AFTER a tumultuous week in which the Dow Jones (DJ) index entered correction territory – a 10% drop from its previous high – those heavily invested, especially US President Donald Trump’s supporters, are hoping that the fall is temporary.
Their dreaming has been buoyed by last Friday’s rally, with stocks clawing back some of their steep losses as tariff-related headlines took second place to
the Ukraine truce-agreement-dominated news.
Was this a dead cat bounce or a signal that the worst is over and the US market can resume its bull run and trajectory of growth ongoing since 2023?
“We will begin a new era of soaring incomes,” Trump said at a rally in October.
“Skyrocketing wealth. Millions of new jobs and a booming middle class. We are going to boom like we’ve never boomed before.”
Making a comeback or worst yet to come?
Market bears do not think that Trump is right or that any relief is sustainable. Many fear the worst is yet to come.
Firstly, there is little or no disagreement that the market turbulence and fall is a result of uncertainty about how much pain Trump will let the US economy endure through tariffs and other economic policies in his attempt to reshape the country and world as he wants.
Secondly, Trump has not given any indication that he will back down from the tariff war that he has launched. He has also not ruled out the possibility of a recession arising from the tariff war.
When asked in an interview with Fox News Channel’s Sunday Morning Futures, Trump defended imposing 25% tariffs on imports from Mexico and Canada
that had sent markets tumbling over concerns of a trade war.
When questioned whether he was expecting a recession in 2025, Trump responded: “I hate to predict things like that. There is a period of transition because what we’re doing is big. We’re bringing wealth back to America. That’s a big thing.”
He then added: “It takes a little time.”
Trump has also brushed aside concerns from businesses seeking stability as they make investment decisions.
He said: “For years the globalists, the big globalists have been ripping off the United States.” And now, “all we’re doing is getting some of it back, and we’re going to treat our country fairly.”
Beneath Trump’s media rhetoric on his tariff bazooka are larger political and strategic considerations that indicate that tariffs and trade relations may just be the first bazooka that he will fire at the rest of the world, including at his allies, to bring wealth back to America.
Trump’s tariff and trade policy
The key political reason behind Trump’s tariff war policy relates to his campaign promise of making America great again through an “America first” policy.
This populist and nationalist agenda not only panders to his domestic political base. It has also attracted support from Democrat voters who have felt marginalised by globalisation and former president Joe Biden’s policies that have failed to protect their jobs.
The fact that Trump’s economic messaging has been successful is attested by his election win in all seven battleground swing states, including farming and industrial states.
In the tariff war with China during his first administration, Trump was able to counter the backlash of retaliatory tariffs on US soybeans that hurt farmers by increasing agricultural subsidies.
Expect this to be part of the defensive weaponry that Trump will deploy in the coming days. The strategic reasoning behind the
tariff war policy is a longer-term offensive plan aimed at reducing America’s chronic trade deficit with other countries.
According to reports, the 2024 US trade deficit was a record US$1.2 trillion (RM5.32 trillion), marking the fourth consecutive trade deficit above US$1 trillion and the sixth increase in the last eight years.
At the end of January 2025, the US was in the red on trade (in billions of dollars), with the top countries being China (US$295.4), the European Union (US$235.6), Mexico (US$171.8), Vietnam (US$123.5), Ireland (US$86.7), Germany (US$84.8), Taiwan (US$73.9), Japan (US$68.5), South Korea (US$66.0), Canada (US$63.3), India (US$45.7), Thailand (US$45.6), Italy (US$44.0), Switzerland (US$38.5) and Malaysia (US$24.8).
All these countries, including those such as Australia, that have a trade deficit in favour of the US will soon see a renegotiation of tariff and trade relationships aimed at extracting or extorting (as many are seeing it) gains for the US in one way or another.
The impact of Trump’s new international economic order – centred on Maga (Make America Great Again), unilateral action over multilateral cooperation, rejection of global frameworks like the
World Trade Organisation dispute settlement and a confrontational, bilateral approach to asserting US interests – is still too early to tell.
Recessionary riptide
However, if worse-case expectations of a global recession come about – a possibility which Trump has demurred on and has not rejected – we can expect the Dow to fall much more from its current level of 41,488, reached on March 14.
Past experience indicates that a severe, unresolved tariff war combined with recessionary forces could push the Dow down 30% to 50% from peak levels.
Proactive monetary/fiscal intervention, corporate adaptability and a partial Trump retreat may cap losses closer to 20% to 30%. This will place the index at the 32,000 level.
Investors should closely monitor the coming trade negotiations for signals on how far south the US and global markets will go.
Lim Teck Ghee’s Another Take is aimed at demystifying social orthodoxy. Comments: letters@thesundaily.com
