In record time, US President Trump has transformed a strong economy into one on the brink of recession and a booming stock market into a collapsing one. This week, we came perilously close to a full-scale financial crisis—one that may have been narrowly avoided when Trump partly conceded defeat. Yet the danger is far from over, and the damage will be long-lasting. How did we get here?
US President Trump declared April 2 “Liberation Day” after announcing sweeping tariffs on all countries except Russia, North Korea, and a few others—but bizarrely including uninhabited islands home only to penguins (link). The Economist, however, dubbed it “Ruination Day” (link), a far more fitting description of that fateful day.
Stock markets are inherently volatile, but they are also forward-looking, reflecting investors’ expectations about the future prospects of firms. And following the April 2 announcement, the markets made their judgement clear. Over three days, the US stock market plummeted by $6 trillion—equivalent to a 12% decline, as shown in Figure 1. That is a lot of money, much of it representing the hard-earned savings of ordinary people. I do not recall anyone voting for Trump to make them so much poorer in such a short space of time.
Figure 1. Market value of all stocks in the S&P 500. Billions of USD. 1 January 2025 – 10 April 2025. Source: Datastream via Refinitiv and J. Rangvid.
US Treasurer Scott Bessent attempted to downplay the stock market crash—the third-fastest two-day decline in the history of the S&P 500—insisting it had nothing to do with Trump’s tariffs. No, according to him, the culprit was DeepSeek (link).
I have marked the DeepSeek event in late January in Figure 1. The S&P 500 barely moved before quickly recovering. Now, compare that to the devastation of Ruination Day. It should be obvious to anyone (outside Trump’s administration) that the market crash was indeed triggered by Trump’s tariff decision.
Figure 1 illustrates the stock market’s collapse, but the turmoil extended far beyond equities. All risk assets plunged—credit spreads widened, the VIX index soared, and measures of economic and political uncertainty surged.
Even the dollar weakened. Typically, during times of crisis, investors flock to safe havens like U.S. Treasuries, driving up demand for the dollar to purchase those Treasuries and consequently strengthening the currency. This time, however, the dollar plummeted. While Trump has advocated for a weaker dollar, a loss of investor confidence during a crisis is the last thing you want—and yet, that is precisely what occurred.
US Treasuries were dumped, causing a massive surge in yields. The 10-year Treasury yield jumped by 53 basis points over three days—the largest three-day jump since 2001, worse even than during the Global Financial Crisis (link). Again, a very worrying sign of the lack of trust in the US.
Taken together, these market movements signalled that the US was teetering on the edge of a full-scale financial collapse.
Trump, ultimately, caved—at least partially. As Figure 1 shows, markets staged a strong rebound when he was forced to acknowledge his catastrophic mistake—a mistake, using his own phrases, bigger than you’ve ever seen before.
The crazy tariffs, Part I
Why did markets—and the rest of us—conclude that these tariffs are catastrophic? First and foremost, because of their sheer magnitude. Figure 2 illustrates the average tariff rate on US imports since 1900, highlighting just how extreme this policy shift is.
Ruination Day saw tariffs surge to their highest levels in more than a century. Last time tariffs were this high was in 1909.
Some argue that Trump had already raised tariffs during his first term, but as Figure 2 shows, those increases were minor in comparison. Between 2017 and 2019, average tariffs rose from 1.5% to 3%. On Ruination Day, Trump took them from 2.4% to a staggering 22.4%.
Figure 2. US average effective tariff rate. Customs duty revenue as a percentage of goods imports. 1900 – 2025. Source: The Budget Lab at Yale and J. Rangvid.
The Budget Lab at Yale (link) analysed the impact of the tariffs and concluded that they would:
- Increase prices in the US by 2.3%. What happened to the falling prices Trump promised during his election campaign?
- Reduce real disposable income by $3,789 per household on average, making American families poorer. Is this what MAGA is supposed to mean?
- Shrink long-term economic output by 0.56%.
- Cut government revenues by approximately $600 billion over time.
But didn’t Trump claim tariffs would generate income for the US government? In isolation, they do. However, by dragging down economic activity, they also reduce corporate and income tax revenues—leading to an overall loss for the government.
The crazy tariffs, Part II
Not only are these tariffs wrong because they reduce incomes for both people and businesses, but their very design is weird too, to put it mildly.
When Trump presented his tariff plan in the Rose Garden—etched onto tablets like some modern-day Tablets of Stone—nobody, including yours truly, could make sense of it. The tablets declared: “Tariffs charged to the US, including currency manipulation and trade barriers.”
