News of the week summary - 06/04/2025

Trump erects highest American tariffs in over 100 years

Donald Trump has announced the steepest import tariffs in over a century, erecting a broad protectionist wall around the American economy. Framed as a bid for "economic independence," the move will see a baseline 10% tariff applied to nearly all imports, with significantly higher levies targeting countries that run large trade surpluses with the U.S.

Trump’s justification is straightforward: he argues that foreign nations have enriched themselves at the expense of American workers and industries. However, the scale and scope of the new tariffs—expected to raise the effective average rate on imports to 22% (up from just 2.5% last year)—represent an unprecedented shift in modern U.S. trade policy, with serious economic implications both at home and abroad.

    How these tariffs work

Unlike past trade actions that focused primarily on China, this round of tariffs targets a broad swath of trading partners, including the EU, Japan, and South Korea. Trump's administration has employed a crude formula to assign tariff levels: countries with large trade deficits relative to U.S. imports are penalized more severely. For example, Vietnam and Cambodia will face tariffs as high as 46–49%, while the UK—thanks to a small U.S. trade surplus—will only face the baseline 10%.

Economists across the spectrum have criticized the rationale. Trade deficits, they argue, are not simply the result of unfair trade practices but reflect deeper macroeconomic imbalances—chiefly, the U.S. tendency to invest more than it saves, which requires borrowing from abroad and naturally leads to a trade deficit. In addition, some developing countries are too poor to afford American exports, but produce goods enjoyed by Americans for their low prices. Tariffs won’t change this fundamental dynamic. 

The economic risks are considerable. Tariffs raise the cost of imported goods, which typically results in higher prices for consumers and businesses. Analysts warn this could reintroduce inflationary pressures at a time when economic momentum in the U.S. is already slowing.

Historical data from Trump’s 2018 tariffs showed that companies passed around 60% of the extra costs on to consumers. If that pattern repeats, estimates suggest the average American could face an annual cost increase of over $1,300 due to these new tariffs.

Economists warn the policy could push U.S. output into decline later this year, while Fitch Ratings flagged the change as a “game-changer” that raises the risk of a recession. Business investment, already dampened by policy uncertainty, may take another hit as firms weigh the new trade environment.        

    Retaliation looms

Other countries are expected to retaliate, potentially sparking a new global trade war. Officials within the Trump administration have warned that such retaliation would provoke further escalation. Legal challenges are also likely, with critics questioning the president’s use of emergency powers to bypass Congress on such sweeping economic measures.

Internally, the political fallout could become Trump’s biggest vulnerability. Should prices rise and the economy falter, public backlash and pressure from Congress—especially in swing states with vulnerable manufacturing sectors—could force a rethink.

Despite the economic risks, Trump’s team insists this isn’t just a negotiating tactic. They describe the effort as part of a broader vision to restructure global trade rules and revive U.S. manufacturing. Whether this is a serious long-term transformation or simply a short-term political gambit remains unclear.

Either way, the message is loud and clear: the U.S. is taking a sharply protectionist turn. The world hasn’t seen tariffs of this magnitude since 1910. For global trade, and for the U.S. economy, this marks the beginning of a new—and highly uncertain—era.

    China strikes back hard

In direct retaliation for the US’s tariff hike, Beijing has announced new duties of 34% on all US imports, effective April 10. This move mirrors the scale of Washington’s tariff increase, bringing average Chinese tariffs on American goods to around 50%, according to Capital Economics. For comparison, US tariffs on Chinese goods are expected to climb to 76%, based on estimates by the Peterson Institute for International Economics—levels not seen in over a century.

China’s response signals a significant escalation. In addition to the broad-based tariff hike, Beijing has begun restricting rare earth exports, essential inputs for many advanced technologies. The new measures are expected to hit US agricultural exports particularly hard, with soybeans, wheat, and corn among the most exposed. This targets a politically sensitive sector in the US, while also affecting key American exports like pharmaceuticals and energy products (including oil and LNG).

    The EU chooses diplomacy

Unlike China, the European Union is pursuing a more cautious and diplomatic path, at least for now. Brussels has granted itself a four-week window to negotiate a rollback of the 20% tariffs imposed by the U.S. EU Commission President Ursula von der Leyen emphasized the bloc’s readiness to respond but made clear that its priority was to avoid escalation and “remove remaining barriers to transatlantic trade.”

Behind the scenes, the EU is preparing countermeasures, including potential duties on up to €26 billion of US goods, starting mid-April. These are initially focused on sectors like steel and aluminum, and could later expand to car exports, depending on the outcome of negotiations.

Von der Leyen has walked a diplomatic tightrope, acknowledging that global trade rules need reform, but criticizing the US approach: “Reaching for tariffs as your first and last tool will not fix it.” She warned that the US’s actions risk driving up global costs for essentials like food, medicine, and transport.

That said, the EU’s room for maneuver is constrained. Analysts point out that Europe’s dependence on US military support, especially amid rising tensions with Russia, and its limited access to alternative export markets, restrict its ability to retaliate forcefully. 

At the same time, internal divisions are emerging within the bloc. Some countries, including France and Ireland, are lobbying to shield specific national industries—bourbon whiskey and dairy, respectively—from potential retaliatory tariffs.

