During the last two days of last week, U.S. stock markets plummeted as a result of the implementation of a tariff program that was not only non-reciprocal, but was applied using a formula that resulted in the most severe tariffs since World War II. The formula calculated tariffs based on the ratio of trade deficits to total imports, penalizing countries with the largest trade imbalances. This approach departs from traditional reciprocal tariffs, which typically involve the equalization of foreign tariff rates. Instead, it appears designed to reduce the U.S. trade deficit by increasing the cost of imports, apparently incentivizing domestic production while severely disrupting supply chains.

Tariffs imposed by President Donald Trump in April 2025 have raised the average effective U.S. tariff rate to approximately 22 percent, the highest level recorded since 1909. This escalation exceeds tariff rates set under the Smoot-Hawley Tariff Act of 1930 , which previously set average duties at around 20 percent. Surpassing both the protectionist measures of the early 20th century and those implemented during World War II, the current tariff regime represents the most severe and comprehensive imposition of trade barriers in more than a century. An indication of how broadly and haphazardly the new tariffs were inflicted is evident in their application to desolate and economically marginal areas, including remote and essentially trade-free political entities such as Norfolk Island.

From the "Liberation Day" announcement after the market close on April 2 to the close on April 4, the S&P 500 fell from 5,670.97 to 5,074.08, a drop of approximately 10.5%. (This is the stock market's first drop since March 16, 2020 and only the second since the October 1987 drop ). The Nasdaq 100 entered bear territory, falling 21 % from its all-time high, while shares of the Magnificent Seven posted their worst week since March 2020 with a loss of 10.1 %. Treasury yields fell below 4% for the first time since October as investors flocked to safe-haven assets, but the bond rally faltered on reports of countries willing to negotiate tariff cuts.

The U.S. imposed a base tariff of 10% on all imports, with additional punitive levies targeting some 60 countries, including China, Vietnam and Bangladesh. China responded quickly, imposing tariffs of 34% on U.S. imports, while other countries threatened similar measures. Investors are re-evaluating their portfolios to assess vulnerability to rising costs and reduced demand, especially in consumer-oriented sectors such as travel, leisure and retail. Amid the widespread panic, market volatility soared to multi-year highs and credit default spreads widened to levels not seen since the regional banking instability of March 2023.

The unpredictability of the tariffs, their scope and duration have significantly undermined investor confidence. By invoking Section 301 of the Trade Act of 1974 and Section 232 of the Trade Expansion Act of 1962, the government exercised broad authority to impose tariffs for reasons ranging from intellectual property theft to national security concerns. However, the formula's focus on penalizing countries with large trade deficits rather than applying reciprocal tariffs represents a marked departure from established rules.

Broader economic indicators also reflect the strain. Concerns about economic resilience have been exacerbated by pre-existing problems, such as slowing growth and weakening consumer confidence. While tariffs alone may not trigger a recession, they contribute to an environment of heightened uncertainty and a decline in corporate earnings.

Despite market turbulence, the Fed has adopted a hawkish tone. Powell's comments reinforced a "wait and see" stance, which reduced hopes for immediate rate cuts. Meanwhile, Fed rate cut expectations have already discounted nearly four cuts by the January 2026 FOMC meeting. The administration's approach, based on discouraging foreign capital flows into the U.S. to devalue the U.S. dollar, appears to be inadvertently accelerating a broader crisis of confidence in U.S. assets.

Numerous old sayings were vindicated this week. The most prominent is the apocryphal claim that, of the few things that are true and non-trivial in economics, the Law of Comparative Advantage is one of them, and one that those who should know are often unaware of. Moreover, while knowledge in most sciences is cumulative, in economics, and perhaps in finance, it remains cyclical: it is rediscovered and then discarded, only to resurface when the same mistakes are repeated. We face another stark reminder that economic policy designed in defiance of established principles may provide temporary relief or political appeal, but ultimately invites far greater disruption and instability. Americans are right to question exactly what they are being relieved of, and with growing unease, to wonder what they might be relieved of next.

Peter C. Earle, The Daily Economy.