From Liberation to Isolation: Tariffs Return with Force

Liberation or Isolation: At 78, Donald Trump may not have matched Methuselah’s longevity, but he is reading from a policy playbook that predates modern economics. His inspiration is President William McKinley, a 19th-century protectionist who believed tariffs could build national wealth and shield American industry.

That belief has been rebooted in dramatic fashion.

The announcement this week of a 10% blanket tariff on all imports, followed by a schedule of punitive country-specific levies, marks the sharpest shift in US trade policy in decades. China faces a 54% rate, Japan 24%, India 26%, and the EU 20%. The UK escapes with the baseline 10%, while Mexico and Canada are exempt, at least for now.

These were not calculated through traditional trade negotiation methodology. Instead, the US Trade Representative’s office employed a curious formula that effectively penalises countries with large trade surpluses with the US. The resulting schedule bears little resemblance to “reciprocity” in any conventional sense. It is not about matching tariffs on vans with tariffs on vans. It is a retaliatory framework built on perceived imbalances rather than fairness.

Equity Rout: Markets responded with immediate force. The S&P 500 fell 4.8% on Thursday and extended losses on Friday to close out its worst week since the 2020 Covid lockdowns. The index is now down nearly 11% since Inauguration Day, making this the worst start to a presidency since the early 2000s. Apple and other global multinationals bore the brunt of the selling. Bond yields dropped sharply in a classic risk-off move, with the 10-year Treasury yield falling below 4% despite rising concerns over inflation. Year to date, US indices have plummeted, with the Nasdaq, Small Cap and Mag 7 all in bear market territory. The UK and Europe have given up all their gains this year, and China stands alone as the only market with notable gains.

Wall Street analysts were quick to reassess. Core PCE could now rise by more than 1% if these tariffs are sustained, while GDP growth risks slipping into negative territory. The likelihood of stagflation has replaced the promise of a soft landing. Consumer sentiment is already softening, and political consequences are beginning to appear. Trump’s approval rating has fallen to 43%, and the idea that tariffs will tame inflation looks increasingly detached from economic reality.

Adding to the confusion, instead of matching other countries’ tariff rates product by product as many had expected, the new framework punishes whole countries for exporting more to the US than they import. It is trade policy by spreadsheet formula, not proper negotiation. Any conceit of fairness has been replaced by imbalance metrics, resulting in a tariff schedule that risks igniting retaliation, especially in areas like services where the US runs large surpluses.

This blanket approach is where the risk extends well beyond goods. In 2023, the US recorded a $120 billion surplus in information and communication technology (ICT) and business services – everything from cloud computing and software to IT consulting – along with an additional $90 billion from royalties and licensing fees. These high-value service flows now look increasingly vulnerable. The danger is that other countries, particularly in Europe, may not mirror US tariffs on goods but instead retaliate in the sectors where America remains most globally dominant.

There is also a broader financial risk taking shape. Since the global financial crisis, foreign capital has flooded into US equities, particularly Big Tech. Those flows have helped strengthen the dollar and keep valuations elevated. But if tariffs persist and growth slows, there is a real possibility that foreign investors start pulling capital back. That would break the self-reinforcing cycle of strong performance and strong inflows underpinning US market dominance for over a decade.

The ISM Services Index for March added to the sense of fragility. The headline fell to 50.8, well below expectations, though underlying details were mixed. Business activity rose slightly, but the employment component dropped sharply, and new orders softened. Encouragingly, the prices paid index also declined, suggesting services inflation may continue to cool. But with fresh tariffs set to boost goods inflation and investment confidence falling, the disinflation narrative is beginning to look strained.

Strong US Jobs Number Failed to Calm Markets: That fragility was echoed in the March payrolls report. Headline jobs growth came in above expectations at 228K, but the underlying message was far less convincing. Net revisions to previous months were negative, wage growth slowed, and hiring outside healthcare and education fell below trend. Several leading indicators of labour demand, including small business hiring intentions and online job postings, have started to soften.

The unemployment rate ticked up to 4.2%, and although still low by historical standards, it suggests slack may be building beneath the surface.

