Over the last two days of the past week, US equity markets crashed as a result of the rollout of a tariff program that was not only non-reciprocal but also applied using a formula resulting in the most severe duties since World War II. The formula calculated tariffs based on the ratio of trade deficits to total imports, penalizing countries with the largest trade imbalances. This approach deviates from traditional “reciprocal tariffs,” which typically involve matching foreign tariff rates. Instead, it appears designed to reduce the US trade deficit by raising the cost of imports, ostensibly encouraging domestic production while severely disrupting supply chains.
The tariffs imposed by President Donald Trump in April 2025 have elevated the United States’ average effective tariff rate to approximately 22 percent, the highest level recorded since 1909. This escalation exceeds the tariff rates established under the Smoot-Hawley Tariff Act of 1930, which previously set average duties at around 20 percent. By surpassing both the protectionist measures of the early 20th century and those implemented during the Second World War, the current tariff regime represents the most severe and comprehensive imposition of trade barriers in over a century. An indication of how broadly and haphazardly the new tariffs were inflicted is evident in their application to desolate and economically marginal areas, including remote, essentially tradeless polities like Norfolk Island.
From the “Liberation Day” announcement after the market close on April 2 to the closing bell on April 4, the S&P 500 dropped from 5,670.97 to 5,074.08—a decline of approximately 10.5 percent. (This is the first stock market crash since March 16th, 2020, and only the second since the October 1987 crash.) The Nasdaq 100 entered bear market territory, falling 21 percent from its record high, while the Magnificent Seven stocks posted their worst week since March 2020 with a 10.1 percent loss. Treasury yields dropped below four percent for the first time since October, as investors flocked to safe havens, but the bond rally faltered amid reports of countries willing to negotiate reduced tariffs.
S&P 500 (April 2 – 4, 2025)
(Source: Bloomberg Finance, LP)
The US imposed a 10-percent baseline tariff on all imports, with additional punitive levies targeting around 60 countries, including China, Vietnam, and Bangladesh. China retaliated quickly, imposing 34-percent tariffs on US imports, while other nations threatened similar measures. Investors are now reassessing portfolios to gauge vulnerabilities to heightened costs and reduced demand, particularly in consumer-facing sectors like travel, leisure, and retail. Amid widespread panic, market volatility spiked to multi-year highs, and credit default spreads widened to levels not seen since the regional banking instability of March 2023.
The unpredictability of the tariffs, their scope, and their duration has significantly undermined investor confidence. By invoking Section 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962, the administration exerted broad authority to impose tariffs for reasons ranging from intellectual property theft to national security concerns. But the formula’s focus on penalizing countries with large trade deficits instead of reciprocating tariffs represents a sharp departure from established norms.
Broader economic indicators are also reflecting the strain. Concerns about economic resilience have been exacerbated by existing issues such as slowing growth and weakening consumer sentiment. While tariffs alone may not trigger a recession, they contribute to an environment of heightened uncertainty and diminished corporate earnings.
Bloomberg Economics Global Trade Policy Uncertainty (2015 – 2025)
(Source: Bloomberg Finance, LP)
Despite market turmoil, the Federal Reserve has struck a hawkish tone. Powell’s comments reinforced a “wait-and-see” approach, dampening hopes for immediate rate cuts. Meanwhile, Fed rate cut expectations have now priced in nearly four cuts by the January 2026 FOMC meeting. The administration’s approach, rooted in discouraging foreign capital flows to the US in order to lower the US dollar’s value, appears to be inadvertently accelerating a larger crisis of confidence in American assets.
Numerous old saws were vindicated this week. Foremost among them is the apocryphal claim that of the few things which are both true and nontrivial in economics, the Law of Comparative Advantage is one of them, and one that the people who should know it often do not. Furthermore, while knowledge in most sciences is cumulative, in economics and perhaps finance, it remains cyclical — rediscovered and then discarded only to resurface again when the same errors are repeated. We face another stark reminder that economic policy crafted in defiance of established principles may provide temporary relief or political appeal, but it ultimately invites far greater disruption and instability. Americans are justified in questioning exactly what they are being liberated from — and with growing unease, wondering what they may find themselves freed from next.