Take the EU as an example: according to Trump’s calculations, the EU supposedly imposed tariffs (and currency manipulation and trade barriers) of 39% on US goods.
Thirty-nine per cent? Where did that number come from? The EU’s actual tariffs are closer to 2%. So how did Trump conjure up 39%?
The answer emerged quickly—and it was even more flabbergasting than we could have imagined.
It turned out that Trump had used a bizarre formula:
Tariffs towards a country =
0.5 x US trade deficit towards a country / Total US imports from the country
This formula clearly reveals that the tariffs Trump imposed on the rest of the world have nothing whatsoever to do with tariffs, trade barriers, or currency manipulation charged to the US from other countries.
Take, for instance, US households buying Nike shoes produced in Vietnam. Imagine that Vietnamese firms produce affordable, high-quality Nike shoes, which American consumers willingly purchase. That has nothingto do with tariffs or trade barriers. And yet, under Trump’s nonsensical formula, it somehow justifies slapping tariffs on Vietnam.
The crazy tariffs, Part III
Trump’s formula only considers goods—not services. As I pointed out in my message to Trump (link), while the US runs a deficit in goods trade, it enjoys a substantial surplus in services. Martin Wolf from the Financial Times wrote an excellent piece based on this point (link).
It makes no coherent sense to ignore the US’s surpluses in services. Revenues from US firms selling services abroad generate American jobs, corporate profits, and tax income. Yet, under Trump’s logic, this economic reality is irrelevant.
If one were determined to impose tariffs based on trade deficits—a very bad idea to begin with, as mentioned—the least one could do is to consider total trade, rather than cherry-picking selected parts of it.
As I explained in my previous post (link), in the four quarters leading up to Q3 2024, the US goods trade deficit with the euro area was €203bn (or €213bn for the full year 2024). However, the US services surplus with the euro area was €146bn (€156bn for 2024). This means the total US trade deficit with the euro area was €57bn.
Had Trump used this more correct figure of €57bn, instead of the cherry-picked €213bn, tariffs—using Trump’s weird formula—toward the EU would have been much lower.
I use the EU as the example here, but the point holds towards most other countries, as the US has a surplus on the balance of trade in services towards most countries. But of course, doing a logical calculation was never an ambition for Trump’s administration.
Unpredictability
The April 2 tariffs have now been paused for 90 days towards most countries, offering some relief (link). But what happens after those 90 days? Or even during them? Given what we’ve seen so far, I would be surprised if Trump simply sat on his hands for three months. More likely, we’ll see new erratic decisions—after all, a lot can happen in 90 days.
And let’s be clear: tariffs have not disappeared. They have merely been capped at 10% for 90 days. Look again at Figure 2—10% is still very high. The last time US tariffs were at this level was 1943.
Worse still, the average tariff burden remains much higher because the 145% tariffs on China—yes, 145%!—have not been paused.
In updated analyses, the Budget Lab at Yale (link) estimates that the severe tariffs on China will negate reductions in tariffs on other countries, ultimately resulting in even greater negative economic effects than the Ruination Day tariffs. Prices are now projected to rise by nearly 3%, and the declines in disposable income will be even steeper than those resulting from the April 2 tariffs.
A crisis of credibility
Beyond the direct economic consequences, consider the broader damage. The stock market, bond market, and global financial stability have already suffered. But perhaps more damaging is the collapse of the US’s credibility as a global trading partner.
Nobody knows what to expect from the White House anymore. One day, tariffs are imposed. The next, they’re partially lifted. Then they’re replaced with new ones. This level of chaotic unpredictability destroys business and consumer confidence, leading to lower investment and consumption.
Trump’s policies are designed to isolate the US from the world. If this deglobalisation continues, the US will experience weaker long-term growth. Lower corporate profitability and persistent uncertainty will push up risk premiums, potentially leading to permanently lower equilibrium levels for US stock prices.
The damage is unfathomable.
Conclusion
In just a short period since his 20 January inauguration, President Trump has managed to turn a roaring stock market and strong economy into a crashing market and a recession-bound economy. It’s an impressive achievement—just not in a good way.
And the effects won’t be confined to the US. While America will bear the brunt of the pain, other countries will suffer as well. But they will adapt.
Until common sense returns to the White House, businesses and policymakers worldwide must find ways to reduce their dependence on America. The US accounts for around 15% of global trade. As trust in the White House erodes, other nations will start prioritising trade among themselves, reducing their reliance on the US. This transition won’t be smooth or immediate, but it is now inevitable. While optimism for the US is difficult given its current policies, I suggest that the rest of the world remain calm and seek ways to navigate the erratic decisions, the uncertainty and the unpredictability, emanating from the White House.
