"The iron curtain of tariffs" falls, followed by the central bank cutting interest rates "domino effect" and a global "demand cold wave"?

Four months ago, Donald Trump, who started his second term as President of the United States at the White House returned to the White House and shocked the world by displaying a sign with global tariff rates in the Rose Garden at the White House, which stirred global stock, bond, and currency markets. However, on Thursday, the reaction among the investor community to the revised tariffs he announced was much calmer compared to the initial "Liberation Day" in early April. It is worth noting that the world still faces the highest level of tariffs since the 1930s, with average basic tariff rates reaching 15%, nearly six times higher than a year ago. Trump's latest round of tariff actions set the minimum rate at 10%, and imposes 15% or higher tariffs on countries with trade surpluses with the United States. So far, the global economy has performed much better than many economists had anticipated after Trump's initial tariff blitz. In order to ship a large volume of goods before higher tariffs take effect, exports were loaded early and shipped out, driving GDP growth in many Asian economies beyond expectations and to some extent, shielding American consumers from the impact of price hikes caused by tariffs. In the view of some economists, this overly optimistic situation may soon change. "For the rest of the world, this is a very serious demand shock," former Reserve Bank of India Governor, former Chief Economist of the International Monetary Fund, and current professor at the University of Chicago Booth School of Business, Raghuram Rajan, said in a media interview on Friday. "As global economies slow down in the face of these significantly higher tariffs compared to when Trump took office again, you will see many central banks considering rate cuts." New US equivalent tariff rates After months of negotiations, during which Trump threatened both US allies and competitors on social media, the new tariff rates announced roughly match the equivalent tariff levels announced on "Liberation Day" on April 2 but were slightly lower due to the stock market plunge and bond yield surge. However, there were still some surprising measures, such as unexpectedly imposing a punitive 39% tariff on imports from Switzerland and raising tariffs on some Canadian goods to 35%. On Friday, Asian stock markets fell by 0.7%, the Europe Stoxx 600 index dropped by over 1%, and S&P 500 index futures also fell about 1%. Despite this, these declines were initially much smaller compared to the most dramatic reactions in the market since the financial crisis following the announcement of tariffs on April 2. Although Trump's new tariff rates provide a certain level of certainty for global manufacturers, the uncertainty surrounding the tariff policy remains significant. The US President is expected to introduce separate tariff measures for imported drugs, semiconductors, critical minerals, and other key industrial products in the coming weeks, and there may also be changes to the tariff framework for key economies such as Canada, Switzerland, India, and the EU. Meanwhile, a very unfavorable factor for the Trump administration is that US courts are still reviewing the legality of these "equivalent" tariffs. The past four months have also shown that Trump is more willing to use tariffs to address geopolitical issues. While the tariff rates on "Liberation Day" followed a rough formula loosely related to trade deficits with various countries, the subsequent figures seem more arbitrary. Trump has threatened Brazil due to domestic political threats, India due to its energy trade relations with Russia, and Canada due to plans to recognize the state of Palestine. As US tariff rates rise significantly, the "soft moment" in the global economy may be difficult to avoid If the new tariffs of the Trump administration are implemented as planned within seven days and the agreements reached with the EU, Japan, and South Korea on temporary auto tariff policies are maintained, Bloomberg Economics estimates that the average US tariff rate will increase slightly from 13.3% before August 1 to 15.2%, which is significantly higher than the 2.3% before Trump's reelection. "This is a very high wall of tariffs," said Deborah Elms, head of trade policy at the Hinrich Foundation. "For US companies and consumers, costs will increase significantly, and they will have to cope by reducing purchases." Trump's tariffs push up the average tariff rate - The average US tariff rate reaches the highest level since World War II According to the model used by the Fed's economic research department during the first trade war, Bloomberg Economics estimates that the average tariff rate has risen by 12.8 percentage points since Trump returned to the White House, which may lead to a 1.8% decline in US GDP in two to three years and