🚨 Trump's Tariff Implementation and US Capital Market Shock

Today Korean Economic News | 2025.02.03

📌 US Capital Markets Fall Across the Board Following 'Trump Tariff' Announcement

💬 As the Trump administration went ahead with imposing tariffs from February 1, US capital markets fluctuated significantly. On the 31st of last month (local time), US stocks fell with the Dow down -0.75%, S&P500 -0.51%, and Nasdaq -0.28%. Cryptocurrencies could not avoid weakness either, with Ripple plunging more than 4%.

1️⃣ Simple Explanation

The US financial markets are tumbling as the Trump administration has actually implemented the tariffs it had previously announced. I'll explain why this situation has occurred and what it means in simple terms.

What are tariffs? You can think of them as taxes imposed on goods imported from foreign countries. It's similar to how prices go up due to customs duties when buying items directly from overseas. President Trump has vowed to impose high tariffs on imported goods since the beginning of his term, emphasizing 'America First,' and has put this into action starting February 1.

Why do these tariff impositions affect the stock market and cryptocurrency market? Simply put, tariffs can increase costs for companies and reduce their profitability.

Let me give you an example. When Apple imports iPhone components from China and tariffs are imposed, manufacturing costs rise. If this cost increase is reflected in consumer prices, sales may decrease, and if not reflected, profits will decrease. Both cases can negatively impact company value.

Additionally, US tariff impositions are likely to lead to retaliatory tariffs from other countries. This can shrink global trade and hinder world economic growth. These concerns have stimulated investors' risk aversion psychology, spreading selling pressure in the stock market and cryptocurrency market.

Trump's tariff policy is a factor increasing short-term market volatility. However, the long-term impact remains uncertain. Some experts worry that tariffs will accelerate inflation and slow economic growth, while others expect them to help revive US manufacturing and resolve trade imbalances. The market is reacting sensitively to this uncertainty, and additional fluctuations are expected depending on the specific content of future policies and international responses.

2️⃣ Economic Terms

📕 Tariffs

Tariffs are taxes imposed on imported goods, used to protect domestic industries and adjust trade balances.

• They have the effect of increasing the price of imported goods, relatively enhancing the price competitiveness of domestic products.
• They are an important tool of trade policy but can shrink international trade and increase consumer burdens.

📕 US Stock Market

The US stock market is the world's largest stock market, consisting of major indices such as the Dow Jones, S&P500, and Nasdaq.

• The Dow Jones consists of 30 large industrial stocks, the S&P500 consists of 500 large-cap stocks, and the Nasdaq is an index centered on technology stocks.
• It is considered an important indicator that determines the direction of global financial markets.

📕 Cryptocurrency

Cryptocurrency is a digital asset based on blockchain technology, with Bitcoin, Ethereum, and Ripple being representative examples.

• It is traded on a decentralized network without central institution control and has a strong character as an investment asset.
• As its correlation with traditional financial markets increases, it responds sensitively to global economic conditions and policy changes.

📕 Trade Conflict

Trade conflict refers to disputes between countries over trade conditions and policies.

• It appears in various forms such as tariff impositions, import restrictions, and non-tariff barriers.
• It can result in global supply chain reorganization, changes in corporate strategies, and increased consumer costs.

3️⃣ Principles and Economic Outlook

💡 Background and Content of Trump's Tariff Policy

• The tariff policy implemented by the Trump administration from February 1 is the core of the 'America First' economic policy that was predicted with his re-election.

  • First, looking at President Trump's tariff policy stance, he also imposed high tariffs on major trading partners including China during his first term (2017-2021). At that time, he imposed tariffs of up to 25% on Chinese imports and applied tariffs regardless of country for specific items such as steel and aluminum. During his re-election campaign, he predicted an even strengthened tariff policy, mentioning that he could impose tariffs of 10% on all imports and over 60% on Chinese products. The tariffs implemented this time can be seen as the first step of these pledges.

