Markets Tumble as Donald Trump’s Tariff ‘Liberation Day’ Finally Arrives
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From the opinion pages of The Wall Street Journal, this is Potomac Watch.

Donald Trump announced new tariffs on the world that amount to the biggest attempt to reorder the world trading system and the American economy in decades. Global financial markets plunge in response, but the White House says the short-term pain will be worth the long-term gain. But how bad will that pain be? And will the U.S. really be better off for imposing what amounts to a $6 trillion tax increase on commerce?

That's our topic for today here on Potomac Watch, the daily podcast of the Wall Street Journal opinion pages. I'm Paul G. Goh, the editor of those pages. And I am here with Joe Sternberg and Alicia Finley, two of my colleagues. So let's listen to Trump on Wednesday at the White House talk about his new tariffs. This is one of the most important days, in my opinion, in American history.

It's our declaration of economic independence. For years, hardworking American citizens were forced to sit on the sidelines as other nations got rich and powerful, much of it at our expense. But now it's our turn to prosper and in so doing, use trillions and trillions of dollars to reduce our taxes and pay down our national debt. And it'll all happen very quickly. So what is...

the president proposing. First of all, he's proposing 10% tariff on everybody across the board on all imported goods into the United States, no matter where you are in the world. Then he's going to impose surcharges in addition to that on what the White House calls bad actors based on what appears to be a fairly straightforward calculation of the size of the US trade deficit with a country then divided

by American imports from that country. Then he cuts that percentage in half to arrive at the new tariff. So let's give you an example. China, Trump calculation is based on a trade deficit that's very large. And then he says that would be worth a 67% tariff. But then he says that out of the graciousness of his heart, he cuts that to 34%. So that's the tariff he's putting on. But that doesn't include the 20%.

He already imposed on China, so the total tariff on China is going to be 54% on all goods from China. I guess this explains why Apple shares are down 8% as we speak, given all the iPhone imports from China, Alicia, because if the tariffs stick, the cost of those iPhones is going to soar. So what do you make of this calculation based on the trade deficit? It doesn't make any sense. It's trade policy.

Well, no. To your point about the Apple and iPhones, what's also interesting is that Apple has actually moved a lot of production out of China in recent years to try to avoid the China tariffs that President Trump imposed during his first term. Where? It has moved them to India.

Taiwan. Samsung also manufactures a lot of its phones and it has about half of the market share in the US, by the way. That's from Korea though. It does produce some of the phones in South Korea, but it increasingly produces them in Taiwan. Okay. And so that's why you see a lot of companies or a lot of the stock prices hit is because retailers, a lot of these companies have moved production

out of China, both because of Trump's first term tariffs and because of its actually raising labor costs to other countries in the Southeast. They're going to get hit real hard with this. Yeah, in Southeast Asia. Southeast Asia, right. His justification is the trade deficit. We have too large of a trade deficit with all these countries, but even with the countries in which we have trade surpluses like the UK or Australia, he's still imposing a 10% tariff.

Because for some reason, he claims that, well, there are non-tariff barriers and so they still discriminate against the US, notwithstanding the fact that we also have non-tariff barriers too to their goods. Sure. We have big sugar quota, for example. We have tariffs on lumber just to...

to cite two examples. But the trade deficit has been a fixation of Trump for a long time, basically. And this is now becoming the justification. I think it's the main justification for what he's doing. Right. And it's very simplistic analysis. He looks at, oh, there's a big number of 500 billion or so from Mexico or Canada. And now note that any goods imported from Mexico or Canada and that

qualified under the USMCA deal, are exempt from this. But he looks at the trade deficit as basically an indication that other countries are ripping us off and they're making us poor while they're getting richer, which is very odd in that

Yes, those countries are getting wealthier, but so are we. And consumers here are able to buy many more goods than they otherwise would. And living standards have been improving. And the U.S. GDP per capita is still among the highest in the world and much higher than many of these other countries. Right. I mean, the trade deficit is really not a calculation we look for when you talk about defining prosperity, because what you really look at there is

How fast is the economy growing? How fast are real incomes growing? And that's what you should care about. How fast is productivity growing that contributes to real incomes? The trade deficit reflects often comparative advantage, right?

