Trump's tariffs explained: Why they caused a market meltdown & who will bear the brunt

09/04/2025 03:13 AST

Major stock markets in the world suffered heavy losses at the start of the week triggered by US President Donald Trump's new tariffs. Some economists downplayed the global stock market plunge and said there was "no reason" to anticipate a recession based on the tariffs.

Other countries, particularly China, have announced countermeasures after Trump announced another sharp tariff hike on goods from the world's second biggest economy. And there are also strong indications that this back-and-forth tariff announcements will see prices rising not only for the US consumers but will also harm the world economy.

Lest we get lost in the economic jargons and soundbites, let us take a more fundamental understanding of these Trump tariffs and how they caused markets around world to tumble. And more importantly, what these drops and gains mean for the consumers.

What are tariffs?
Tariffs are customs duties or taxes imposed by one country on goods/ products imported from another country. They raise revenues for governments. In international trade, tariffs serve as a protectionist measure to shield local emerging industries from international competitors. They give a price advantage to locally-produced goods over similar goods which are imported.

On April 2, US President Donald J. Trump "declared that foreign trade and economic practices have created a (US) national emergency". He said a 10 per cent tariff on all nations and much higher rates of up to 50 per cent on individual countries will boost the US economy and protect jobs.

In essence, the "US changed from being among the most open economies in the world to its most closed," noted Filipino economist Sonny Africa, executive director of Ibon Foundation - an independent non-government organisation providing research, information and education.

"Before Pres. Trump's so-called 'liberation day' tariffs, the US's average tariff of 3.3 per cent was just two-fifths of the global average of 8.7 per cent. With the additional reciprocal tariffs, the US's average tariff leaps six-fold to 19.8 per cent and it is now the most protectionist economy in the world, by the measure of average tariffs," he underscored.

Who (really) pays for tariffs?
Tariffs levied on importers are eventually passed on to domestic consumers. Tariffs make foreign products relatively more expensive for consumers, particularly when domestic manufacturers rely on imported inputs in their production process. To recoup their expenses, they will pass the increased cost to consumers.

In the US, vehicle affordability is already a major issue for consumers, and this will hit harder when tariffs on auto parts will come no later than May 3.

In the UAE, buying new and used cars from the US could get more expensive in the aftermath of new tariffs rolled out by Trump, said experts, adding "the impact could even extend to car maintenance and repairs."

"On the other hand, the tariffs will also open an opportunity for cars produced in Asia, especially China, to capture a higher market share in the region," noted Abhinav Gupta, CEO of Cars24.

Why is Trump using tariffs?
Trump, who is intrinsically a businessman, is using the imposition of tariffs as a political tool for his government. He said tariffs will boost the US economy by encouraging American consumers to buy more US-made goods. They will also hike government revenues.

Trump said the 'Made in America' is not just a tagline - but "an economic and national security priority" of his administration.

A White House statement reads: "President Trump refuses to let the US be taken advantage of and believes that tariffs are necessary to ensure fair trade, protect American workers, and reduce the trade deficit - this is an emergency." This means the tariffs "will remain in effect until such a time as President Trump determines that the threat posed by the trade deficit and underlying nonreciprocal treatment is satisfied, resolved, or mitigated."

Who (really) benefits from tariffs?
Not the consumers for sure. The US government will see increased tax revenues as imported products will enter the domestic market. American companies can benefit from a reduction in competition, and local manufacturers can pass on the added cost to the consumers.

Some businesses will profit from reduced international competition and the government will see an increase in revenue from customs duties. But tariffs will increase the price of goods and services in domestic markets. To cover the increased costs, the importer charges higher prices for the goods and services. In the end, higher prices for consumer goods will reduce consumption which will eventually weaken the economy.

How are Trump's tariffs affecting the global economy?
We have seen at the start of the week - dubbed as Black Monday - the sharp fall in stock markets across the world. There are no signs of letting up as Trump is threatening the imposition of additional tariffs on Chinese goods entering US soil.

