Trump’s Reciprocal Tariffs Shock Markets

Hello Traders, we hope you’re having a nice weekend. Here are some of the biggest stories this week:

1. Trump announced steep tariffs on all of America’s trading partners.
2. Government debt interest costs hit their highest level since 2007.
3. OpenAI’s latest funding round valued the company at $300 billion.
4. Eurozone inflation fell for the second month in a row.

Dig deeper into these stories in this week’s review.

Trade War

Traders were on edge leading up to April 2 – dubbed “Liberation Day” by Trump – as they awaited details of the US president’s reciprocal tariffs. And on one hand, the announcement brought some much-needed clarity for investors. But on the other hand, the magnitude of the tariffs announced was a lot bigger than expected. On top of a blanket 10% levy on nearly all US imports, Trump is slapping some 60 nations with even higher duties.

Tariffs on China, for example, will rise to more than 54% after the US president imposed a further 34% duty on top of the 20% levies he placed on the world’s biggest exporter earlier this year. The eurozone will face total tariffs as high as 20%, while imports from Japan – one of the US’s closest allies – will be hit with a 24% rate. Vietnam, an increasingly important US trade partner, will see tariffs climb to a steep 46%. All in all, the measures would take America’s average tariff rate to its highest level in decades. Fitch Ratings, for example, estimates that the new effective tariff rate will rise to 22% – the highest since 1910.

Further bewildering traders and economists is how the US administration calculated the reciprocal tariffs. Leading up to the announcement, Trump had said that the new import taxes would be tailored to each of America’s trading partners, factoring in other countries’ levies on US good as well as “non-tariff barriers” such as unfair subsidies, strict regulations, value-added taxes, managed exchange rates, and weak intellectual property protections.

However, in a statement released Wednesday night, the US Trade Representative outlined a different methodology: it divides a country’s trade surplus with the US by its total exports (based on 2024 data), then halves that figure to arrive at a “discounted” tariff rate. In other words, the reciprocal tariffs weren’t based on matching other countries’ levies and trade barriers – they were based solely on trade imbalances. Adding to the confusion, even countries where the US runs a trade surplus – or where trade is roughly balanced – were still hit with a flat 10% tariff.

The move marked a sharp escalation in Trump’s trade war, heightening the risk of retaliation (China and the eurozone have already signaled plans to respond) while fueling inflationary fears and threatening global economic growth. In response, stock markets worldwide slumped on Thursday, while safe-haven assets like bonds and gold surged. The S&P 500, for example, fell 4.8% (its worst day since the depths of the 2020 pandemic), erasing $2.5 trillion of market value.

Government Debt

New data this week showed that interest payments are consuming a growing share of advanced economies’ GDPs and are outstripping their spending on defense and housing. The OECD’s 38 member nations spent an average of 3.3% of the size of their economies on interest payments last year – the highest level since at least 2007. In contrast, the World Bank estimates that the same group spent 2.4% of GDP on its militaries in 2023. The surge in interest payments comes down to a combination of rising borrowing costs and ballooning debt levels. And if that one-two punch sticks, governments could find it harder to borrow money – at a time when their investment needs are greater than ever, according to the OECD. Case in point: government debt issuance among the OECD’s 38 member nations is expected to reach a fresh record of $17 trillion in 2025 – up from $16 trillion in 2024 and $14 trillion in 2023.

Much of this expected surge in issuance is due to the looming wave of refinancing, with nearly half of OECD countries’ outstanding debt set to mature or require rollover by 2027. The timing is far from ideal: central banks, cautious about reigniting inflation, have pulled back on bond purchases. That means private investors – including banks, hedge funds, and pension funds – will likely need to step in. But to do so, they may demand higher yields on bonds to compensate for their rising risks, pushing government borrowing costs up further and potentially crowding out spending on healthcare, education, or other economic growth initiatives.

OpenAI

Despite ongoing concerns about a potential AI bubble, investor enthusiasm remains strong for companies at the forefront of the technology – underscored by OpenAI’s massive funding round this week at an eye-popping valuation. The ChatGPT-creator secured $40 billion in new funding in a deal that valued the world’s leading generative AI firm at $300 billion – the highest in Silicon Valley’s history. That’s nearly double what it was worth six months ago, and is ten times the $29 billion level it fetched in April 2023. What’s more, the post-money valuation of $300 billion would rank OpenAI as the 27th biggest company in the S&P 500 if it were publicly listed – a testament to the soaring enthusiasm surrounding the AI sector.

In fairness, the startup has earned it with its explosive growth. Revenue is projected to reach nearly $13 billion this year – more than triple last year’s total – and could approach $30 billion in 2025. Still, profitability remains elusive: despite its cash haul and soaring revenues, OpenAI doesn’t expect to turn a profit until 2029…

Eurozone

Eurozone inflation fell for the second consecutive month, moving closer to the European Central Bank’s 2% target and bolstering the case for a rate cut later this month. Consumer prices in the bloc increased by 2.2% in March from a year ago – in line with economist estimates and down from February’s 2.3%. Meanwhile, core inflation, which strips out volatile food and energy items to give a better idea of underlying price pressures, fell slightly more than expected, from 2.6% in February to 2.4% last month – the lowest level since the start of 2022. Adding to the good news, services inflation – a measure closely watched by the ECB for signs of domestic price pressures linked to the labor market – declined from 3.7% to 3.4%, hitting its lowest level in almost three years.

Next week

1. Monday: Eurozone retail sales (February).
2. Tuesday: Nothing major.
3. Wednesday: Minutes of the Fed’s latest meeting.
4. Thursday: China inflation (March), US inflation (March).
5. Friday: UK GDP (February), US consumer sentiment (April). Earnings: BlackRock, JPMorgan, Wells Fargo.