esterday was President Donald Trump’s "Liberation Day,” which shocked the markets with its severity.

The U.S., it turns out, will impose a 10% baseline reciprocal tariff rate on its trading partners. But certain countries will face much higher levies. The European Union, for instance, will take a 20% hit. We saw additional levies of:

  • 34% for China

  • 39% for Iraq

  • 41% for Syria

  • 50% for Saint Pierre and Miquelon

The financial markets have been quavering ever since Trump began implementing tariffs, which was pretty much right away. And they absolutely cratered this morning even before the opening bell.

They’re well schooled in the language of extremes – going all in on either fear or greed – and they certainly haven’t let us down over the past six months.

When Trump was first elected, Mr. Market went galloping with the bulls, delirious at the prospect of a low-tax, low-regulation regime. Then, after Trump actually took office and started implementing his campaign promises, it U-turned into panic mode.

Being just as human as the next investor, I understand all of it. It’s hard not to buy when the headlines are euphoric and sell when they’re dismal.

However, I believe there’s a much better approach you should take: one where you analyze before you act.

It’s easier said than done, I know. Even so, I’m asking you to hear me out as I try to answer three important questions about yesterday’s announcement:

  1. What is the rationale behind the “Liberation Day” tariffs?

  2. What will the immediate effects be?

  3. How will they affect the markets in the long term?

The combined answers should guide us in how to react – if we want to not only survive the turmoil… but thrive in it.

After listening to Trump’s speech yesterday afternoon, I truly think that’s possible. But first, we have to understand all the ins and outs of what’s going on.

The Tariff Situation Explained From Trump’s Perspective (and Mine)

Exactly two months ago, I discussed Trump’s initial tariff plans for Canada and Mexico, including this explanation:

On Saturday, the White House published its stance that “the extraordinary threat posed by illegal aliens and drugs, including deadly fentanyl, constitutes a national emergency under the International Emergency Economic Powers Act (IEEPA).”

Therefore, until the crisis was alleviated to his satisfaction, the tariffs would remain. Or at least, the tariff threat would remain.

What I didn’t mention at the time was that tariffs are a long-standing practice of economies around the world. To quote conservative think tank The Heritage Foundation:

Many European nations use schemes like value added taxes (VATs) to impose implicit tariffs on American exports. Furthermore, countries like Germany and Japan still have tariffs that were put in place after World War II to protect industries being rebuilt following the conflict. The status quo has completely changed, and there’s no reason for these nations to continue penalizing American farmers and factory workers.

China, of course, employs its own tricks, including with its currency, to manipulate global trade. South Korea and Taiwan use regulatory filters. And other countries have their own trade barriers against the U.S.

As Trump said, “They charge us.” So now we’ll “charge them.”

I’m not necessarily even criticizing these governments for their practices. They’re focused on making their own nations great.

It’s just that I won’t criticize my own president either for turning around and doing the same.

An Obvious Short-Term Reckoning for Trump’s Tariffs

The question for me, then, is whether these tariffs will actually work. And let’s be blunt…

They’re causing some definite short-term issues. This goes beyond how badly the markets tanked today – on top of how badly they fell in the run-up to the Liberation Day announcement.

I already mentioned all of the market turmoil we’re seeing, including from the guessing game of “Will he/won’t he?” and “How bad will it be?” Moreover, even now that Trump has officially unveiled his global tariff plan, there’s still so much uncertainty…

Which we all know Wall Street hates.

Now, some of that uncertainty is positive. Global leaders have already begun responding, and it hasn’t been nearly as inflammatory as some predicted.

es, China has made it clear that it won’t take the tariffs sitting down. But even before Trump took center stage, Ontario Premier Doug Ford told CNBC’s Squawk Box that he was willing to “sit down and discuss this… And we’d be willing to take [our tariffs] off tomorrow if” Trump did the same.

Of course, Canadian Prime Minister (“PM”) Mark Carney declared the larger government will “act with purpose and with force” in implementing further tariffs itself. So we shall see about our northerly neighbor.

Australian PM Anthony Albanese, however, said he and his “will not be seeking to impose reciprocal tariffs. We will not join a race to the bottom that leads to higher prices and slower growth.”