We make certain things that we do well in the United States. Other countries do things that they do well. And then also, his trade deficit numbers does not include services, which we export in surplus. So it's a very, I think, narrow definition of what he thinks is a kind of zero-sum trade deficit.

Now, Joe, I want to talk about the U.S. average tariff rate after the trade tariffs announced on Wednesday will be 24%, according to Evercore ISI. That is higher than it was after the Smith-Hawley tariff of 1930. And when you impose the calculation after Trump goes further and imposes so-called sectoral tariffs on things like pharmaceuticals, it's going to be 27%.

which is unheard of and it really reverses 70 years of US policy, which attempted to get trade barriers down around the world so you could have efficiencies and general prosperity. Let's listen to JD Vance on Fox and Friends.

Thursday, talk about the short-term pain for the long-term gain. - What I'd ask folks to appreciate here is that we are not gonna fix things overnight. Joe Biden left us, this is not an exaggeration, Lawrence, with the largest peacetime debt and deficit in the history of the United States of America.

with sky-high interest rates. You don't fix that stuff overnight. We know people are struggling. We're fighting as quickly as we can to fix what was left to us, but it's not going to happen immediately. But we really do believe that if we pursue the right deregulation, we pursue those energy cost-reducing policies, yes, people are going to see it in their pocketbook. They're also going to benefit from the fact that foreign countries can't take advantage of us anymore. That means their jobs are going to be more

Joe, how much pain is there going to be? If you look at the equity markets around the world, they're down sharply here on Thursday, 3% on the Dow Jones Industrial Average as we speak, 5% on the NASDAQ. Yeah, this is basically the equivalent of the doctor saying, "We've got this patient in the intensive care unit who is in a coma, so why don't we amputate his leg and see if that helps him feel better?"

Because the thing about that clip that we heard from Vice President Vance is that his diagnosis of the problem that they inherited from the Biden administration is basically correct. I mean, you have out-of-control government spending. You have very punitive policies on business investment in the U.S. that were making it difficult for wages to grow. You have

All of these economic problems, the thing that is just unfathomable here is both the economics and the politics of then saying that you're going to cure this by imposing what is essentially an enormous tax hike on American households.

Because that's what we're talking about here when we talk about these many, many billions of dollars that the tariffs are going to end up costing. I mean, that's going to be paid by any household that is buying an imported product that has had to bear this tariff because there are not domestically produced alternatives.

And over the longer term, even if you do end up with more domestic production, which seems to be how the Trump-Vance administration thinks this is all going to work out in the end, you're paying higher prices for those goods, too. The whole point of the tariff is to allow domestic producers to charge consumers higher prices. Right.

So, it's a baffling policy for an allegedly Republican administration to be pursuing if what they're trying to do is turn around an economy. All right. We're going to take a break. And when we come back, we'll talk about the short-term pain the administration says we are likely to suffer here in return for long-term gain when we come back.

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Welcome back. I'm Paul Gigot here on Potomac Watch with Joe Sternberg and Alicia Finley. And we're talking about the Trump tariffs. It is, Alicia, to put Joe's point another way, the policy is an enormous income transfer from consumers of imported goods to American producers who are protected.

and their workers if they can gain monopoly profits from high tariff walls. Right. To the extent that there are no substitutes, right? The bigger problem is that it's also going to be hurt workers to the extent that it's going to, one, raise costs and what they have to pay for goods. Two, can also result in some kind of what we call demand destruction, for instance, in the

auto industry, the tariffs are going to increase prices and therefore you're already hearing about automakers talk about making layoffs. An interesting and other anecdote is that Cleveland Cliffs, one of the perhaps the biggest steel maker in the U.S. and has a monopoly on a lot of types of steel and makes steel

two thirds of automotive steel in the US. It's laying off workers because it is noted that the tariffs have actually reduced demand for its steel. Yeah, demand destruction is essentially what you mean is-

Costs go up. And people say, I'm not going to buy it. Right. And so then, you know, you get layoffs, you get slower wage increases, and that ends up hurting all workers. The other thing that is really significant here is the international impact. Around the world, this is really being felt as a huge shortfall.

because it does reverse American policy of 70 years, regardless of party. And I think the damage economically will depend in part on whether countries retaliate and how much they do retaliate if they do. So let's listen to Treasury Secretary Scott Besson.

warn Wednesday night against retaliation appearing on CNN. One of the messages that I'd like to get out tonight is everybody sit back, take a deep breath, don't immediately retaliate. Let's see where this goes, because if you retaliate, that's how we get escalation.

