What the financial markets are screaming about Trump's tariffs

A month before the 2024 election, Elon Musk tweeted, "Trump now leading Kamala by 3% in betting markets. More accurate than polls, as actual money is on the line."

These markets were correct. Also correct is Musk’s assessment of these markets. When people stake their own money, they do so with as much solid information and rational foresight as possible.

This fact is a big reason why President Donald Trump should reverse his tariff policy. Financial markets are driven by people investing their own money in anticipation of future economic conditions, and these markets are screaming that the president’s tariffs will inflict enormous harm on America’s economy.

From the time of Trump’s April 2 release of his "Liberation Day" tariffs until his April 9 announcement of a 90-day pause in most of these duties, the Dow Jones Industrial Average shed 11% of its value. The S&P 500 dropped by 12% and the NASDAQ by 13%. These massive declines occurred in a mere six days. Then when investors learned of his tariff pause, the sell-off stopped. Much, though not all, of these losses were recovered. 

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If the tariffs were truly likely to restructure America’s economy in a way that, as Trump promises, will "make us very rich and very strong," the tariff announcement would have immediately had Wall Street overrun with bulls. They would have ignored any short-term economic disruptions caused by the tariffs. Focused on the bright future, the bulls would have immediately driven share prices upward.

But instead, financial markets tanked as they were mauled by bears – revealing that people in the know and spending their own money anticipated that the economic damage from these tariffs won’t be temporary. It will be lasting.

Then the bulls appeared in force as soon as the president announced his 90-day pause. There’s no better evidence that investors with their eyes on the future are convinced that these tariffs are economically destructive.

And why wouldn’t they be destructive?

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By raising the prices of consumer goods, tariffs shrink families’ purchasing power.

By protecting producers from competition, businesses become less entrepreneurial and innovative. The economy’s dynamism diminishes.

Further, because more than 61% of U.S. imports are raw materials and intermediate goods used as inputs by producers in America, tariffs jack up American firms’ costs of production. Covering these higher costs by raising the prices of their outputs, these firms not only sell less at home, their exports become less competitive globally. As firms sell and export less, they lay off workers.

And several foreign governments retaliate by raising their own tariffs. This retaliation further reduces the market for U.S. exports.

Unfortunately, the tariffs’ economic carnage doesn’t end there. By dampening the American economy’s competitiveness and dynamism, tariffs incite global investors to retreat from the U.S.

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Global investment brings capital to our shores and lowers our interest rates. Much of this capital funds the opening of new businesses, the expansion and improvement of existing businesses, and research and development as well as worker training.

These investments raise U.S. GDP. More importantly, they increase American workers’ productivity. And increased worker productivity is utterly necessary if real wages are to rise and Americans’ living standards to continue to improve.

And so as the tariffs prod global investors to flee the U.S., American workers will, over time, find themselves less well-trained, and employed in workplaces that are less productive. Americans’ incomes will shrink.

This retreat of global investors from America will, ironically, achieve one of Trump’s main goals: smaller U.S. trade deficits. The president believes that these deficits are evidence that other countries are cheating America and ripping us off.

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But the president is mistaken. America runs trade deficits because foreigners are especially eager to invest in America. Just as you can’t spend all of your dollars on consumption goods if you want to invest, foreigners can’t spend all of their dollars on American exports if they want to invest in America.

Dollars that foreigners don’t spend on American exports raise U.S. trade deficits. But those same dollars are invested in America, causing the U.S. to run capital-account surpluses – meaning, a net inflow of investment to our shores.

Because no one invests in places believed to be in economic decline, the now half-century-long run of U.S. trade deficits proves that investors worldwide have immense confidence in America’s economy. We shouldn’t be pestered by having built a globally attractive economy. We should be proud.

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And just as a company grows by attracting more investment, so does America’s economy grow by attracting more investment.

Far from U.S. trade deficits signaling Americans being ripped off, these investment inflows are foreigners’ contributions to the health and growth of America’s economy. The president’s tariffs, alas, will impel foreigners to make their contributions elsewhere.