Confusion and falling stocks after Trump's new tariffs

Confusion and falling stocks after Trump's new tariffs

Momentary relief was accompanied Friday by the harsh reality that President Donald Trump is far from finished with his chaotic tariff regime. In statements to reporters from the Oval Office, Trump announced that he would announce new so-called "reciprocal tariffs" next week. This could fulfill a campaign promise and reflect a long-held desire to adjust foreign countries' import taxes on a one-to-one basis to restore what the president believes is fairness in international trade.

Impact on financial markets

The announcement rocked financial markets on Friday after stocks had been relatively quiet the week before. Although Trump's 10% sweeping tariffs on China took effect on Tuesday and China responded with its own expanded tariffs on the U.S., markets edged higher this week on relief that Trump postponed plans for 25% tariffs on all goods imported from Mexico and Canada until March 1.

Market reactions and economic consequences

The announcement of new potential tariffs that could affect all corners of the world unsettled investors. The Dow Jones Industrial Average fell 400 points, or 0.9%. The broader S&P 500 also fell 0.9%, while the technology-focused Nasdaq Composite Index fell 1.4%. Trump said reciprocal tariffs would ensure “that we are treated the same as other countries” and could help reduce the U.S. budget deficit.

Consumers and the possible consequences of tariff increases

Tariffs are a central element of Trump's promise to raise revenue to finance the extension of his 2017 tax breaks and other promised tax breaks. But the tariffs themselves could represent a huge tax increase on American consumers, who economists say will ultimately bear the cost of the tariffs. If Trump pushes through the 25% tariffs on Mexico and Canada, the direct cost of import taxes on Chinese, Mexican and Canadian goods could be over $1,200 a year for a typical American household, researchers at the Peterson Institute found. This would be the largest tax increase in the US since at least 1993.

The uncertainty about tariffs

It is unclear what form the reciprocal tariffs will take if they are actually implemented. Trump recently threatened a blanket 10% tariff on all imports into the United States. The threat of reciprocal tariffs appears to return to a common campaign theme: matching foreign countries' import taxes dollar by dollar to reduce U.S. trade deficits.

Danger of a trade war

If Trump pushes forward with reciprocal tariffs, it could trigger a series of retaliatory tariffs from affected countries. That could spark a trade war that leads to ever higher taxes that ultimately hit consumers, who economists say typically end up footing the bill. That's because American importers pay the tariffs - not the foreign countries affected by the tariffs. These importers pass the costs on to retailers, who typically increase prices for consumers as a result.

Situation report on customs policy

The 10% tariff on China affects about $427 billion worth of goods. That already exceeds the various tariffs Trump imposed on about $380 billion of foreign goods during his first term, according to Tax Foundation estimates. However, the Trump administration on Friday delayed some of those tariffs and temporarily restored the so-called de minimis exception, a loophole that allows packages worth less than $800 to enter the country duty-free.

Unresolved status of customs regulations

The exemption went into effect on Tuesday, and the US Postal Service immediately halted all package deliveries from China and Hong Kong to comply with the order. But soon after, USPS suspended service again within hours, causing confusion over how items from China would be inspected to determine their import taxes. Trump signed an executive order Friday restoring the de minimis exception until such time as "adequate systems are in place to fully and expeditiously process the collection of tariffs at the Department of Commerce." However, the decree does not mention how long the delay will last, another example of the uncertainty surrounding the implementation and scope of potential tariffs that may soon be imposed.

Reporting was by CNN's Matt Egan, Elisabeth Buchwald and Ramishah Maruf.