When President Donald Trump, unilaterally declared new trade policies, the United States stock market dropped like a stone. This unexpected change surprised most stakeholders. Within the span of only two days, U.S. equities crashed by a never-before-seen 8%. This sudden decrease has set off panic among investors and economists. It’s an important signal of things to come in the global economic landscape ahead that could have radical implications for countries well beyond American borders.
In fact, Trump’s Treasury Secretary Scott Bessent is on record outlining their vision for what he terms a “global economic reordering.” He aims to reshape international trade dynamics to favor the elite in the United States, prompting speculation about the long-term implications of such a strategy. This proposed overhaul echoes historical precedents, notably the Volcker shock of the early 1980s, which created the globalized world system that Trump appears determined to dismantle.
The Volcker shock, named after Paul Volcker, the newly appointed chair of the Federal Reserve at the time, involved aggressive interest rate hikes aimed at combating rampant inflation. Under Volcker’s leadership, the feds pushed interest rates up to an unprecedented 13%. They jumped much higher still to 19%, pushing the economy back into a double-dip recession. As the U.S. economy continued to struggle, unemployment rates peaked at just under 10% in late 1982. It quickly bounced back and experienced tremendous growth during the second half of the decade.
The administration of President-elect Trump has set the stage for the start of what will likely be called a trade war. The President has recently made headlines by threatening large tariffs on foreign-made goods. This position dates back to the 1980s, when Japan was his chief boogeyman as he climbed the ranks. As the former reality star doubles down on this anti-globalization personal crusade, the United States’ largest trading partners are pushing back hard. China has already retorted by raising the same amount—34% in tariffs—on American products exported there. Worse still, this move sparks new, troubling prospects of a full-blown trade conflict with potentially sweeping repercussions.
In fact, according to Trump’s administration, there are 50 other countries eager to begin negotiations with the U.S. How they’re actually implemented is going to matter a lot for how effective these policies end up being. Countries such as Vietnam are countering such inaction by agreeing to remove every last tariff on U.S. exports. This decision illustrates America’s deep and permanent economic clout.
The present scenario is much like what we saw with the S&P 500 prior to August 1982. In early 2020, the index again lost 27% of its value in just under two months due to COVID-related economic uncertainty and market volatility. Investors are asking themselves the question, is history repeating itself. Will this new paradigm produce better results?
The appointment of Stephen Miran as the new chair of the Council of Economic Advisers adds another layer of complexity to this unfolding scenario. Shortly before his appointment, Miran authored a detailed paper titled “A User’s Guide to Restructuring the Global Trading System,” indicating that there are indeed strategic plans in place to navigate this turbulent economic terrain.
While the market adjusts to that uncertainty and rapid changes in trade policy, economists are watching very closely for what those repercussions might be. The effects of Trump’s moves could not only affect markets here at home but reconfigure ties with other important powers. The stakes could not be higher, and the international community is closely monitoring how this new economic narrative develops.