And then it becomes a full-fledged trade war in your view? Not a trade war. It depends on the country. But remember that the history of trade is we are the deficit country. The deficit country has an advantage. They are the surplus countries. The surplus countries traditionally always lose any kind of a trade escalation. So I did...

As a student of economic history or a professor of economic history, I devise against it. So you're essentially saying that they should not retaliate? I would say that doing anything rash would be unwise. He also suggested, Joe, in that conversation that if you do retaliate, country does retaliate, there's likely to be even more tariffs in response from the United States. So he's basically saying don't retaliate or else.

How is the world going to respond here? Well, I think that if other countries are smart, what they would do is nothing. Because, again, I think that the smart answer in any kind of trade war is actually, economically, unilateral disarmament. There's no particular reason

that the European Union, the United Kingdom, China, Japan, South Korea should inflict higher prices and bigger economic distortions on their own consumers to punish America for our policy error. Now, saying that that's what they should or shouldn't do, the political reality is that there's going to be a lot of pressure to retaliate. And I think that you're already seeing that

In Europe, they're seeing calls from the French and German governments for the European Union to impose pretty hefty retaliatory measures on the U.S. on behalf of the 27 countries that are in the European Union. You know, that's an example of how other governments face political pressures of their own. And once the U.S.

goes down this road, it becomes very difficult to resist those protectionist pressures elsewhere. And if Treasury Secretary Besant thinks that this isn't going to hurt the U.S. at the end, I mean, it is going to hurt everyone, but that includes Americans. We're going to take another break. And when we come back, we'll talk about how the rest of the world is reacting to the Trump tariffs and whether countries will retaliate against the United States when we come back.

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From the opinion pages of The Wall Street Journal, this is Potomac Watch. Welcome back. I'm Paul Gigot here on Potomac Watch with Alicia Finley and Joe Sternberg. One of the things that's interesting to me based on the initial market reaction in the 24 hours, Alicia, is that stocks' equity prices in the U.S. have fallen more sharply than they have in the rest of the world, like Japan and Europe. It's very interesting. Also,

This is interesting to me too. The dollar value has fallen, which is opposite of what has happened in the past when US imposes tariffs usually get an increase in the dollar. This time, no. Suggests what to you? Well, there's concern that this could actually throw the US into a recession and there's a lot of weakening. On the US corporate stocks, US is their largest market and they make a lot of the goods abroad.

And so they're going to be hit a lot harder than some of the foreign multinationals. I think J.D. Vance made some kind of misconceived remark saying that this is only going to hurt foreign companies when we're seeing just the opposite, that this is actually going to hurt U.S. companies and to that extent, again, hurt their work

You're already seeing consumers raise at least in consumer confidence surveys, the concerns about the tariff impact, and then you're seeing them pull back a little bit. Then again, they pulled forward some purchases, for instance, on autos and such.

But there's concern that one, on the consumer spending side, that that could hurt. Investment is gonna slow down on the economy just because there's a lot of uncertainty and those two combined could create a recession. My concern, Joe, is also, nevermind the immediate prospects for recession or not, we're gonna see slower growth for sure. But my concern is the slow, gradual erosion of American competitiveness behind high tariff

The countries that do this tend to, and protect their companies. Those companies that are protected have less of an incentive to innovate. They can charge monopoly profits without working all that hard.