push up core prices by 1.1%. At the same time, this will also bring downside risks to exporters dependent on US demand. Bloomberg Economics believes that Canada and Mexico, due to the exemption clauses in the US-Mexico-Canada Agreement (USMCA), "are able to withstand the shock," and they have an additional 90 days for negotiations. The EU, Japan, and South Korea - all facing a 15% tariff rate, the export situation of these three major US core trading partners is much better than the pessimistic scenario feared by the market. In contrast, another long-time US trading partner, Switzerland, faces a 39% high tariff on products exported to the US, causing the Swiss franc to depreciate. Thursday's tariff news did not involve the US's largest trading partner, China. Trump will decide in the near future whether to extend the tariff truce; previously, the two sides had just ended talks in Stockholm. Earlier this week, a US official said that the two sides agreed to temporarily maintain current tariff levels as part of the US-China trade cease-fire reached after the tariff announcement on April 2 when China cut off the supply of rare earth magnets. Trump also included a key provision to impose an additional 40% tariff on goods identified as transshipments, a move apparently targeting China, but the provision lacks clear guidelines on how transshipment trade is determined. "These tariff measures do provide more clarity, but there remains a significant amount of uncertainty for manufacturers," said Jonathan Cohen, Chief Economist at Challenger Ltd. based in Sydney. "So far this year, we have seen multiple changes to the US tariff system, and there could be more changes in the future. In this environment of ongoing uncertainty, US and global companies will be more cautious in their investments and planning." Cohen, a former central bank official, expects the price pass-through effect on US consumers to be greater in the coming months. The Trump administration hopes that the latest tariff system will generate fiscal revenue, reduce the trade deficit, and encourage international companies to set up factories in the US - without raising prices or causing demand to collapse. "Global trade is now being reorganized based on the principles of fair and balanced trade - all efforts are for the economic and national security interests of the country," US Trade Representative Jamie Grer wrote in a statement. "This new trade system will reduce the US trade deficit and bring better results for American workers, their families, and communities." However, since Trump announced the tariff plan in the Rose Garden in April, he has been criticized by the market for making excessive promises on trade agreements - he and his aides promised to reach numerous agreements, with at least one even claiming to "be done with 90 agreements in 90 days." Economists have continually warned that American households will bear the cost, with the specific burden depending on how much profit compression exporters are willing to endure in order to maintain sales and how much tariff costs American importers are willing to bear. This time, the Federal Reserve faces a dilemma "Unlike the first trade war in 2018, when Chinese exporters and non-US exchange rates bore most of the adjustment costs, this time tariffs are generally global and with a minimum rate of 10%, so it is highly likely that some of the costs will be passed on to American consumers," said Selena Ling, economist at OCBC Bank in Singapore. "This could make the monetary policy situation that the Federal Reserve faces even more complex." Fed Chairman Jerome Powell resisted pressure from the White House this week, rejecting calls from two Fed Governors for a rate cut in July and stating that the central bank needs to be vigilant on inflation risks. "A reasonable baseline expectation is that the impact of tariffs on inflation may be temporary, reflecting the results of a one-time upward shift in price levels, but it is also possible that these inflation effects could be more prolonged - a significant potential risk that needs to be evaluated and managed," Powell said after the Fed's interest rate decision on Wednesday Eastern Time. It remains to be seen whether the US tariff policy will trigger broader trade barriers globally. While the EU has imposed tariffs on Chinese electric cars and other countries are considering similar restrictions on low-cost goods, most countries are largely avoiding Trump's protectionist path. "Although we have not fully reverted to the pessimistic system of 'jungle law', we have taken several large steps in that direction," said Stephen Olson, former US trade negotiator and current ISEAS-Yusof Research Institute fellow. "Don't think this is the end of the Trump trade story," he added. "Trump may see this as an ongoing reality show. In the coming period, the market must be prepared for more 'deals' or a possible wave of further tariff increases."