, competitive dollar, and

• B) some sort of lower financial cost, whether in terms of tariffs or otherwise.

The Trump team seems to think that it will be possible to have key countries participate as preferred trading partners in this new MAGA-led order, where the U.S. re-industrializes and maintains the dollar as the world’s reserve currency.

Yet that participation is conditional on allies’ trust, which is currently fraying amid the trade war and annexation threats to Canada and Greenland.

Further, the U.S. must run large trade deficits to flood the world with enough dollar assets for the greenback to continue to be a reserve currency.

In other words, the desire to maintain the USD as the world’s reserve currency is partly predicated on a strong dollar, given the demand for such assets, and thus works against any attempts to re-industrialize the U.S.

It is therefore far from clear that Trump’s big gamble to reshape the global trading system will work out, but investors bet against the U.S. at their own peril.

So even though there is good reason for there to be blood in the streets, Trump could be forced to course-correct if Republican electoral prospects fade in 2026 and/or 2028.

Thus current market turmoil could be a historic buying opportunity for a range of risk-on financial assets - much akin to March 2020, though for the time being a range of havens are earning their name.

Disclaimer: The content provided in this newsletter is for informational purposes only and should not be construed as financial, investment, or other professional advice. While I strive to ensure accuracy, I make no guarantees regarding the completeness or reliability of the information presented. Readers are encouraged to conduct their own research and consult with qualified financial professionals before making any investment decisions. The author and publisher are not responsible for any actions taken based on the information provided.