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Today’s Points:

• The blanket versus reciprocal tariffs debate has been resolved: Both.
• 10% blanket tariffs on all imports, starting April 5.
• Tariffs of 54% on China, 20% on the EU, 24% on Japan, 26% on India, from April 9.
• Mexico and Canada avoid new tariffs for now.
• The UK escapes with a 10% tariff — a Brexit dividend at last.
• China and small Asian countries like Vietnam seem the worst affected.
• The initial market reaction is very, very negative.
• AND: The doors we never opened into the Rose Garden.

A McEnroe Moment

The most immediate response to Donald Trump’s Liberation Day tariff announcement must be to channel another son of Queens. As John McEnroe once said to a Wimbledon umpire: “You can NOT be serious!”

The main headlines are bullet-pointed above. The official White House fact sheet can be found here. The tariff rates that the president chose to announce in the style of a game-show host appeared on this chart:

The market reaction was extraordinary, if unsurprising. As Trump started his speech with the blanket 10%, there was a tentative reaction that the tariffs would be more lenient than feared. Once he produced his chart to show the “reciprocal” levies on top of that, the exodus from risk was dramatic. At least the Mexican peso, spared any new levies, could stage a rally: 

Asia has come out far the worst. The biggest victims in the US are the companies most-exposed and that source a lot of their products from there, such as Apple Inc. and some of its Magnificent Seven brethren, or Nike Inc., which makes many of its sneakers in Vietnam. Scott Bessent, the Treasury secretary, told Bloomberg that he’d learned never to look at after-hours trading, and he had a point. But an after-hours selloff like this is hard to ignore:

It’s hard to call this an overreaction, but how to describe all of this? Jean Ergas of Tigress Capital Partners said this week that it wasn’t “rebalancing” trade: “This is verticalizing the US economy!” That appears to be right. Tariffs at these levels would turn America into its own economic island, trading only with itself. Horizontal links with the rest of the world are out. Yes, the globalized status quo isn’t working, but it’s difficult to see how this will be any better.

Clarity is still lacking — even excluding the possibility that some of these rates are never levied after a few days of negotiation — but back-of-envelope math suggests that this is even bigger than the Smoot-Hawley tariffs at the beginning of the Great Depression. Omair Sharif of Inflation Insights LLC calculates as follows:

I looked at imports from 50 countries shown on the White House chart. Together, they made up 68% of total US imports in 2024. Applying the tariff rates shown on that chart and assuming a flat 10% on the remaining 32% of imports gets you a weighted average tariff rate of 23%. We’ll likely end up somewhere between 25% and 30%. Note that this would be higher than the average effective tariff rate of about 20% in 1933 under Smoot-Hawley. 

Fitch Ratings’ Olu Sonola reckoned the new effective tariff rate at 22% (up from 2.5% last year). That would be the highest since 1910.

Sonola described the announcement as a “game changer” for the US and the rest of the world: “Many countries will likely end up in a recession. You can throw most forecasts out the door, if this tariff rate stays on for an extended period of time.”

Alternatively, if we look at this package as a revenue-raising measure, then it should raise some $600 billion — if all trade continues as before. Dan Clifton of Strategas Research Partners said: “Trump said he wanted $600 billion and he got it. This represents 2.2% of GDP and twice the size of the largest tax increase in modern US history.” Recall that three months ago, everyone was looking forward to tax cuts. 

A further problem is the bizarre mathematics behind the estimates of countries’ overall tariffs, which include currency manipulation and non-tariff trade barriers. No explanation of how these can be combined into one tariff rate has been offered. Peter Tchir of Academy Securities commented that this “seems like the sort of thing you turn in when you watched college hoops all weekend and need to get the assignment turned in or you fail.” He drills into it:

Currency Manipulation as a percentage seems difficult to calculate? What portion of a currency move is “manipulation” as opposed to market forces?

Trade barriers, includes VAT? Currency restrictions (or is that included in manipulation?) No idea.

Average Tariffs. Presumably  there is some average tariff level. Is it trade weighted? Is there any weighting at all? Or is it simple average? 20% on eggs and 5% on autos is 12.5%? For tariffs attached to quotas (which many are), is it based on the average or the highest? There is no way to tell.

This is not a serious way to proceed, and it’s insulting to put such huge restraints on allies’ trade with such weak explanation — particularly in a speech that accuses the rest of the world of “raping and pillaging” the US. Under the common understanding of reciprocity, trade negotiators would go through product by product (involving many difficult definitions), and make sure that each individual tariff is balanced. That would have been very difficult, but would appear fair. This appears arbitrary, because it is. Presenting it as “kind” adds salt to the wound.

Japan’s stocks plunged on news of 24% tariffs. Photographer: Kiyoshi Ota/Bloomberg

World leaders will have to keep their cool better than McEnroe did. But taken together, this isn’t the action of serious people, even though its consequences could be very serious indeed. 

Next Move, Rest of the World

What happens next? There’s been a range of initial reactions, but governments in general haven’t been outspoken, as they’re obviously now expected to use the next few days as a bargaining window to offer concessions. Many will already have a laundry list to take to the White House. Canada says it will retaliate, Australia says it won’t, and most are keeping their own counsel. 