Some analysts say market falls often herald an economic downturn. Stock markets were hit but not only investors will be affected because there can also be an impact on pensions, jobs and interest rates.

The last time the world economy suffered a major blow was five years ago, during the Covid pandemic, when - understandably - the health emergency forced the apparent shutdown of the global economy.

Who are taking advantage of the stock market decline?
"Retail investors demonstrated strong conviction on April 3, the first full trading day following President Trump's so-called 'Liberation Day' and the announcement of new US tariffs. Instead of panic-selling, many chose to buy the dip, seeing the sharp sell-off as an overreaction to macroeconomic developments," noted Lale Akoner, market analyst at eToro, in a statement to Khaleej Times on Tuesday.

Buying the dip means purchasing stocks during a market decline.

Akoner said: "Many saw it as a buying opportunity in quality names like Nvidia, Amazon, and Nike, which have strong fundamentals but were dragged down in the broad risk-off move."

She explained: "Nike, for example, plunged due to tariff concerns on imports from Southeast Asia, but long-term bulls likely saw its brand strength and market dominance as worth holding through short-term supply chain pressures."

Despite recent volatility driven by tariffs and inflation concerns, Akoner said "retail investors are becoming increasingly sophisticated, using macro-driven sell-offs as entry points into fundamentally strong assets. In short, retail investors bought in because they believed the assets were fundamentally strong - the drop was temporary - and opportunity often lies in chaos," Akoner concluded.

Are we seeing a global economic downturn?
There are indications that we may be heading in that direction. An economic study shared on Tuesday with Khaleej Times by Trends Research & Advisory noted: "The new tariffs imposed by the Trump administration on China, the European Union, and several Asian nations may further destabilise global trade, potentially prompting retaliatory measures from affected countries."

Trends Research & Advisory examined the global repercussions of Trump's tariff policies, which took effect on April 2, and said "these measures could escalate trade protectionism and intensify economic tensions between the US and its key trading partners, ultimately affecting global trade and investment stability."

"Global financial markets reacted sharply to these decisions. While the Trump administration's tariff policies aim to reduce the US trade deficit and boost domestic industry, the (fresh tariffs) could negatively impact American businesses and consumers by increasing import costs and product prices."

"(These) policies could reshape global trade relations and alter the international economic landscape in the coming years. (We) may witness a further escalation of global trade conflicts, with the possibility of new negotiations or additional tariffs from both sides - placing the global economy at a critical crossroads," the Abu Dhabi-based private, independent research institution added.

Africa, however, underscored we are not yet heading towards a global economic meltdown. He maintained "the global stock market crash was a knee-jerk reaction to the uncertainty."

"There are effects but the disruption is not generalised because the global supply chains are wide and there are alternatives to the US," he added, noting: "Economic growth will definitely be inflationary and slow, and the least developed countries that are foreign debt- and commodity export-dependent will have problems - they might have a debt crisis.

"But honestly, it's hard to say about the global meltdown because down the line the US might do something more - it might tighten or loosen up. Other countries might have a more extreme reaction, resulting in geopolitical crisis, etc.," Africa noted.

Who must be really protected?
The consumers and the wider public first and foremost. Beyond the tariff wars, Africa noted "there are far-reaching impact from disrupted global production lines and resulting adjustments and likely countermeasures.

Tariffs are not always negative - they are means to have negotiations between trading partners, and help to stabilise a country's economy.

"What's clear though is the global free market never really worked," noted Africa, explaining: "The biggest gainers from more open US economy were foreign firms, including American ones, setting up in enclave economic zones as an export platform of their global production lines. They're also the biggest immediate losers of the higher tariffs and more closed US economy.

Africa is in favour of protecting, supporting and strengthening domestic economy and industry. "It's never too late to fix things but the sooner acceptance comes then the sooner we can start to rectify and radically reform," he added.

Khaleej Times