Liberation Day Has Arrived

After weeks of build up and flip-flopping headlines, President Trump’s “Liberation Day” has finally arrived. His new economic policy of reciprocal tariffs is about to be instated, although no one truly knows what to expect. I wanted to write a quick post to share my thoughts on these tariffs and how the market might react. Let’s dive in..

First off, it must be said… I didn’t think Trump would actually do this.

Last fall, I expected Trump’s tariffs to be much more like his first term and mostly noise. While he did enact some tariffs, he previously used them mostly as negotiation and to collect perceived “wins”. However, Trump 2.0 has made it very clear that he is much more serious this time around. Maybe it’s because he was almost assassinated a couple of times, but so far he seems much more committed to implementing his ideas and is even willing to take on major political risk to do so.

In addition, Vice President JD Vance has been very vocal on the negative effects of globalization. He has spoken several times about the struggle of working-class Americans in recent decades and how the offshoring of manufacturing has weakened our national security. Both Trump and Vance seem to truly believe in their tariff policy and view it as a way to not only restructure wealth in America, but incentivize the return of manufacturing ability.

I tend to agree with (most of) their general thesis.

The post-WW2 system of America exporting dollars in exchange for goods worked out very well, but it is glaringly obvious that the world is now changing. China (in my opinion) has likely already passed the US as the #1 global superpower. Our leaders have pushed the post-war system to it’s limits and every piece of data shows that young Americans, specifically young men, realize that they will not get to benefit from it like their parents and grandparents did.

I think an “economic restructuring” is indeed due in America. The status quo is simply unsustainable. We don’t need to be the manufacturing center of the world anymore, but we certainly went too far in the other direction. We are running multi-trillion dollar annual deficits and yet we are largely reliant on our greatest adversary. I also think they are correct when suggesting that the US economy can handle some tariffs along with more “balanced” trade. However, what has been hurting the Trump administration isn’t necessarily their tariff policy or manufacturing thesis… it’s the uncertainty around them. My main disagreement with their policy is the implementation of it.

In my view, Trump should have come out originally with his tariff plan already set, solidified and thought through. It would have caused some uproar regardless, but businesses and markets would have then known what the deal was, what the economic regime shift was going to be, and would begin to adjust to it. Instead, the administration has been causing chaos and flip-flopping back and forth for months. This has frozen large parts of the economy and weakened business outlook before they even got started. They put themselves in a difficult position that was completely avoidable.

Let’s also talk about the risks of tariffs quickly. Tariffs are not inflationary. (At least not in the way expanding the money supply is). Tariffs are simply a tax. This import tax is very often passed onto consumers. Tariffs cause short-term, one-time price increases. They do not cause generalized inflation. Markets and consumers can adjust to tariffs, and the slowed demand as a result could actually lead to lower prices in the medium or long-term. Even Jerome Powell stated at the last FOMC press conference that the tariff price effects were indeed “transitory” last time around with Trump. He is correct.

When it comes to the economic risks of tariffs, there is little risk of any long-term inflationary pressure. The main risk is much more loaded in the other direction, which is slowing growth or a recession. If the tariffs are too severe, too fast or if there is too much uncertainty regarding the tariffs, they will continue to threaten growth, consumer confidence and business investment. Slowing growth is without a doubt the major risk here for the Trump administration, not inflation.

Now, if Trump truly wants to make this historic economic regime change and this isn’t all just a messy negotiating tool, Liberation Day needs to be rock solid and long-lasting. They need to announce their chosen tariff rates, put them into effect, and then leave them. Let businesses and markets adjust to the new reality, even if they scream and yell about it at first. The worst thing he could do is announce these long-awaited tariffs and then within days start announcing more changes to them; higher and lower rates, some countries exempt but not others, some products but not others. Economic uncertainty is much worse than any established tariff.

The other factor that is impacted by uncertainty is their goal of onshoring manufacturing. If you really want more things to be built in America once again and companies to return, then tariffs could indeed help you achieve that. BUT, they need to be in effect and remain in effect for likely his entire term. If Trump continues to change his tariff policies, no one is going to build a factory or invest in America based on them. Onshoring can’t be done overnight, and extended uncertainty will handcuff businesses who will then simply sit on the sidelines and wait 3 years for the next administration.

On the market reaction… While there is always the possibility that Trump could come out on Wednesday and send stocks lower by saying something wild, I find myself leaning in the other direction. I think markets could end up liking Liberation Day. I think if Trump follows my suggestion and announces a list of set, finalized tariffs, markets will appreciate the removal of uncertainty. Much of the weakness in stocks recently has been due to the uncertainty and markets could rally if they are finally provided with some clarity. On the other hand, if he announces weaker than expected tariffs or is already talking about lowering them from the podium, markets could rally as they’ll see him as not that serious after all. Either way, as long as the White House manages to remove and not add more uncertainty around their economic policies, I think Liberation Day could set up a short-term rally.