Were the risks hiding in plain sight?
- Anthony Mazza
- Apr 10
- 3 min read
Updated: 3 days ago
Investors may rightly ask how the markets did not see this tariff-induced pullback coming. Indeed, on the campaign trail in 2024, President Trump often referred to tariffs as “the most beautiful word in the dictionary”, relenting later in the campaign to include God, Family and “perhaps” Love in front of it. Liberation Day was set in the diary, yet despite all this forewarning, why was the market so surprised and ill-prepared?
The surprise is due to the sheer size and magnitude of the tariffs announced, in addition to Mr Trump’s apparent willingness to accept ‘a little disturbance’ in asset prices in order to set his agenda on course. The market is now pricing a meaningfully increased risk of Recession in the US as a result.
Investment house Apollo Global Management illustrates this quite well in the chart below. To get to Mr Trump’s vision of a more mid-century American economy, the effects of globalization need to be rewound. Tariffs are his prescription for achieving this.
How much pain, and who wears it?
At the time of writing, US markets are bearing the brunt. However, US markets were already weakening before Liberation Day, partly due to concerns about technology valuations and the news that the Chinese Deep-seek engine could deliver much of AI’s benefits for a fraction of the cost.
Tariffs may feel like tools for protecting domestic industries, but they’re a tax on growth. The global economy is too interconnected; hurting one link—especially a major exporter to the U.S.—ultimately sends shocks back to American businesses and consumers.
From a trade perspective, we believe the American economy will lose the most in the short term.
Trade wars are still wars. Conventional military strategy suggests that fighting a war on all fronts has proven risky.
The problem for the US economy is that ‘attacking’ every other country with unilateral tariffs of varying rates has a cumulative impact on the US, as it spans every dollar of goods imported into the US. This contrasts with almost every other major trading partner, where the individual share of trade with the US is meaningfully smaller and non-cumulative.
As Bismarck knew, fighting a war on many fronts creates asymmetry. The instigator is fighting all the world at once, but the world has only one target in return.
The numbers in the following chart help to illustrate the point:
US imports, in total, represented 13.9% of US GDP in 2023¹. By unilaterally increasing tariffs on every dollar of imported goods, the increase in costs to American manufacturers and consumers is amplified. Tariffs are effectively taxes, and as imports represent roughly 14% of US GDP, the proposed tariffs represent the most significant single tax increase in the United States, some 3x larger (adj for inflation) than the previous record tax hike in 1942 to pay for World War 2².
European exports to the US. While Europe is the second largest trading partner to the US in dollar terms, as a % of GDP, the export relationship is only worth 3.0%³ % of European GDP. Different European countries are affected at varying levels; for example, Ireland has 10% of their GDP exposed to US exports.
It’s a similar story for China, the largest trade US partner in dollar terms, where only 2.9%⁴ % of GDP is connected to US exports. Vietnam, for example, has 30% of its domestic GDP represented by exports to the US. This likely explains its urgency in seeking to negotiate.
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