(Source: U.S. Bureau of Labor Statistics (BLS))

For now, the resilience of sectors like healthcare is offsetting some of the drag. However, as the tariff regime expands and policy uncertainty hardens, the risk is that hiring will slow more broadly. The Fed will take some comfort from softer wage data and moderating services inflation, but the overall message is clear. The economy is weakening, just not fast enough to force immediate easing.

That may soon change.

China Responds: And then came the retaliation. On Friday, China announced sweeping countermeasures to the US tariffs, including a 34% levy on all US imports, export restrictions on seven critical rare earth elements, and targeted action against US companies across sectors from agriculture to defence. Markets fell further on the news, with futures pointing sharply lower and bond yields retreating. China’s decision to act before the US tariffs formally take effect on April 9 signals a shift in strategy. This is no longer a waiting game.

The restriction on rare earth materials exporting is especially significant. These 17 elements, though obscure to most, are essential to the functioning of everything from smartphones and wind turbines to guided missiles and electric vehicles. Materials like neodymium and dysprosium are vital for permanent magnets used in EV motors, while others such as terbium, lutetium, and gadolinium play key roles in high-efficiency lighting, medical imaging, and aerospace alloys.

China dominates the global rare earth supply chain in mining and, more importantly, refining and processing, where alternatives are limited and difficult to scale quickly.

By immediately imposing export restrictions on seven critical elements, Beijing sent a clear and deliberate message: retaliation won’t just be about soybean tariffs or poultry bans; it can strike at the strategic foundations of advanced economies. In doing so, China reminded both markets and the White House how dependent modern industry remains on deeply integrated global supply chains. The trade war is no longer theoretical. It has arrived, and it’s targeting the wiring of the global economy itself.

FED fails to Calm Markets: Jerome Powell’s remarks later on Friday did little to stabilise things. Speaking in Virginia, the Fed Chair acknowledged that tariffs will likely slow growth and boost inflation but clarified that the central bank will not rush to react. With inflation still elevated, Powell signalled a reluctance to cut rates unless absolutely necessary, emphasising the Fed’s obligation to keep long-term inflation expectations anchored. His message was simple. Policy clarity is lacking, and until it improves, the Fed will wait.

That was not the reassurance markets were hoping for. The S&P 500 closed out its worst week since the 2020 Covid lockdowns, finishing near session lows, while 10-year Treasury yields fell below 4%. Futures markets, which had priced in a 50% chance of a rate cut in May, pared that to around 30%. The message from Powell was that while the economy may soon require support, inflation risk still looms large. The result is no Fed put, at least not yet.

Credit markets echoed the risk-off tone in equities. Investment grade spreads widened meaningfully over the week, with the BofA US Corporate Index spread rising to its highest level since November. The move reflects growing investor unease about the impact of tariffs on corporate margins and overall credit conditions. While far from crisis levels, the shift is enough to suggest that fixed-income investors are no longer pricing in a smooth landing.

With Trump calling publicly for rate cuts and Powell responding cautiously, the stage is now set for a potential policy standoff. For now, it is enough to say this. Recession risk is no longer a theoretical exercise. With tariffs rising, inflation re-accelerating, and capital flows at risk of reversal, the margin for error is narrowing fast.

This Week: Crucial for Markets and Policy

This week is shaping up to be pivotal. The formal implementation of US tariffs on April 9 shifts trade tensions from rhetoric to reality, and the risk of further retaliation remains high. China has already responded forcefully, and attention will now turn to how Europe and Japan react, particularly in areas like services, where the US remains most exposed.

Earnings season begins with the US banks on Friday. While headline results may hold up, guidance will likely be cautious or withdrawn altogether. Many companies will struggle to provide clarity in the current environment, and the absence of forward-looking commentary may unsettle investors further.

On the data front, the March CPI report will be closely watched by investors for signs that tariff-related pressures are beginning to feed through to core inflation. If price growth surprises to the upside, the Federal Reserve will face an even harder balancing act. The FOMC minutes and several public appearances from Fed officials will provide further insight. Still, Powell’s comments on Friday suggest that any rate cuts are likely to come slowly and only after greater clarity emerges.

Market sentiment remains fragile. Volatility is elevated, credit spreads have widened, and technical support for equities is under pressure. With risk assets already reeling, this coming week will go a long way toward determining whether the current repricing stabilises — or accelerates.