The US Dollar (USD) is having a tough time finding momentum in today’s capital markets. All this despite even the good news on Initial Jobless Claims reported Thursday. So, it’s no wonder that investors are increasingly nervous about an impending economic crash. Ironically, this anxiety is a result of the new trade regime created under the Trump administration. This environment has resulted in ongoing pressure to sell the USD as stagflation fears remain at the forefront.
At the same time, the recent tariff announcements have considerably worsened the fiscal picture in the US economy. This financial tightening is likely to weigh down on both consumption growth and investment. The tariffs, particularly the removal of the ‘de minimis’ exemption on packages valued below USD 800, will add further strain to the financial landscape. Analysts believe the market will suffer a painful collapse of UK exports. They further expect private consumption growth to slow down due to increased uncertainty around unemployment and decreased consumer sentiment.
Economic Implications of Tariff Regime
The new, self-inflicted trade regime has sounded alarms across the economic spectrum, with many warning that tariffs will drastically limit our economy’s growth potential. The announcement earlier this month of the reciprocal rate adds one more ad valorem duty. This new duty is in addition to existing tariffs and risks a staggering cumulative impact. The highest tariffs on Chinese goods have now surpassed 30%. This 60% increase even factors in the 20% increase due to Fentanyl as well as other increases enacted by additional levies during Trump’s presidency.
Combined tariffs could now exceed 64%, with the reciprocal tariff rate for China fixed at 34%. This enormous increase suggests that average tariffs on imports from China are closer to 65% or 70%. These exorbitant tariffs will hardly hurt Chinese exports at all. Perhaps most importantly, they will send shocks across global markets, rippling through economies from Wall Street to mainland China. Analysts expect bad news in the form of reduced European and other low-cost Asian country import growth. Illustratively, that includes Vietnam, which is being hit with tariffs as high as 49%.
These tariffs are proving to be a tremendous blow to trade. Specifically, they have the potential to destabilize existing supply chains and change consumer behavior. Key Point #7: Businesses are hurting from pandemic-induced import inflation. This perfect storm exacerbates the potential to raise prices across all goods, further inflating inflationary pressures.
Consumer Sentiment and Investment Concerns
The unknowns we see with the new tariff regime will exacerbate damage to consumer sentiment. Rest assured, this sentiment is what is needed to accelerate economic growth. Private consumption growth may take a major hit as worries about joblessness make consumer confidence shake. Making these tariffs worse, their potential impact on the housing market is serious. A further decline in consumer sentiment will lead to less investment and spending.
As families continue to recalibrate their budgets to make up for increased expenses, many will likely have to reduce non-essential spending. The cumulative effect of these changes could lead to a ripple effect throughout various sectors, from retail to housing, ultimately slowing overall economic growth. Investor hesitation from the uncertainty surrounding tariffs is widespread. That waiting could otherwise paralyze new investment and lock in a long spell of economic stagnation.
It’s the bigger economic picture that seems more precarious as these new round of tariffs come online. Consumption is an important pillar of the US economy. Just a large consumption drop of a few percentage points could substantially change growth paths. As a result, investors are now on their own to read the tea leaves in a sector notoriously characterized by uncertainty and volatility.
Precious Metals Struggle Amid Tariff Turmoil
Against this backdrop, even the haven assets, gold among them, are getting crushed. It is President Trump’s ill-considered tariff decisions that are determining their value. After peaking at an all-time high of $3,167, gold has run into a correction and lost the $3,100 level. This sharp drop happens amid gold’s failure to benefit from the risk aversion usually seen in times of extreme market volatility.
Supply chain issues and a global economic slowdown have market analysts expecting gold to be a safe haven in uncertain times. Yet its present performance exposes a more nuanced relationship between the tariffs and investor sentiment. Since no one needs USD right now, it’s putting downside pressure on gold prices. At the same time, rising fears of inflation are another factor creating a headwind for gold’s bullish momentum.
Equity investors are hunkering down for an economic storm. They have been monitoring the daily movement of tariffs and how these tariff changes will affect the market. Increased prices for consumers and businesses alike can upend established investment habits. That’s why it’s so important for all stakeholders to remain vigilant as this new landscape is established.