The Week in Review: April 7, 2025
Tariff Takedown
Reciprocal tariffs were announced Wednesday afternoon, and while the market had largely anticipated a move toward more protectionist trade policies, the magnitude and variability of the new tariffs caught investors off guard.
The White House detailed steep rates—46% for Vietnam, 54% for China (including an existing 20% plus a 34% reciprocal tariff), 20% for the European Union, and 10% for the United Kingdom. Though the concept of reciprocity had been signaled, few expected such aggressive levels.
Adding to the surprise, a 10% minimum tariff now applies to all imported goods, including those from countries where the U.S. runs a trade surplus, such as Argentina, Brazil, the U.K., and Australia, according to the U.S. Census.
Fitch Ratings noted this is the highest overall tariff level since 1910, raising concerns over inflationary pressures and broader global trade disruptions.
The Math
How did the Trump administration devise the tariff rates?
This is taken verbatim from the Office of the U.S. Trade Representative:
Consider an environment in which the U.S. levies a tariff of rate τ_i on country i and ∆τ_i reflects the change in the tariff rate. Let ε<0 represent the elasticity of imports with respect to import prices, let φ>0 represent the passthrough from tariffs to import prices, let m_i>0 represent total imports from country i, and let x_i>0 represent total exports.
Then the decrease in imports due to a change in tariffs equals ∆τ_i*ε*φ*m_i<0. Assuming that offsetting exchange rate and general equilibrium effects are small enough to be ignored, the reciprocal tariff that results in a bilateral trade balance of zero satisfies:
Confused? So were economists. Instead, let’s review an example from the Wall Street Journal in plain language.
Divide the U.S.’s 2024 goods-trade deficit with China of $295 billion by U.S. imports from China of $439 billion. You get 67%. The White House set the new tariff rate at half of the calculated amount. Continuing with our example, China’s levy is 34%.
The math works for at least 71 of the 184 nations. In most of those cases, the U.S. is charging a new tariff of about half the rate calculated. A country with a calculation below 20% incurs a minimum tariff of 10%.
The Trump administration's calculation of each country’s tariff is unusual because it uses a math formula designed to force equal trade between the U.S. and each country—meaning we import the same amount we export.
We find this approach odd because:
It ignores key factors like currency changes and global market reactions.
It treats trade like a simple give-and-take when it’s actually complex and interconnected.
It uses fixed numbers (like how much prices change when tariffs go up) that aren’t consistent across industries or countries.
It assumes every country can be dealt with in isolation, which isn’t how global trade works.
In the end, it led to tariff rates that seemed random and mismatched—like 54% for China and 46% for Vietnam—based more on math than strategy. This created a great deal of uncertainty and confusion in the market.
Ok, that’s great (and wonky), but what does it mean to me?
Although manufacturing accounts for a small portion of the economy, consumer spending accounts for almost 70% of economic activity, according to the U.S. Bureau of Economic Analysis.
The sharp rise in tariffs is expected to slow economic growth and contribute to higher inflation, affecting a wide range of products, including cars, auto parts, smartphones, clothing, household goods, TVs, PCs, appliances, and more.
If you see it at Walmart (WMT $83), it will probably rise in price, at least to some degree, because many goods we buy are imported. Products made in the USA often have parts sourced from abroad, so we anticipate some price increases for USA-assembled goods.
Furthermore, the likelihood of a recession is rising due to the considerable uncertainty that U.S. businesses must navigate if the tariffs remain in effect.
That is why we experienced a steep selloff in stocks this week – an extremely high level of economic uncertainty, the unknown effect on corporate profits, and higher expected inflation.
No one wins an extended trade war. U.S. exporters are likely to face higher barriers to overseas markets. China announced higher tariffs on U.S. goods on Friday morning. While there has been some saber-rattling from other nations, they have thus far refrained from retaliating.
Meanwhile, retailers cannot absorb such a tax and will do their utmost to either negotiate some of the tariffs away with foreign suppliers or pass along as much of the tax as possible.
Yet, the situation is fluid. On the one hand, a trade war that tips the economy into a recession would likely create additional selling pressure. However, sellers could quickly turn into buyers if tariffs are removed, negotiated away, delayed, suspended, or reduced.
Final thoughts
Volatility crops up from time to time, and this is one of those times. However, Treasury bonds have rallied (yields and prices move in opposite directions) as investors seek safe havens. In turn, that has helped reduce volatility in a well-diversified portfolio.
A significant decline in stocks can rattle some investors, and understandably so. However, it has rarely been advisable to sell based on market action.
Evaluate your risk tolerance. That is to say, how do you emotionally manage market downturns that are an inevitable part of investing? Heavy volatility can serve as a wake-up call to reassess one’s risk tolerance. Others take it in stride, fully expecting markets to eventually recover.
We welcome a conversation about your tolerance for volatility any time.
Market Summary
TWO FOR THE ROAD
Since World War II, there have been 48 corrections of -10% or more on the S&P500, and 12 of them morphed into a bear market of -20% or more. - Yahoo! Finance, March 17, 2025
Jack Daniels is feeling the hangover from tariffs. The U.S. whiskey maker says European duties have cost them 1-out-of-every-5 bottles in sales overseas. Apparently, even Tennessee whiskey isn’t immune to international drama… trade wars now come with a chaser.. CNN, March 6, 2025
Please do not hesitate to contact me with any questions or concerns.
I hope you have a great week!
Bill Stordahl, CFP®
Managing Director
Stordahl Capital Management
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