Sweden’s PM Ulf Kristersson declared, “We want to find our way back to a path of trade and cooperation together with the U.S.” for everyone’s benefit.

Italian PM Giorgia Meloni stated, “We will do everything we can to work towards an agreement with the United States, with the goal of avoiding a trade war that would inevitably weaken the West in favor of other global players.”

And Irish Trade Minister Simon Harris said, “The [European Union] and Ireland stand ready to find a negotiated solution.”

Personally, I’m not so sure he should be speaking for the whole EU. After all, Manfred Weber, president of the European parliament’s largest party, slammed the measures, adding that “Europe stands united, ready to defend its interests, and open to fair, firm talks.”

Still, I guess there is an open door in that statement. And perhaps – perhaps? – the same can be said for Spanish PM Pedro Sánchez saying his country “will protect its companies and workers and will continue to be committed to an open world.”

In short, there will almost certainly be more short-term pain ahead as everything gets sorted out and settles down – pain for the markets and consumers alike.

It’s only a matter of how long it will take. 

The Bigger-Picture Perspective on Whether ‘Liberation Day’ Will Work

Trump acknowledged this yesterday, predicting that:

In the coming days, there will be complaints from the globalists, the outsourcers, special interests, and fake news… Never forget that every prediction our opponents made about trade for the last 30 years has been proven totally wrong. They were wrong about [the North American Free Trade Agreement (“NAFTA”)]. They were wrong about China. They were wrong about the Trans-Pacific Partnership… In my first term, they said tariffs would crash the economy. Instead, we built the greatest economy in the history of the world.

Trump is, of course, known for his “willingness” to talk himself up, shall we say. However, there are plenty of facts to back his ego up on those allegations.

  • NAFTA and its successor, the United States-Mexico-Canada Agreement (“USMCA”), have long since been criticized for causing job losses and stagnant wages for U.S. citizens as their employers moved production to Mexico.

  • The same goes for encouraging business with China.

  • The U.S. economy flat-out flourished between 2017 and 2019, with lowered unemployment – including in key minority demographics – and an overall enthusiastic economic environment.

As for the Trans-Pacific Partnership? Well, Trump withdrew us from that before it could take effect. So, in reality, we just don’t know how that would have gone.

We do, however, already have some indication about how these tariffs will go. After all, as I noted on March 24:

[Trump has] said that some short-term pain is worth the long-term gain of bringing manufacturing back to America. And maybe he’s right considering how, thanks to his tariff threats and actions:

  • Hyundai aims to boost production at its Savannah, Georgia-based facility from 300,000 units to 500,000.

  • Honda Motor (HMC) is investing $4.5 billion in Ohio for global manufacturing operations.

  • Volkswagen plans to build a new $2 billion plant in South Carolina for a new battery-electric SUV and pickup plant. And it’s evaluating U.S.-based production for its Audi and Porsche brands as well.

  • Volvo said it would expand domestic production at its plant in Ridgeland, South Carolina.

Meanwhile, Inventec, one of Nvidia’s AI server suppliers; Louis Vuitton Moët Hennessy, the world’s largest luxury conglomerate; Essity, a Swedish hygiene products company; Campari, an Italian spirits maker; Compal Electronics, a Taiwanese laptop manufacturer; LG Electronics; and Samsung are all considering their own investments into the U.S.

While concerns of a trade war and slowing economy are likely to weigh on equity markets over the near term, this is exactly the type of backdrop in which we believe high-quality, dividend-paying stocks will succeed.

Some Final Thoughts on Liberation Day

The USA is the gold standard when it comes to technology, manufacturing, energy, infrastructure, and real estate. And ultimately, I do expect Trump’s actions will encourage that standard further, not detract from it.

With that in mind, I look forward to seeing where this goes! And in the meantime, the Wide Moat team is hard at work identifying quality safe-haven stocks to help you sleep well at night.

Make sure to also tune in to our YouTube channel, The Wide Moat Show. We just highlighted five blue-chip compounders that should benefit in the slowing macro economy… and at very reasonable prices.

As Benjamin Graham, the father of value investing, reminds us, “Adversity is bitter, but its uses may be sweet. Our loss was great, but in the end, we could count great compensations.”

Regards,

Brad Thomas
Editor, Wide Moat Daily