After weeks of uncertainty about tariffs that have rattled markets, trade partners and U.S. companies, President Donald Trump on April 2nd announced a sweeping tariff plan that went beyond what most analysts anticipated. The plan imposes a universal baseline tariff of 10% on all imports and higher tariffs on 60 countries with which the United States has significant trade deficits.
Markets initially reacted negatively, with overnight futures sharply down following three days of gains. We expect elevated market volatility today and moving forward as investors digest the president's plans.
The announcement launches an economic experiment not seen in nearly a century, one which most economists believe will spark a global trade war and result in higher prices, slower growth and rising inflation, but which the White House believes will fundamentally reshape the U.S. economy with ultimately positive results. Regardless of which perspective turns out to be correct, the tariff plan is likely to have a profound impact on the global economy, the markets and the Federal Reserve's monetary policy decisions in the months ahead.
Tariff details
In a Rose Garden speech at the White House, Trump signed an executive order implementing a minimum 10% tariff on all imports that will go into effect on April 5th, and additional individualized reciprocal tariffs on imports from 60 countries that in some cases will exceed 50%. The additional tariffs will become effective on April 9th.
Following the president's announcement, the White House released a list of the new tariffs on imports from 185 nations and territories. While the 20% tariffs on imports from the European Union and 10% on UK imports were not surprising given what had been previewed, other tariffs were considerably higher than expected, especially on imports from Asia. New rates include 54% on Chinese imports (the new 34% tariff on top of the existing 20% tariff), 46% on Vietnam and 32% on Taiwan, the largest global supplier of semiconductors.
Previously announced sector tariffs, such as the 25% levies currently in place for imported automobiles, steel and aluminum, will remain unchanged, and those products are not affected by the April 2nd announcement. The White House also indicated that other sector-specific tariff announcements, notably on pharmaceuticals and semiconductors, could come as soon as later this week.
Importantly, tariffs are not paid by foreign countries. Rather, tariffs are paid by the U.S. companies that import goods from other countries and are typically passed on to consumers in the form of higher prices. Economists fear that rising prices will curb consumer spending, leading to job losses and a broader economic slowdown.
A key question is to what degree the new tariffs are a negotiating tactic, designed to encourage countries to work out better trade terms with the United States. The executive order signed by Trump specifically gives him the ability to reduce tariffs if a country negotiates or takes other steps to reduce its trade barriers. That may mean that the April 2nd announcement represents "peak tariffs," with subsequent announcements likely to be directionally downward as countries begin negotiations and make concessions. Trump has a history of rapid policy changes and it would not be surprising to see a series of alterations in country-specific tariffs in coming weeks as negotiations continue. But the across-the-board 10% minimum tariff appears likely to remain in place for an extended period.
Bear market and recession risk have risen
Schwab Chief Investment Strategist Liz Ann Sonders said the tariff announcement, coupled with deteriorating consumer sentiment and spending and other economic warning signals, increases the likelihood of a recession. Recession probabilities from Wall Street analysts and economists have been accelerating in recent weeks and may now be better than 50-50 in the wake of the new trade policy.
Sonders also expects many companies will opt to make adjustments to their 2025 earnings estimates, as the tariffs are likely to squeeze profit margins. The U.S. stock market is already in the midst of a correction. Historically, one of the key determinants of whether a correction morphed into a bear market was whether a recession was on the horizon. Alongside what she expects will be rising recession probabilities, a bear market is a distinct possibility, barring a significant ratcheting down of tariffs.
Bond and currency markets react
Schwab Chief Fixed Income Strategist Kathy Jones said bond investors are viewing the tariffs as a tax on imported goods that will weigh on consumer spending and slow economic growth. Yields have fallen sharply and the yield curve is beginning to invert.
Jones noted that U.S. Treasuries remain an attractive perceived "safe harbor," despite uncertainty as to how and when the Republican-controlled Congress will address the looming debt ceiling crisis and pass a massive budget bill of tax cuts and spending reductions.
"Investors still view U.S. Treasuries as a reliable port amid the storm," she said.
Currency markets have also been roiled. Initially, the dollar moved higher, which is expected when a country imposes tariffs. But the dollar soon began falling as investors seem more focused on the risk of slower economic growth, which by some estimates could reach 2% of gross domestic product (GDP).
Jones said that the Federal Reserve, which has held the federal funds rate steady at both of its meetings this year, will be watching carefully and may cut rates sooner than expected if the economy weakens. The Fed's next meeting is May 6-7. Markets had not been anticipating a rate cut that soon, but the chances of one have increased to about 25%, according to the CME's FedWatch tool.
Potential international opportunities
International stock performance has outpaced the U.S. market thus far in 2025. Schwab Chief Global Investment Strategist Jeffrey Kleintop said that "global markets could remain volatile in the near term," but noted that "while there are no winners in a trade war, international markets may fare better—especially in Europe—where rising economic and monetary stimulus can help support domestic growth."
What investors can do now
We suggest investors stick with their long-term plans and maintain a well-diversified portfolio. The situation is fluid and could change quickly. It may be a good time to review plans with your financial consultant.
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