President Trump’s tariffs have wiped trillions of dollars off the value of stock markets worldwide and amplified concerns that the global economy is hurtling toward a recession.
According to analysts, the decline in US stocks has been among the largest since the Second World War, surpassed only by the 1987 “Black Monday” stock market crash, the 2008 global financial crisis and the early days of the Covid-19 pandemic.
Sharp stock price falls after Trump announced his package of “reciprocal tariffs” last week show no signs of letting up: on Monday, London’s FTSE 100 slid by as much as 6 per cent, while some shares in Asia had their worst day since the late 1990s.
• Trump tariffs latest: FTSE 100 plunges as Asian markets fall
Below we examine what is behind the historic declines.
Why are global stock markets falling?
Trump’s tariffs are likely to damage global economic growth, push up inflation and make it much tougher for companies to efficiently produce goods due to greater trade friction, all of which are corrosive for stocks.
Western companies benefited from the rapid expansion of global trade since the 1990s, which allowed them to tap into low-cost production, mostly in Asia especially after China joined the World Trade Organisation in 2001.
These tariffs threaten to upend that low-cost-of-production business model. They will also put downward pressure on demand from US consumers by pushing up prices as companies pass on the import taxes to consumers, sending a chill through economies around the world.
Where are the falls the worst?
Stocks in Asia have been the worst affected since the president’s tariff announcements. Hong Kong’s Hang Seng stock index slid by 13.2 per cent on Monday, its largest daily decline since 1997. Japan’s Nikkei index also dropped by nearly 8 per cent and China’s CSI 300 index fell by 7 per cent.
Trump saved the most punitive tariffs for Asia’s largest economies: the effective tariff rate on Chinese imports is now around 60 per cent, Vietnam was hit with a levy of 46 per cent and Thailand was subjected to a 37 per cent import charge.
• Fightback begins as EU bets markets will force Trump tariff retreat
Many Asian countries rely on trade with America to generate economic growth and the tariffs are a threat to that export-oriented economic model.
Will there be a global recession?
Since Trump mapped out his tariff package last week, JP Morgan and Goldman Sachs, the US investment banks, have warned that the US and global economy could slip into recession.
This week, consultancy KPMG lowered its forecast for the UK economy this year to 0.8 per cent from 1.7 per cent previously. Analysts at Morgan Stanley, the US investment bank, said that the tariffs could wipe 1 per cent off of European growth and experts have speculated that China will miss its 5 per cent growth target.
Tariffs are likely to hit global growth in two ways: pushing down demand for imported goods in the US and constraining global trade flows.
Will the stock market declines continue?
Whether or not the turbulence in global financial markets continues depends on whether Trump stays the course with tariffs.
He has previously delayed import levies on Canada and Mexico and there is speculation that the tariffs will eventually be used as a negotiation tool to extract concessions from trading partners.
However, if Trump does stick with his protectionist trade strategy, it would be the largest shake-up of the global economic order since the end of the Second World War.
