The current stock market crash is all about the Trump administration’s tariff policies. All the indices dropped sharply after Wednesday, when Trump unveiled his across-the-board tariff plan, which was not in any way reciprocal, was not geared to protecting national security, was based on a mathematical formula that made no sense, and appeared intended to bring international trade to a screeching halt.
Trump has manifested that hostility toward trade for many years, often appearing to be fond of tariffs for their own sake. Likewise, after J.D. Vance’s speech at the 2024 Republican convention, I wrote:
[Vance] went full protectionist; at one point, he denounced the “cheap Chinese products” that had “flooded into the American market”–that would be the iPhone, for example–without acknowledging the benefit to American consumers. Embarrassing. And it sounded as though he wants to bring international trade to a halt.
On the other hand, Trump sometimes sounds as though he wants to reduce or eliminate trade barriers. Thus, in 2018 at the Group of Seven meeting in Quebec, Trump offered to eliminate tariffs if other countries would do likewise:
No tariffs, no barriers. That’s the way it should be. And no subsidies. Ultimately, that’s what you want. You want tariff-free, no barriers and you want no subsidies.
In 2017, there was much talk of a trade war, but in fact Trump, after rattling sabres, renegotiated some trade deals to our benefit. Most observers, including me, expected the same this time around. Most thought that Trump would stake out an aggressive position and then negotiate to lower tariffs and other trade barriers, to our advantage. This is one of the reasons why the financial markets welcomed Trump’s election victory.
But when it appeared that Trump was not just bluffing but actually intended to initiate a high-tariff regime, the markets tanked. Understandably so: Trump’s approach was uncomfortably reminiscent of the Smoot-Hawley tariff act of 1930, which has widely been credited with causing or prolonging the Great Depression.
Early today, the markets rallied. Why? Because of indications that Trump was only bluffing, and was ready to negotiate tariff reductions:
The Dow industrials rose 1,461 points early on, reflecting investors’ faith that the administration may deliver on talk of potential trade deals. … Tuesday’s enthusiasm started when Treasury Secretary Scott Bessent said the Trump administration was open to negotiating to reduce tariffs, saying the U.S. could “end up with some good deals.”
President Trump said he spoke with South Korea’s president and that the administration was in discussions with “many” nations.
But the markets ended down again, because of suggestions that Trump is trying to kill trade after all:
The ecstatic tone didn’t last the morning, though. U.S. Trade Representative Jamieson Greer said Trump won’t provide exemptions to his new global tariffs for individual products or companies. Stocks declined from their highs at midmorning.
Peter Navarro is the Trump adviser who is pushing the president in a protectionist, anti-trade direction. Earlier today, Elon Musk called Navarro a “moron.” I hope Trump is paying attention.
These ambiguities in Trump’s approach to trade will dictate the direction of the financial markets for some time to come. If it becomes clear that Trump’s goal is autarky rather than fairer trade, there is no telling how low the markets could fall.
