The Day After Liberation Day

President Donald Trump holds up a copy of a 2025 National Trade Estimate Report as he speaks during a “Make America Wealthy Again” trade announcement event in the Rose Garden at the White House on April 2, 2025. Chip Somodevilla/Getty Images

Commentary

Last week was the worst week for the U.S. stock market since the “COVID crash” of March 2020. Indexes such as the S&P 500 and the Nasdaq are each down by more than 10 percent since April 2. April 4 saw the largest-ever volume of shares traded in one day.

Markets reacted negatively to the new tariff regime announced by the Trump administration, which placed across-the-board tariffs of 10 percent on trading partners around the world, and up to 50 percent additional tariffs on perceived trade abusers such as China and Vietnam.

Under the new framework, tariffs will comprise 20 percent of imports, a level not seen in the United States in a century, and up from as low as 2 percent in recent years. Tariffs are projected to represent more than 2 percent of gross domestic product, a level last seen ... never, at least not in the United States.

Markets are concerned that the Trump administration, with these recent actions, have launched a trade war that will end badly for the U.S. economy and global trade as a whole. Is the market justified in its reaction? No one really knows. Here are a few thoughts from my perspective.

Markets Will Correct, Then Stabilize

Equity markets have been overvalued for a long time. The Shiller index of the ratio of price-to-earnings, a measure of relative value for equities, was at the third-highest (most expensive) level ever, only previously surpassed by the dot-com bubble and the global financial crisis, both of which ended in painful corrections. Stocks were priced for perfection, and up to this point investors had ignored the warning signs indicating that they had gotten ahead of themselves. Investors hoped that President Donald Trump was bluffing in making threats about tariffs, and were perhaps caught off guard when they realized he wasn’t.

The market’s correction—and it may not be over yet—will set the stage for a new bull market, especially once interest rates come down.

The End of Globalization

We can say with some certainty that the era of globalization and free trade has come to an end. It is being replaced by a system of trade nationalism, represented by higher trade barriers and bilateral agreements, but also one of escalating trade wars and geopolitical competition over scarce resources.

What is often forgotten in the debate is that while the United States’ position is shifting, it is only to more fairly align with what our trading partners have been doing for years. China has manipulated its currency, subsidized its industries, and closed its borders to U.S. goods. Japan has kept U.S. products and services out for decades. The European Union has subsidized its industries and limited access (including through mind-numbing red tape) to U.S. goods, and captured excess taxes through the VAT (value-added tax) system. Just because these tools weren’t called tariffs doesn’t mean that they weren’t effective barriers to free trade, placing U.S. companies at a disadvantage.

This is not the first time that this shift has happened. Globalization and free trade characterized world markets until 1914. World War I brought an end to the system in favor of nationalism and “beggar thy neighbor” policies. The Trump administration has learned from history and is engaged with its trading counterparties to, yes, win the advantage, but also to ensure that the system works in a way less disadvantageous to the United States.

The US Economy Will Grow Stronger

The U.S. economy is still the largest and most attractive market in the world. The United States is better positioned than any other nation to withstand a disruption to the system of global trade. We have a weakness in our manufacturing base and supply chain, to be sure, but the resources of the nation are now focused on addressing the issue. I wouldn’t bet against Americans on this score.

We are more trade independent, have more natural resources, and have more human, technological, and financial capital than our competitors. Therefore, we can outlast them. While China may choose to ratchet up the stakes in a trade war, and we may wince because of it, other countries are already showing signs of capitulation. Alliances will shift, and terms will tilt to the United States’ favor.

The Trump administration is aware of and won’t repeat the mistakes of the 1930s, which featured overly restrictive monetary and fiscal conditions which combined to strangle the economy and deepen the Great Depression.

The entire suite of economic-related executive orders and legislation now moving through Congress will work in concert to stimulate a new round of technological innovation and productivity growth that will be more broad-based, i.e., benefiting Main Street and not just Wall Street. If there is a recession in the near term, for which I give even odds, it is likely to be short-lived.

The Persistence of Inflation

Americans can rest assured that inflation will remain with us for the foreseeable future. As tariffs are raised on imported goods, prices will rise for the U.S. consumer. Prices for items such as textiles and apparel, manufactured goods including autos, and commodities such as aluminum and steel, are almost certainly going to rise, perhaps by more than 20 percent.

On the other hand, the silver lining on this unpleasant prospect is that inflation should continue to abate for food and energy, two of the most important categories for the working and middle classes. With some notable exceptions such as coffee and bananas, the U.S. is blessed to be able to produce and provide most of the nation’s nutritional requirements, including fruits and vegetables, grains, legumes, and animal proteins. As barriers and restrictions on domestic energy production come down, gas and fuel oil prices will follow. This will also contribute to lower food costs. This disinflation will be significant for items that make up more than half of the expenditure wallet of American families.

Interest Rates Will Fall

Eventually, the Federal Reserve will be forced to choose between inflation on the one hand, and recession and unemployment on the other. No central bank, reputedly independent or not, will long accept being held responsible for a severe recession or depression. This implies that interest rates will come down, perhaps later this year. As a result, asset prices, falling today in a slow but steady market panic, will eventually rise as the cost of capital comes down, and as the seeds of recent policy changes begin to bear fruit.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.