Liberation Day: The Trade Battles Begin

Donald Trump may not have promised anyone a rose garden, but he certainly used it to launch a plan that could push the global economy into a long and deep recession.

We now know that his “Liberation Day” tariffs announcement includes increased tariffs on goods coming into the U.S. from any country in the world. Whereas before those tariffs amounted to 2.3%, they could now rise to 22%, higher than at any time before the First World War.

Immediate Global Fallout

The fallout from his announcements is occurring as this is being written, with promises of severe retaliatory responses from most affected countries, likely to be met by further tariffs from the U.S.

Already, markets have responded negatively, with concerns rising over the potential wealth-destroying impact of this kind of protectionist trade policy.

The last time the U.S. took such an irresponsible and unproductive approach to enact a significant protectionist trade and economics policy was in 1930 with the Smoot-Hawley Tariff Act. That act was enacted under Herbert Hoover, who was president during the stock market crash of October 1929. Barely eight months later, this new act added tariffs on 20,000 imported goods and was a major factor in prolonging what was a bear market and recession into the biggest and longest decline in U.S. stocks in history, combined with the Great Depression. Before Smoot-Hawley, the S&P 500 was down about 33% from its October 1929 highs. After Smoot-Hawley, the S&P 500 would drop another 67% to its nadir in the summer of 1932. It would not reach that 1929 peak until 1955 (10 years after the end of the Second World War).

The Smoot-Hawley Tariff was never repealed, but under Roosevelt the Reciprocal Trade Agreements Act of 1934 began to reverse much of the damage. However, by 1933, most of the serious harm had already occurred, with unemployment in the U.S. reaching 25% as the economy had sunk by 30% since 1929. It required WWII to pull the U.S. out of the Depression, damage that could have been significantly mitigated without the mistakes of Smoot-Hawley.

Yet here we are again. It has been less than 24 hours since the Rose Garden debacle, but as of 9:00 a.m. PST on April 3, 2025, the following has occurred:

• U.S. major equity indices are all down. The S&P 500 is off 4% this morning and 11% from its peak. The Nasdaq is worse, at -5% and -17.5% respectively, while the small/mid-cap Russell 2000 is now officially in bear market territory at -22%.
• Canadian markets have been impacted, but to a much lesser degree so far, with the TSX being off about 5-6% from its peak a few weeks ago.
• The U.S. dollar is falling against almost all other currencies, and our own CAD has come back over 70 cents US to a current level of $0.71.
• U.S. 10-year Treasuries have dropped 75 bps since early January and are now at their lowest level for 2025 at 4.05%. Markets are pricing in a much higher likelihood of a recession in the U.S. for 2025. Meanwhile, in Canada, 10-year government bonds have also dropped by about 65 bps this year to a current level of 2.9%.
• Canada and Mexico were spared much in the way of additional tariffs (although lumber, agricultural products, and pharmaceuticals are in the Trump crosshairs). Notwithstanding that, Mark Carney has announced reciprocal tariffs of 25% on imported U.S. autos that do not meet USMCA standards.
• There are very few economists who do not think these tariffs will be inflationary in the U.S. (and in other countries as well). At the same time, they will reduce economic activity. This combination of higher inflation and flat or declining GDP was last experienced in North America in the 1970s and early ’80s as stagflation. How can central banks reduce interest rates in a meaningful way to try to stimulate the economy when inflation is making a comeback?

What This Means for Our Strategy

We’ll keep updating our clients on the situation as we see it, and how this impacts our investment recommendations and overall asset mix. Some of our decisions are being vindicated by what we are observing in markets:

• Declining mid- to longer-term interest rates help pricing in real estate markets through lower mortgage rates. We still must be diligent with respect to leasing and occupancy rates to improve long-term real estate returns.
• Equity markets, especially in the U.S., have been expensive for quite a while. A correction—and even a bear market—would have been expected at some time. The Trump tariffs are accelerating that time frame. With our focus on dividend-paying companies, along with our total allocation to all equity markets of less than 30%, we believe our defensive approach positions us well for the market conditions.

Questions for Our Federal Leaders

We are also in the middle of a critical federal election. It is our responsibility to ask our leaders who would like to be our next Prime Minister questions such as:

• How are we productively going to respond to U.S. tariffs?
• What is our plan to diversify from our dependence on U.S. trade for our well-being?
• How and when will we see interprovincial trade barriers removed?
• What do we need to do to attract foreign direct investment (FDI) into Canada?
• We are a major resource country. How can we best develop those resources responsibly and then deliver them to global markets?

To quote Winston Churchill:

“This is not the end. It is not even the beginning of the end. But it might be the end of the beginning.”

We can only hope so.

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