On April 2, 2025, U.S. President Donald Trump announced the imposition of widespread tariffs on imports, including a 54% increase on Chinese goods and 20% on European products, in what he called "Liberation Day." This move came as part of his efforts to reduce the trade deficit and boost domestic production.
In response, China imposed retaliatory tariffs of 34% on all U.S. imports, escalating trade tensions between the two largest economies in the world.
These developments have raised investor fears of an all-out trade war that could lead to a global economic recession. As a result, global financial markets experienced severe disruptions, with the Dow Jones Industrial Average falling by more than 2,200 points (5.5%), and the S&P 500 declining by 6%, leading to an estimated loss of about $6.6 trillion from the value of U.S. stocks in just two days.
Powell's statements
Federal Reserve Chairman Jerome Powell indicated that the economic impact of the new tariffs will be much greater than previous expectations. These statements show a clear concern about the persistence of inflation, which may not be just a transient issue but could extend for long periods. Powell warns of the risk of "stagflation," a highly dangerous economic situation that combines rising inflation with slowing economic growth, posing extremely complex challenges for the economy.
What the Trump administration does not know
Smoot-Hawley Act (1930)
We must remember the experience of the Smoot-Hawley Act imposed by the United States in 1930 with the aim of protecting domestic industries. Instead of protecting the economy, this law caused a global trade war, as other countries retaliated by raising their tariffs as well, leading to a sharp collapse in international trade. The result was catastrophic, manifested in the exacerbation of the Great Depression, with U.S. exports dropping by more than 60% and a significant rise in unemployment rates.
Recent economic research and the implications of tariffs
Recent economic studies confirm that raising tariffs typically leads to a noticeable and sustained decline in economic growth. According to a comprehensive study covering 151 countries over 50 years (1963-2014), it was shown that countries that raised tariffs experienced a clear decline in economic growth rates, and the negative effects of these policies may last for many years and are not just a temporary phase.
Risks of stagflation and past experiences
Powell's statements raise real concerns about the return of the "stagflation" scenario experienced by major economies in the 1970s, when rising prices (due to rising energy costs and protectionist policies) led to declining productivity and slowing economic growth. The new tariffs could create similar conditions, where prices rise due to increased production costs, while economic activity declines and investments shrink.
Challenges facing the Federal Reserve in managing the economy
The Federal Reserve faces a significant challenge in addressing inflation caused by "supply-side" factors (such as tariffs). Traditional monetary policies like raising interest rates may fail to control this type of inflation and could lead to a greater economic slowdown if used incorrectly or excessively. This situation complicates the central bank's task of making effective and balanced economic decisions.
In light of these developments, it is important for investors to prepare for a period that may be economically complex, characterized by a continued rise in inflation rates and an expected decline in growth. Companies, for their part, are required to prepare flexible plans that enable them to deal with potential rising costs and decreasing demand. As for consumers, they must adapt to recurring price increases, necessitating a thoughtful reorganization of their financial spending.
