Investors are stunned by the extent of President Trump’s so-called reciprocal tariffs, announced on what Trump called “Liberation Day,” April 2. Stock markets are in a tailspin as analysts assess the damage likely done to corporate profits and equity values. Economists are slashing their estimates for growth and factoring in higher inflation and unemployment. A Trump-induced recession is now more likely and perhaps probable.
The tariffs will sharply raise the cost of imported products equivalent to about one-tenth of the US economy. To that extent, they’re a consumption tax that American businesses and consumers will pay. The total amount of this new tax depends on how Americans adjust their spending in response to higher prices. But it will likely amount to the biggest tax hike in at least 60 years.
The United States imported about $3.3 trillion worth of goods in 2024, with an average tariff of about 2.5%. So the import tax generated about $83 billion in annual tax revenue before Trump took office in January.
There’s still a lot of confusion about how all the new Trump tariffs will play out, but economists estimate it could boost the average import tax rate from 2.5% to as low as 15% or as high as 30%. A 15% tariff would generate about $500 in annual tax revenue. A 30% rate would generate $1 trillion in revenue. Compared with 2024 levels, that would be a tax hike, in rough terms, ranging from $400 billion to $900 billion. And contrary to what Trump often claims, American importers and their customers are the ones who pay tariffs, so it’s a huge tax hike imposed directly on Americans.
The Trump tariffs will have multifold other consequences, including a lot of value destruction. The first casualties are stock values, which is why markets reacted violently to the tariff announcement, which was much more aggressive than almost anybody expected. Markets are now trying to reprice stock values for an environment in which costs are higher, profits lower, and risks greater.
Bank of America estimates that the tariffs will cut earnings for stocks in the S&P 500 (^GSPC) index by 5% to 35%. The range is so large because there’s so much unpredictability. If the main disruption is simply the higher cost of imports, the earnings hit would be near the lower end. But if US trading partners retaliate with higher tariffs of their own on American products, or other measures, it could slam the foreign sales of American companies and hit earnings closer to the higher estimate.
Since the Trump tariffs will raise costs and generate uncertainty throughout the economy, companies are likely to rein in investment, with some battening down for a recession. That means slower growth, rising unemployment, and rising inflation. In a lucky scenario, that would be stagflation without a recession. But a recession is also possible.
Deutsche Bank, as one example, has dropped its estimate for GDP growth in 2025 from 2.2% to less than 1%. Brett Ryan, senior US economist at Deutsche Bank, calls that “stall speed” for the US economy. The bank is also raising its inflation estimate for the end of the year from 2.7% to around 4%, and raising its forecast for the unemployment rate from 4.1% to as high as 5%. In nonstatistical terms, prices of many everyday products will rise and more Americans will lose their jobs.
Oxford Economics expects the new tariffs to “send the advanced economies back into industrial recession just at the moment they were set to return to growth.” The industries worst hit, according to the forecasting firm, will be those with long and complex supply chains now subject to substantially higher costs. That includes electronics, automobiles, machinery, and clothing.
If there’s a recession, the normal expectation is that the Federal Reserve would cut short-term interest rates to make money cheaper and stimulate spending. But higher inflation caused by the tariffs may prevent the Fed from doing that. "We think tariff-induced inflation will keep the Fed on the sidelines,” Morgan Stanley said in an April 3 analysis. "Our economists do not expect the Fed will be willing to provide accommodative monetary policy, via rate cuts, for the rest of 2025."
There is a possible escape hatch from all this bedlam. Trading partners could offer concessions and Trump could pull back some of the tariffs. "The tariff rates are just too absurd to be believed," Tom Lee, co-founder of investing firm Fundstrat, said in an April 2 video presentation. "We believe these will ultimately be short lived."
The "absurd" tariff formula Lee is referring to is the method by which Trump came up with what he claims are the effective tariff rates other nations impose on imports from the United States. The formula seems to be the ratio of a nation’s trade deficit with the United States to the value of imports to the United States from that country.
That’s an arbitrary calculation with no economic significance. But it allowed Trump to generate wildly inflated numbers representing what he claims are the real tariffs imposed on American products, including both monetary and nonmonetary ways that trade partners treat US imports. Trump then imposed a reciprocal tariff of half that number, also a figure snatched from thin air.
China, for instance, has an average tariff of about 5.5% on products from the United States. But Trump’s artful methodology allowed him to claim that China’s real tariff rate is 67%. From that number, imposing a reciprocal of half gets to a tariff of 34% on Chinese imports to the United States. But it's worse than that. Trump already imposed new tariffs of 20% on Chinese imports, and these tariffs are "stacked," or cumulative. So the new tariff rate on Chinese imports is a whopping 54%.
Trump says his tariffs will “put America on a path to a new golden age” by creating powerful incentives to build more stuff domestically and buy less from foreign suppliers. If anything like that ever happens, though, it would take years and occur after unnecessary and unrecoverable economic losses that could be in the trillions. There are virtually no credible forecasters expecting the sort of upside Trump envisions.
Economists often say that the stock market is not the real economy. But the stock market is still an important barometer measuring what profits and losses are likely to look like in the future economy. And a brutal market sell-off in response to Trump's tariff plan is telling us that investors see no golden age, and no liberation, as long as Trump continues his tariff rampage.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