In 2023, the EU exported €503 billion worth of goods to the US, running a €157 billion trade surplus—a relationship it is clearly keen to preserve, even as tensions rise.

    Tariffs trigger some backlash from Republicans

A growing number of Republican lawmakers and conservative donors are publicly voicing concern over the economic consequences of a trade war that many fear will hurt U.S. consumers, workers, and key export sectors.

At the heart of the dissent is the tension between pro-market conservatives and Trump-aligned economic nationalists. Former Senate Majority Leader Mitch McConnell, long a defender of free trade, condemned the tariffs as “bad policy,” warning that they disproportionately harm working Americans already contending with high prices.

Veteran Senator Chuck Grassley went further, proposing legislation to curb presidential authority over trade policy. His proposal would require any new tariffs to be subject to congressional approval within 60 days. Meanwhile, moderate Republicans such as Lisa Murkowski and Susan Collins joined a symbolic bipartisan resolution urging an end to tariffs on Canada, highlighting the growing unease over supply chain impacts and higher prices for everyday goods.

Still, support for Trump’s approach remains strong in some corners. Allies argue that short-term pain is necessary to “reset” the global trading system. House Budget Committee Chair Jodey Arrington framed the tariffs as a step toward reducing American dependence on China: “Consumers won’t like the price of anything when China is our sole source provider.” 

    Markets plunge in reaction to the tariffs

Markets responded swiftly and sharply to the new tariffs, with investors pricing in fears of higher inflation, disrupted global supply chains, and retaliatory measures from trading partners. The announcement triggered one of the steepest single-day declines across major U.S. indices in recent years.

The S&P 500 fell by nearly 4%, and the tech-heavy Nasdaq Composite dropped 4.4%, as traders digested the implications of what are now the highest U.S. tariffs in over a century. The U.S. dollar also tumbled 1.8%, marking its worst daily performance since 2022 — a sign that investors may be losing confidence in dollar-denominated assets amid rising geopolitical and economic uncertainty.

Economists warned that the new duties — a 10% blanket tariff on nearly all U.S. imports from April 5, and “reciprocal” tariffs up to 50% on dozens of countries from April 9 — could act as a tax on consumption. Since imported goods will become more expensive, this is expected to push prices higher for U.S. consumers, stoking inflation at a time when the Federal Reserve is already trying to manage a delicate disinflation process.

The banking sector was hit particularly hard. The KBW Bank Index, a benchmark for U.S. bank stocks, plunged 8%, its worst day since the early days of the pandemic in March 2020. Fears are growing that tighter financial conditions, coupled with rising consumer costs, could choke off demand and tip the economy into recession.

Tech stocks also bore the brunt of the sell-off. Apple alone lost over $250 billion in market value, as investors anticipated that tariffs could disrupt its Asia-based supply chains and dent profitability.

Industrials didn’t fare better. Stellantis, the European-American automaker, announced it would furlough 900 U.S. workers and temporarily halt production in Canada and Mexico, making it the first major manufacturer to respond with concrete layoffs.

Energy markets also reacted. Brent crude oil fell 7% to below $70 a barrel, reflecting expectations of weaker global demand as the tariffs weigh on trade volumes and growth prospects worldwide.

Fitch Downgrades China's Sovereign Debt Amid Fiscal and Trade Pressures

Credit rating agency Fitch Ratings has downgraded China’s long-term foreign currency debt from A+ to A, citing growing concerns over the country’s fiscal outlook and the economic fallout from escalating trade tensions with the U.S. 

According to Fitch, the downgrade was driven by expectations that Beijing will significantly increase fiscal spending to stimulate growth and fend off deflationary risks, particularly as tariffs squeeze external demand. Higher public investment, while supportive in the short term, is expected to widen budget deficits and push government debt-to-GDP ratios higher in the coming years.

In response, China’s Ministry of Finance criticized the decision as “biased,” arguing that the fundamentals of the Chinese economy remain solid. It pointed to the country’s economic resilience, ample domestic savings, and a commitment to high-quality growth, despite mounting headwinds.

While China holds relatively little debt denominated in foreign currency (most government bonds are issued in renminbi) the downgrade is symbolically important and comes at a delicate time. As international investors assess the risks of lending to China, even small shifts in ratings or sentiment can influence capital flows and borrowing costs.

Still, recent debt issuances suggest market confidence remains relatively intact. In November, China issued $2 billion in bonds in Saudi Arabia, attracting strong demand and achieving borrowing costs nearly on par with the U.S. government. And just this week, Beijing successfully issued RMB 6 billion (approx. $826 million) in green sovereign bonds in London, which were seven times oversubscribed, according to the Bank of China.

China is expected to respond to economic pressures with a proactive fiscal policy and a moderately loose monetary stance. This likely means more debt-financed public spending, alongside easier credit conditions. The People’s Bank of China is also expected to continue loosening monetary policy by cutting banks’ reserve requirements, which frees up liquidity for bond purchases and credit expansion.

Although Fitch downgraded the rating, it revised its outlook back to stable, signaling that — at least for now — the agency believes China can absorb the near-term economic costs of its stimulus efforts and the fallout from U.S. tariffs.

The downgrade underscores the broader dilemma facing Beijing: supporting short-term growth while maintaining long-term fiscal sustainability, all in a climate of rising geopolitical tension and slower global trade.