What Could Happen to Global Markets with Surprisingly High Tariffs？

TradingKey - Following President Donald Trump's announcement of new tariffs on global trading partners, stock markets in the Asia-Pacific region and Europe fell on Thursday, with U.S. markets also showing a pre-opening decline. 

According to White HoU.S.e officials, the baseline tariff rate of 10% will take effect on April 5, followed by reciprocal tariffs on April 9. Trump still plans to impose additional tariffs on sectors like semiconductors, pharmaceuticals, and potential critical minerals that are not covered in this round of tariffs.

Mary Lovely, a senior fellow at the Peterson Institute for International Economics, stated that the tariffs announced by Trump on Wednesday are “much worse than we feared.”

Southeast Asia Hit Hardest 

Trump's tariffs primarily target countries that receive investments from China. Southeast Asian nations, including Vietnam, Cambodia, and Thailand, are significant trading partners for the U.S.. Many international manufacturers have shifted their production to Southeast Asia, benefiting from lower operational costs and the ability to avoid tariffs, as a result of Trump’s measures against China during his first term.

Vietnam, where companies like Apple, Nike, and Samsung Electronics operate, faces a 46% tariff, making it particularly vulnerable. Its exports to the U.S. were worth $142 billion last year, accounting for nearly 30% of its GDP. Cambodia is the most affected country in the region, with a tariff rate of 49%. Over half of the factories there are Chinese-owned, primarily exporting clothing and footwear.

Dr. Siwage Dharma Negara, a senior fellow at Singapore's ISEAS-Yusof Ishak Institute, remarked that the tariffs on Southeast Asian countries are indeed aimed at harming China. “The administration thinks that by targeting these countries, they can also target Chinese investment in Cambodia, Laos, Myanmar, and Indonesia. By focU.S.ing on their products, they might affect Chinese exports and the economy,” he said. “The real target is China, but the impact on those countries will be significant, as this investment creates jobs and export revenue.”

U.S. Tariffs Zero In on China

Cumulative tariffs on China yield an effective rate of 54% (34% + 20%). Moreover, CNBC reported that the average U.S. tariff on imports from China will be 76%, consisting of a 34% reciprocal tariff, a 20% fentanyl tariff, Sec. 301 tariffs from the first term, and baseline U.S. tariffs.

Source: CNBC

Earlier on Wednesday, the president signed an executive order to end regulations on low-value packages from China, allowing Chinese e-commerce giants like Shein and Temu to send packages under $800 to the U.S. without tariffs and inspections. According to cU.S.toms data, nearly 1.4 billion shipments entered the U.S. last fiscal year under this regulation.

However, Pushan Dutt, a professor at INSEAD BU.S.iness School, indicated that the tariffs could encourage China to seek alliances with other Asian countries that are also facing tariffs. Talks are already underway, as China, South Korea, and Japan recently held their first economic talks in five years. They decided to speed up negotiations on a free trade agreement that was first suggested over ten years ago. The new tariffs might jU.S.t give them extra motivation to work together.

Auto Tariffs Set to Take Effect Soon

Last week, the Trump administration announced a 25% tariff on imported vehicles and parts. However, an analysis of the tariffs listed in the Federal Register by Reuters shows that this latest tariff policy will expand to cover automotive parts worth nearly $600 billion. This includes cars, light trucks, engines, transmissions, lithium-ion batteries, and minor components like tires, shock absorbers, and spark plug wires.

Major countries importing vehicles into the U.S., including Mexico, Japan, South Korea, Canada, and Germany, may face substantial impacts. 

On Monday, the Japanese stock market already plummeted due to concerns over the auto tariffs, with Nomura suggesting that the market had not fully absorbed this wave of tariffs. After the latest tariff announcements, the Nikkei index fell again, dropping 7% over the past five trading days.

The automotive sector constitutes 3% of Japan's GDP, and these tariffs could reduce overall economic growth by 0.2 percentage points. Investors previoU.S.ly considered that this situation could affect the likelihood of a rate hike in Japan in April, more review needed before making a final decision.

The automotive indU.S.try is also crucial to the European economy, accounting for 7% of EU economic output. A survey conducted last month by the German Automotive IndU.S.try Association revealed that about one-third of small and medium-sized suppliers expect to be directly affected by U.S. tariffs. 

Over a dozen global automakers operate nearly 40 factories in Mexico, including General Motors, Mercedes-Benz, BMW, Hyundai, and Toyota. The country exports nearly 3 million vehicles to the U.S., supplying 40% of U.S. automotive parts last year. Approximately 2 million Mexicans work in the automotive and parts sectors, with exports approaching $200 billion last year.

Meanwhile, the three major American automakers based in Detroit also produce vehicles sold in the U.S. abroad. General Motors is likely to be the hardest hit by the import tariffs, as it exports around 46% of its U.S. sales, primarily to Mexico, Canada, and South Korea. Ford and Stellantis, the parent company of Jeep, also manufacture models outside the U.S. and source many parts from foreign manufacturers. Bernstein analysts estimate that Ford and General Motors could see earnings decline by as much as 30% this year, even after adjU.S.ting for changes in parts sourcing.

What about Tesla? According to the American University's 2024 Manufacturing Automotive Index, the Tesla Model 3 Performance has the highest domestic content among any cars sold in the U.S., with 87.5% of its parts sourced domestically. However, it will not emerge unscathed. Analyst Dan Ives noted that even among automakers assembling vehicles in the U.S., about 40% to 50% of parts are imported.

No car manufacturer is exempt from these challenges.

Europe to Take Action

The EU plans to introduce counter-tariffs in response to the U.S. imposing a 20% reciprocal tariff on EU goods. ING estimates that these tariffs could reduce eurozone GDP growth by 0.3 percentage points over the next two years, leading to sluggish economic growth.

The EU has confirmed its readiness to take strong measures. As a first step, it will reinstate tariffs on a variety of previously suspended U.S. products, including agricultural goods, textiles, clothing, footwear, furniture, appliances, construction materials, and optical products. With 13.7% of the EU's trade linked to the U.S., these measures could greatly impact American exporters, especially if other countries implement similar actions.

Is Australia Immune to the Latest Tariff Waves?

Australia has avoided many of the higher tariffs placed by the U.S. on its major trading partners. Though Australian beef exporters to the U.S. will face tariffs, the government has exempted gold and pharmaceuticals from this round. However, pharmaceuticals might be targeted in future tariff rounds.

Australia’s main trading partners are also under increased U.S. tariffs—34% on China, 24% on Japan, and 25% on South Korea. Analysts warn this could hurt the construction and manufacturing sectors in these economies, reducing demand for Australian iron ore, coal, and natural gas exports.

Dr. Daniel Kiely from Curtin University noted that the tariffs will "affect Australia not just directly, but indirectly." He stressed that the impact on Western Australia, particularly regarding iron ore and gas exports, could be significant.

How Wall Street Responds?

Wall Street analysts suggest that GDP growth would be dragged down, inflation would rise, and U.S. stock markets will likely remain under pressure following the announcement of reciprocal tariffs. 

The tariff rate in the U.S. could approach 20%, compared to the previous baseline assumption of 15%. So U.S. stocks are expected to face a challenging day, with the S&P 500 likely to see a decline of around 4%.

Goldman Sachs believes that the greatest issue with the tariffs is their impact on actual earnings for U.S. companies, forecasting the S&P 500 index to reach only 5,550 points by end 2025.

Source: GS