Last week, U.S. President Donald Trump announced sweeping tariffs on all countries.
The announcement has led to significant uncertainty across global stock markets, including here in Australia, where the ASX 200 fell sharply yesterday.
In this explainer, we’ll give you a refresher on what the tariffs mean and what’s happened since Trump’s announcement.
What are tariffs?
Simply, tariffs are a type of import tax. They’re applied to foreign-made goods brought into another country and paid by the importer.
Since coming to power in January, Trump has imposed a range of tariffs on imports to the U.S, including a 25% tariff on Australian steel and aluminium.
The goal of tariffs is to encourage a country’s companies and citizens to buy locally-produced goods, boosting industrial activity. Tariffs can also be influenced by geopolitical tensions and trade partnerships between countries.
Liberation Day
On Wednesday (local time) last week, President Trump announced new tariffs on all products imported to the U.S.
Displaying a chart of tariffs imposed against the U.S. by other countries, Trump claimed he was charging “approximately half” of that amount in return.
For example, the chart showed the U.S. is imposing a 34% tariff on China, who Trump claims charges a 67% tariff on American products.
Why?
Trump claims that tariffs are needed to boost American manufacturing jobs and reassert the country’s economic dominance.
The U.S. President has emphasised his plan to encourage Americans to buy more domestically-made products, by making imported goods more expensive.
Trump also claimed trading partners have “ripped off” America.
Response
After the tariff announcements, the U.S. share market fell rapidly in its two worst days since the COVID-19 crash of 2020.
It means U.S. markets have fallen by 15% since Trump‘s inauguration, with two-thirds of that decrease occurring since last week’s tariff announcements.
Australian markets followed, recording the biggest one-day fall in five years as roughly $100 billion was wiped from the market.
But... why?
There are several reasons to explain why global markets have tumbled since Trump’s tariff announcement.
We’ll explain more in the following slides, but to put it simply:
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- Businesses are going to face higher costs
- Individuals are going to have to pay higher prices
- Concerns around the threat of a global trade war
- All of this leaves investors feeling uncertain, and they hate uncertainty.
Higher costs
Many U.S. companies rely on importing goods from other countries to build the products they sell to Americans (and consumers around the world).
For example, Apple. The U.S. tech giant imports computer chips from Asian countries. If a single computer chip from China, cost $5 last month, it costs 54% more today ($7.70).
Investors worry that higher prices will cut profits. If there’s less profit, a company is not as valuable — so investors look to sell their shares in a company at today’s prices, worrying that it’ll be less valuable next week.
Higher prices
Many companies will pass on increased manufacturing costs to consumers.
For example, if Apple products become more expensive to make, customers could face higher prices on products like iPhones and MacBooks.
This can lead to individuals buying less, lowering company revenue reported to the share market.
Reduced consumer spending can also slow the economy, making investors less confident to back new or growing companies - especially if a trade war looms.
Trade wars
Some countries may retaliate against Trump by introducing new taxes on U.S. goods, known as counter-tariffs.
That hurts American exporters, making their products more expensive and less desirable in other countries.
If the U.S. responds with more tariffs – as Trump did overnight by threatening a 50% hike on Chinese goods – countries could enter a ‘trade war’. If enough major economies join, it becomes a global trade war.
Uncertainty
This one is simple: financial markets don’t like surprises. The tariffs were not a complete surprise, but their scope and scale was unexpected, so investors are nervous.
When investors are nervous, they are less likely to make investments into companies that they think are going to grow in the future (it’s that optimism and promise of future success that often drives up share prices).
Instead, investors are finding ways to pull their money out of stocks and putting it into safer investments, like gold, or simply holding onto more cash.
