By the time Australians woke Wednesday morning, 3 April, the world had changed.
In a single stroke of his pen, a former reality TV star, property mogul and now second-term president of the most powerful country in the world had undone a century of US trade liberalisation.
As global financial markets shed trillions in dollars of value, Australians compulsively check their superannuation balances to see how much damage Donald Trump’s trade war is inflicting on their retirement savings.
Even the treasurer is losing sleep.
“I do wake up in the middle of the night and read the Wall Street Journal updates on the American market, I confess to that,” Jim Chalmers told ABC radio on Friday morning.
Somehow along the way, we had once again been lulled into taking Trump seriously, but not literally.
Instead, as the CBA’s chief economist, Luke Yeaman, said in the wake of an historic week, “the era of trade liberalisation, free market reforms, deregulation and fiscal discipline – the Washington Consensus – is officially dead and buried”.
The end of free trade
On 2 April in Washington DC – or “liberation day”, as Trump calls it – the president unveiled a plan to put tariffs of 10% on imported goods from countries around the world.
That was bad enough, but there was worse to come.
Every country which sold more to the US than it bought (that is, who had a trade surplus with the US) would be further punished with a “reciprocal tariff”, that came into effect on 9 April.
The higher tariffs were crudely formulated based on the size of America’s trade deficit.
It was an amateurish approach, roundly condemned by economists and trade experts. It led to perverse outcomes such as obscure and unpopulated islands being whacked with trade sanctions.
Australia, which has a trade deficit with the US (we buy more stuff than we sell), escaped with the relatively low – in a world of vastly changed expectations – tariff rate of 10%.
Others were less fortunate.
Goods from the EU were hit with an import duty of 20%, and Japanese goods 24%. China was hit with tariffs of 34% – which came on top of the 20% existing rate.
China imposed its own tariffs of 84% on US imported goods – and again to 125% on Friday.
By then, in a series of tit-for-tat retaliations, America’s tariff on Chinese goods had reached an unbelievable 145% – raising the prospect that trade between the world’s two economic giants will simply disappear.
An act of economic self-harm
Australia ships less than 5% of the total value of exports to the US. Experts say we should be shielded from the fallout from a global trade war – a recession is not on the cards – but we are not immune.
The Reserve Bank is expected to cut rates when it next meets on 19-20, even as the RBA governor, Michele Bullock, pushes back against calls for more aggressive policy easing.
Instead, economists say the US will be the biggest loser from its trade aggression.
Tariffs are a tax on imports and will raise the prices of goods for everyday Americans, costing an average of $US4,700 in 2024, according to estimates by The Budget Lab.
Americans will be paying 64% more for clothing in the short run, while prices for electric equipment will be 46% higher, and car prices 12% higher.
As was widely reported, JP Morgan said there was a 60% chance the trade shock would drive the US into recession.
Trump assured the world that “I know what the hell I’m doing”, but investors around the world were panicking.
And within 12 hours of the reciprocal tariffs coming into effect on 9 April, Trump had reversed course. He paused them for 90 days (with the notable exception of China), which he said would give countries the chance to come and do a deal.
But what really changed Trump’s mind?
The markets get ‘the yips’
On 2 April, Trump declared that his tariffs would “make American wealthy again”.
But a week later, when the higher duties came into effect, it was clear that Americans were suddenly and substantially less wealthy.
Major Wall Street stocks, such as Apple, started trading like unstable penny stocks, shedding billions of dollars in value in the immediate aftermath over concerns their entire production model would unravel.
Some traders described it as “obliteration day”.
Global markets, including in Australia, followed the US lead and a tumultuous period ensued.
By 8 April, shares on Wall Street had plummeted by 12% over four tempestuous days of trading.
If the US share market is, as economist Justin Wolfers calls it, “a bet on the future of the American economy”, then things were looking grim indeed.
The chief investment officer at Sydney-headquartered Opal Capital Management, Omkar Joshi, said the uncertainty is unnerving.
“No one really knows what’s going to happen next, there’s so much headline risk,” Joshi said.
Those headlines were coming from Trump himself, as his posts on his Truth Social platform sparked dramatic market moves.
“THIS IS A GREAT TIME TO BUY!!! DJT,” Trump wrote on Wednesday morning, 9 April, US time.
Hours later, Trump announced the pause.
The US’ chief benchmark, the S&P 500, closed up 9.5% that day, gaining about US$4tn, regaining more than two-thirds of the value it had lost over the previous four trading days.
It was one of the biggest rises since the second world war.
Australia’s benchmark S&P/ASX 200 caught some of the exuberance, closing up 4.5% to record its strongest trading day since the pandemic.
Days earlier it had also recorded its steepest one-day fall since the pandemic.
The Australian dollar, which threatened to plunge below US59c earlier this week, had spiked above US62c on Friday.
Despite the rebound, after eight days of chaotic trading, the S&P/ASX 200 was down about 4%, taking the benchmark back to levels reached mid last year.
“Equities probably do go lower from here, but you’re also going to see some massive rallies along the way. It’s not just going to be one way down or one way up,” Oshi says.
Trump’s ‘Liz Truss’ moment
Meanwhile, something curious is happening outside equities.
Traders have also been selling the American dollar, a counterintuitive move given money tends to flow into the greenback during volatile times.
AMP’s chief economist, Shane Oliver, says the panic in the bond market reflected investors losing faith in American assets as the ultimate safe port of call in a storm.
“It has an echo of Liz Truss,” Oliver says, referring to when a meltdown in British bonds forced the former UK prime minister to cancel plans for major tax cuts.
“But it’s not just that. I don’t think Truss destroyed confidence in [her] government like Trump has [in his].”
It was this spectre of a bond market revolt – or in other words, the threat to a hugely indebted country from a big rise in borrowing costs – that eventually appeared to convince Trump to press pause on his reciprocal tariffs.
Asked to explain, Trump told reporters: “Well, I thought that people were jumping a little bit out of line”.
“They were getting yippy, you know, they were getting a little bit yippy, a little bit afraid.”
But with the US president determined to reshape the global trading system, whatever the cost, the yips are here to stay.