The obvious intention is to spark a negotiation. But it’s politically difficult for foreign leaders to negotiate with a US president who has just insulted their country, while the obscure math makes it difficult even to start a discussion. “I don’t see how many leaders could pick up the phone to negotiate after this,” commented Tchir. 

The single biggest decision rests with China, and whether it will allow its currency to devalue further. For several years, the yuan has been weak but hasn’t slipped below 7.4 to the dollar. It’s a clear ceiling, and as this terminal chart shows, the offshore yuan is already very close to breaking it:

In Europe, always slow-moving, a 20% tariff rate makes it easier to organize retaliation. It will be hard for member countries to convince their electorates to take quite such a big penalty lying down. But retaliation comes in different forms. 

Tina Fordham of Fordham Global Foresight argues that an important unintended consequence of the trade rhetoric to date has been “the fomenting of a growing anti-US alliance, including between such strange geopolitical bedfellows as China, Japan and South Korea — historically bitter rivals” who had already indicated a joint response to US tariffs. Europe’s sudden moves toward coordinating investment for defense are another example.

A container ship under construction in South Korea. Photographer: SeongJoon Cho/Bloomberg

There is also the possibility that “retaliation” could take the form of fiscal policy, not tariffs. George Saravelos, head of FX research at Deutsche Bank AG, said:

Put simply, a tariff retaliation would be a big growth negative. Alternatively, a fiscal retaliation (= offsetting fiscal stimulus) would be much more positive. Our expectation is increasingly leaning towards the latter; consumption subsidies and corporate tax breaks.

Trump might just badger the rest of the world to find new trading partners, and to borrow money to create their own growth. That would be much better for the global economy. It wouldn’t bring back US manufacturing jobs.

Pre-Liberation Markets

Investors try not to wait for the news, if they can help it. The response to Liberation Day has been taking shape for at least a quarter, and reflects a strong bet on a change in leadership  that took hold after the election. Investors are also getting their retaliation in first through a big stock rotation — although the scale of the tariffs may still come as a surprise.

“Part of the pullback process is the churn involved in changing global leadership,” says Chris Watling of Longview Economics. “That is, the switch from portfolios dominated by growth stocks, to those with higher cyclical ownership (via defensive sectors).”

Within the US, that turn has meant a move into large-cap value stocks, which enjoyed a spectacular first quarter — the best compared to growth, according to the Russell indexes, since the extreme conditions of the bursting dot-com bubble in 2001:

Bank of America Corp’s Savita Subramanian suggested there was further upside for large-cap value stocks because they represent “quality and old economy cyclicals.” It’s noticeable that defensive stocks that do well in tough times also enjoyed a rotation in their favor:

Also logically, US investors had already been exiting the stocks that were particularly dependent on overseas revenues, as illustrated by S&P indexes. If these tariffs stay in force for any significant period, we can expect this rotation to go a lot further:

Emerging markets offer the greatest cause for concern; Asia’s, in particular, are the biggest losers from this package. And yet EM credit held up well in the months leading up to Liberation Day, and stocks outperformed.

While there may be emerging cause for concern, there has been one very clear winner so far. Put together a market preference for old economy stocks deriving their income primarily from the US, and for value, and you get Warren Buffett’s vehicle Berkshire Hathaway. Indeed, its stock price has on its own raised the S&P 500 by 17 points so far this year, more than any other company. Nvidia Corp. had accounted for a loss of 70. These are the 10 greatest leaders and laggards for the year to date:

Zeroing in on the contest between Berkshire and Tesla Inc., or old economy versus new, the turnaround is remarkable. Since the beginning of last year, Berkshire is up almost 50%. Tesla, judging by the after-hours move in its stock, is underwater:

Buffett’s uncanny genius even spreads to an opportunistic acquisition he made in the turmoil of September 2008: a stake of roughly 10% in Chinese battery-maker BYD Co. That worked out well, even if Liberation Day will make life harder. And of late, Warren’s vehicle has even outpaced Elon’s:

There’s a new order. The world has been turned upside down. Markets were (kind of, a bit) ready for it. And even at 94, it appears that we can still rely on Warren Buffett. 

Survival Tips

Time for some poetry. Decades of economic history, political campaigns, mistakes, misapprehensions, victories, defeats and opportunities both missed and taken have come to a tragicomic conclusion in the Rose Garden. The first lines of Four Quartets by TS Eliot seem terribly apposite:

Time present and time past
Are both perhaps present in time future
And time future contained in time past.
What might have been and what has been
Point to one end, which is always present.
Footfalls echo in the memory
Down the passage which we did not take
Towards the door we never opened
Into the rose-garden.

This wasn’t inevitable, and it shouldn’t have happened, but it did. There are many reasons why and plenty of blame to go around. Now it behooves us all to try to find the passage that can take us, even from this difficult starting point, to the rose garden — or at least to a global economic order fairer than the last.

More From Bloomberg Opinion:

• Dave Lee: DOGE Has Its Sights Set on US Computer Systems. Oh Boy.
• Clive Crook: US-Led Cooperation Beats Conflict Every Time
• Steven Brill: Big Law Must Stop Caving to Trump’s Demands

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