Trump spooks Wall Street with trade war. Is the era of protectionism coming?

The long-anticipated Liberation Day brought no good news for investors. Donald Trump delivered on every threat he had made. The specter of a trade war now looms over the world, and several major economies—including the European Union and China—have yet to respond to the United States’ ‘draconian’ tariffs. By Trump’s decision, the U.S. will impose a minimum 10% tariff on all trade partners, and in cases where countries impose particularly high tariffs on the U.S., Washington will retaliate with tariffs amounting to half their level. Moreover, Trump announced a 20% tariff on imports from the European Union and 34% on Chinese goods. These are by no means the only economies hit by such measures. Taiwan—a global export hub for semiconductors—was slapped with a 32% tariff; Japan, one of the U.S.’s closest allies, received a 24% tariff; and India, 26%.

In the context of the American economy—where uncertainty about the future and fear of recession have taken root—referring to this as a ‘Liberation Day’ seems excessive. However, the name may hold a subtler meaning. Trump emphasized that over the past few decades, the United States has become far too dependent on foreign goods and neighboring economies. As a result, the country has lost its self-sufficiency, and its power has become ‘fragile.’ Today, the U.S. is a nation vulnerable to a range of extreme global events. Now, it appears that these ‘tariff wars’ aim to put an end to the era of ‘unrestrained’ capitalism that, in pursuit of higher margins, leaned heavily on free trade.

One cannot ignore the rivalry with China. In this context, the revival of American industry seems necessary for U.S. interests—and military power—to be taken seriously. Not just now, but over the coming years, during which China's fast-growing industrial base would otherwise continue to build asymmetric and systematic dominance over America’s. Trump wants to put a stop to that.

It appears Trump is risking short-term economic pain just to ensure that the U.S. can someday truly compete with rising empires—primarily China—and maintain its global dominance. Without a strong industrial base and domestic manufacturing sector, the United States would likely be unable to maintain its role as a global hegemon. A role it once earned through industrial superiority—later exchanged for a service-driven capitalism in times of peace and prosperity. Reversing this model will carry a range of consequences—for the world, and for Wall Street.

Trump has clearly stated he will prioritize the American market and domestic businesses—but not at all costs. The U.S. President announced that tech giants like Nvidia, Apple, and Oracle will face immense costs as they build state-of-the-art manufacturing facilities in the United States.

The prospect of tariff exemptions may indeed push many businesses to consider costly reshoring. However, it would be an oversimplification to assume that this alone would be incentive enough. There are also corporate tax rates, labor costs, and other variables—such as streamlined supply chains and infrastructure—to consider. Launching full-scale industrial production in the U.S. will take years and cost a fortune, both for the federal budget and for businesses. In such a scenario, the main beneficiaries will likely be companies already producing in the U.S., as they won’t bear the extra costs imposed by tariffs.

For the American economy, a scenario involving such aggressive tariffs will likely lead to higher prices for electronics, which the U.S. imports on a massive scale. The Federal Reserve will likely pause any dovish narrative about potential rate cuts this year—at least until weaker consumer, business, and executive expectations are reflected in hard economic data. Inflation is almost certain to rise, and the question is whether the ‘free market’ can handle it, since not all companies will be able to pass costs onto consumers to the same extent. Some may be forced to absorb costs, eroding their profit margins.

Stock indexes plunged after Trump’s announcement. Nasdaq 100 futures ended post-market trading nearly 2.5% lower, despite having shown gains before Trump’s speech. Meanwhile, the so-called ‘fear index’ VIX surged nearly 6%, and uncertainty ahead of tomorrow’s market open continues to rise. The EUR/USD pair slid from 1.091 to 1.083.

Eryk Szmyd XTB Financial Markets Analyst