President Trump announced a 90-day pause in reciprocal tariffs for "nonretaliating countries." The S&P 500 exploded 9.5% higher, even as Trump simultaneously announced still-higher tariffs on China.
It's not entirely clear what Trump has in mind, but this seems to be his intent: A 10% baseline tariff will stay in place on virtually all countries. Countries facing a rate above 10% will have the chance to negotiate that down over the next 90 days.
Meanwhile, in a destructive cycle of retaliation, Trump said he'll raise the tariff on Chinese imports to 125%, after just raising it to 104% from 54% overnight. That came as China hikes its tariff on U.S. goods to 84%.
Trump Tariffs Retreat: Big Questions
The biggest question is whether today's retreat is really a pause or a major course-correction. Probably the latter, at least that's Wall Street's initial reaction. However, Trump's brief remarks to reporters didn't suggest a major rethink. He's explanation for the 90-day pause: People "were getting a little bit yippy, a little bit afraid."
A 90-day pause, at least a partial pause, follows the advice of billionaire investor and Trump backer Bill Ackman who called for "a 90-day time out" to negotiate deals and warned of an "economic nuclear winter" if he didn't. In one post, Ackman said that the plunging S&P 500 had made Trump's negotiating position untenable. The implication was that a pause would stabilize markets and strengthen Trump's hand.
Trump specified "nonretaliating countries." Does that include the European Union? Unclear. The EU has already imposed retaliatory tariffs related to Trump's March 12 tariff on imports of aluminum and steel. However, the EU hasn't struck back for the 20% reciprocal tariff it now faces.
Another big question is whether the Trump-Xi throw-down isn't just stubbornness on both sides, but the start of Trump factoring geopolitics into his vision for tariffs and revamped global trade. Up until now, Trump's vision has been the U.S. vs. the world. Whether that's changed will become clear over time, as deals to whittle down tariffs emerge with Japan, South Korea and the EU.
Recession Averted?
One advantage of a 90-day delay is that Trump's fiscal plan working its way through Congress will be much closer to passage. The Trump administration had been hoping that new tax cuts, paid for at least partly with tariff revenue, would offset the economic hit from tariffs. But the timing was all wrong, with the reconciliation package not expected to get approval before late summer.
Trump's pause, if it's a real course-correction, does raise a question about how much tariff revenue will be raised.
Sectoral tariffs on autos, steel and aluminum, will stay in place. Still, the uncertainty that lingers over the 90-day reprieve may keep investment decisions on hold as everyone waits to see where things land.
"The initial market response speaks for itself, but for now, this is just a step in the right direction," Daniel Skelly, head of Morgan Stanley's Wealth Management Markets Research & Strategy Team, wrote after the pause. "Investment, hiring and consumer spending are likely to slow as policy winds continue to swirl."
Still, Trump's retreat will take pressure off the Federal Reserve to rescue the economy or destabilized financial markets. Odds of a rate cut at the May 7 Fed meeting have plunged to 14% from 50% earlier on Wednesday, according to CME Group's FedWatch tool.
