President Donald Trump beat a partial — and possibly temporary — retreat from the most radical version of his trade agenda Wednesday.
One week ago, he vowed to impose massive new tariffs on virtually all imports from nearly all countries. Although rates varied by nation, many countries faced tariffs of more than 30 percent. Trump branded these duties “reciprocal tariffs,” claiming (falsely) that they mirrored foreign nations’ trade barriers to American goods. The policy triggered a stock market collapse and upended countless businesses dependent on foreign suppliers for goods or parts.
For days, Trump refused to back down in the face of such economic turmoil. But on Wednesday — when the tariffs were scheduled to take effect — he changed his trade policy. In a Truth Social post, Trump announced that — for all nations besides China — he was lowering his “reciprocal” tariffs to 10 percent for the next 90 days, while he negotiated with America’s trade partners.
At the same time, Trump actually escalated his trade war with China, announcing a blanket, 125 percent tariff on Chinese imports. This marked the culmination of a week-long, tit-for-tat volley of tariffs between Beijing and Washington. Now, with US imports facing an 84 percent tariff in China, more or less all trade between the world’s two greatest economic powers has ceased.
Nevertheless, stock markets soared following Trump’s announcement, with the S&P 500 seeing its biggest rally in five years.
This is a welcome sign for the US economy. But we aren’t out of the woods yet. Trump’s current plans may look moderate compared to the shocking radicalism of his initial “reciprocal” tariffs. But, prior to Trump’s inauguration, a 10 percent universal tariff — combined with a total decoupling of the US and Chinese economies — was widely considered the worst-case scenario.
Wall Street’s burgeoning optimism for the American economy therefore depends on the assumption that Trump will continue retreating from his current position. If he instead maintains his current course, the US will face surging prices and a heightened risk of recession.
Trump’s current trade policy is still more radical than Wall Street’s worst-case-scenario circa 2024
During the 2024 campaign, Trump had promised to impose a 10 percent tariff on all foreign goods, and a 60 percent tariff on Chinese ones.
Investors widely considered such a policy too unhinged to be serious. Future Trump Treasury Secretary Scott Bessent assured Bloomberg TV in August that the Republican candidate’s ostensible trade agenda was merely a negotiating tactic, saying, “President Trump speaks like a New York City real estate developer, and that is the opening gambit. … It is a maximalist negotiating position.”
It’s worth dwelling on this quote: America’s current trade policy — a 10 percent universal tariff that could jump higher in 90 days, combined with a 125 percent tariff on China — is more radical than what Bessent deemed a maximalist negotiating position last summer.
For ordinary Americans, it is also an incredibly costly policy. According to an estimate from the Peterson Institute for International Economics, a 10 percent universal tariff combined with a 60 tariff on Chinese goods would cost the typical US household “at least $1,700 in increased taxes each year.” Trump’s current agenda — which includes 125 percent tariffs on Chinese goods and 25 percent tariffs on foreign cars — would cost that household even more.
And he is still planning to impose a new battery of “sectoral” tariffs soon, which are poised to increase the prices of lumber (and thus housing) and pharmaceuticals, among myriad other things.
If Trump maintains his current trade policy, America’s economic pain will only mount in the coming weeks and months. But bulls on Wall Street are betting that a broader retreat is coming.
Why Wall Street thinks Trump will reduce tariffs further
It’s important to keep Wednesday’s stock rally in context: As of this writing, the S&P 500 is roughly 7 percent lower than it was at the beginning of January. Investors still implicitly believe that Trump’s trade policies have lowered America’s growth prospects substantially.
This said, if traders were certain that Trump’s current tariffs were going to remain in place, stock values would be much lower.
Wall Street is heartened by the direction Trump is moving in, not the place where he presently stands. The fact that he substantially moderated his tariffs on Wednesday — before their impact on prices and jobs had been widely felt — suggests that he could cave even further, if and when economic conditions worsen.
Meanwhile, Trump’s announcement on Wednesday potentially establishes a foundation for further tariff reductions. He has already pulled the universal rate down to 10 percent, and says he is looking to “negotiate a solution” to his trade concerns with 75 countries. Presumably, if he does reach such a solution with these nations, he will bring tariffs on their imports below 10 percent.
Even on China, Trump’s remarks offered an opening to trade peace, as he wrote on Truth Social, “At some point, hopefully in the near future, China will realize that the days of ripping off the U.S.A., and other Countries, is no longer sustainable or acceptable.”
Look at all this through rose-colored glasses, and you see a path back to the pro-business, moderately protectionist Republican presidency that Wall Street thought it was getting.
America is still on the brink of an economic crisis
Nevertheless, Trump backing down further on tariffs is no safe bet. As he has made clear in recent days, he believes that the United States should run a trade surplus in goods with every country on the planet — and that any country that runs a trade surplus with us is ripping America off. So long as Trump maintains this belief, it is hard to see how he negotiates resolutions with America’s major trade partners. Countries cannot easily control whether they run trade surpluses with the United States, which are influenced by complex patterns of consumption and investment that governments do not dictate.
What’s more, as of Tuesday, many countries were trying to start negotiations with the United States but getting no response from the Trump administration — a sign that the president’s purported interest in striking deals may not be sincere.
Even if the White House is now genuinely interested in negotiations, it’s unclear what America’s top trade partners, most of whom do not actually impose wildly unfair tariffs on US products, can offer. It’s possible that Trump is comfortable with minor, face-saving concessions that he can frame as triumphs. But in recent weeks, he has repeatedly signaled more sweeping ambitions. On Monday, Trump told reporters, “You know it would be nice to serve a nice, easy term. But we have an opportunity to change the fabric of our country. We have an opportunity to reset the table on trade.”
Trump cannot run for another presidential term. So it would make some sense for him to put his ideological objectives above his political interests.
Regardless, Trump’s waffling will only reinforce business’s uncertainty about the trajectory of US policy. And when firms are uncertain whether their costs will imminently surge or fall, they tend to postpone investments in new factories or stores, thereby depressing economic growth.
In short, as stock movements make clear, the US stepped back from the cliff’s edge. But we still aren’t far from the precipice. And it’s unclear which direction Trump intends to take us from here.