And when you're not subject to international competition or the cutting edge of technological innovation, you can tend to get behind. And that's not been the American way. When I was working overseas in the late 70s and 80s, I could see this firsthand when I traveled to India and pursued an import substitution policy. And they had rattletrap cars and just a very backward economy. Now, that's not where we're headed right away, but you get a kind of slow trend.

erosion. You get rust in the joints of the economy. And I worry about that. I think, Paul, you're really hitting at the contradiction at the center of the Trump trade policy here, because, you know, the three boogeymen in this worldview are China, Japan and Germany. And the rap sheet against them is that they subsidize all of their companies and gin up all of these excess exports that they then foist on the U.S. And that's

the unfair trading practice that creates this awful trade deficit that puts us in an advantage. But if you look at the Chinese, the Japanese, or the German economies right now, I mean, the U.S. is significantly more prosperous than all of them. And it is precisely because, as you pointed out, Paul, we have not pursued the policies that the Trump crowd thinks have made these countries powerhouses. You know, I think in the case of the two of those three that are developed

countries, Japan and Germany, you know, they showed that you can get a certain amount of mileage out of a lot of these industrial policies and trade protections and high taxes and all of the rest of it. But at the end of the day, America has always been significantly

better at productivity, at innovation, at entrepreneurship, at economic growth, and at prosperity. I mean, I was traveling through Germany last month ahead of their election, and the thing that I heard over and over and over again from these German businesses who are supposed to be the big beneficiaries of this model that Trump hates is,

They were saying, "We want to be more like America. We want our system to be more open like America's and more entrepreneurial." What's distressing about the Trump trade policies is that in an important way, we're throwing away one of those biggest advantages that we had. One big question which we get constantly here about Trump's tariffs is, "Well, is this just a negotiating tactic? Could he give in if the economy suffers?"

if the markets continue to fall, we get into a recession, or negotiate lower tariffs with countries and then accept that and call it victory? Well, we could. He could wake up the next day and change his mind, as he has been wanted to do. But he seems to very much believe in tariffs, as we've been discussing, and that the U.S. government needs to do something to prevent countries from taking advantage, ripping us off. And he has

Some advisors like Peter Navarro whispering in his ear and says that this is going to make America wealthier in long term. Don't worry about these market reactions short term. It's just Wall Street. And, you know, you need to be more focused on the working man. And that's what you're actually hearing from J.D. Vance. So I think the reason why the markets have reacted the way they have

is because they are taking him at his word that these tariffs are going to be here for a while. And Joe, the other question that I suppose we should address is, well, could Trump be right here? Whatever the short-term pain, that high tariff walls will in fact lead to trillions and trillions and trillions of dollars of new investment, as Trump said on Wednesday, that it will lead to a manufacturing renaissance here, and that the United States will become this

new economic powerhouse that builds things again that he thinks we should be building, that somehow we let China steal a march. What do you think about that? - I am just deeply skeptical because you can't find examples where it has worked in the past, especially that the US is starting in a position where we are the world's most productive economy and really one of the most prosperous countries history has ever known.

I mean, you can't point to any example where countries in that situation have made themselves even more prosperous by cutting themselves off from the rest of the world.

And the pattern is more often exactly the opposite, that no matter where a country is in terms of its economic development, if it reduces trade barriers, if it opens itself to competition from the rest of the world and opportunities in the rest of the world, it becomes more prosperous. That has been Europe's experience. We underestimate the extent to which the European Union existed to try to open trade barriers

among all of these very protectionist economies on the European continent, and it's been very successful at that. You know, he's fighting a lot of economic history here, and I guess you have to admit, you know, for the sake of argument that it's always possible that he has a point, but that is definitely not where I would be putting my money, and I'm kind of surprised that it's where they are putting their political futures. One data point, the U.S. economy has a share of

world gross domestic product has stayed pretty stable at 25%.

over many, many years, notwithstanding the rise and fall of certain industries, the rise and fall of certain countries in that GDP mix. It suggests that whatever we've been doing isn't the catastrophe that Donald Trump asserts and J.D. Vance asserts. Granted, there are some weaknesses in the U.S. economy, and we certainly were critical of the Biden economic policy, but we'll see where this goes. Thanks, Joe. Thanks, Alicia. Thank you all for listening.

The tariff story will play out over many weeks and months.