  • Second, looking at the specific content of these tariff measures, imports from certain countries, mainly including China, were targeted. In particular, higher levels of tariffs than before were applied to a wide range of consumer goods and intermediate goods, including electronic products, auto parts, household goods, and clothing. Some items had 10 percentage points added to existing tariff rates, and some Chinese products had high tariff rates of 25% or more applied. Additionally, exemption clauses for some items that were exempt from tariffs were also abolished.

  • Third, the main purposes for which the Trump administration is pursuing such tariff policies are as follows. ① Resolving trade imbalances: It aims to reduce US trade deficits, especially the large trade deficit with China. ② Reviving domestic manufacturing: There is an intention to encourage domestic production and create jobs by weakening the price competitiveness of overseas produced products. ③ Technology protection: There is a strategic goal to check China's rise in advanced technology fields and maintain US technological superiority. ④ Strengthening political support base: It is a policy that receives strong support from voters in manufacturing-centered regions.

  • Fourth, what makes this tariff policy different from before is that it targets a wider range of items and countries, and is being implemented in a situation where high inflation and supply chain issues continue after COVID-19. Additionally, there is analysis that tariff policies have been designed under a more systematic and long-term strategy than the first term. It is particularly noteworthy that tariffs are being used as part of a comprehensive industrial policy linked to the cultivation of advanced industries in the US.

• Trump's tariff policy needs to be understood in the context of global economic order reorganization and geopolitical competition beyond simple trade measures. Especially in a situation where strategic competition with China is deepening, the tendency for economic policy to be used as a tool for national security and technology hegemony competition is strengthening.

💡 US Capital Market Reaction and Changes in Investment Sentiment

• The reaction of US capital markets falling across the board to the Trump administration's tariff imposition is a result of various factors working together.

  • First, concerns about corporate performance are the main cause of market decline. Tariff impositions directly affect the cost structure of US companies utilizing global supply chains. In particular, large technology companies such as Apple, Microsoft, and Tesla heavily depend on overseas production and component procurement, and tariff increases could lead to cost increases and margin pressure for them. In fact, after the tariff announcement, there was a tendency for the stock prices of such companies with high dependence on global supply chains to fall relatively more.

  • Second, concerns about re-ignition of inflation are suppressing market sentiment. Tariff impositions on imported goods can directly act as inflationary pressure. Especially in a situation where the US economy has just begun to show stability after a long fight against inflation, price increases due to tariffs could weaken expectations for Federal Reserve (Fed) interest rate cuts. Since the market had already pre-reflected the Fed's interest rate cuts this year, the re-ignition of inflation concerns had a negative impact on investment sentiment.

  • Third, the possibility of deepening trade conflicts and global economic slowdown is being highlighted. Unilateral tariff impositions by the US are likely to induce retaliatory measures from trading partners. In fact, major economic areas such as China and the EU have already announced that they are reviewing response measures. The spread of such trade conflicts can shrink global trade and burden economic growth. Particularly, multinational companies may postpone or reduce investment and employment decisions due to increased uncertainty in the trade environment, which can act as a factor slowing the economy.

  • Fourth, the concurrent decline in the cryptocurrency market shows strengthened correlation between assets and risk aversion psychology. In the past, cryptocurrencies tended to show movements separate from traditional financial markets, but recently, with the expansion of institutional investor participation, correlation with the stock market has increased. In particular, a pattern has settled where cryptocurrencies are also sold when risk aversion psychology strengthens. The particularly large drop in some cryptocurrencies like Ripple is thought to be influenced by regulatory uncertainty and liquidity factors as well.

• This market reaction shows that Trump's tariff policy is having a negative impact on investment sentiment and market stability in the short term. However, there is also a view that this decline is not a shock that will change the long-term market trend. The market was already expecting Trump's tariff policy to some extent, and there is room for a rebound if the actual policy content is more moderate than expected. Additionally, there is a possibility that companies' adaptation capabilities and the government's subsequent economic stimulus policies may partially offset the negative impact of tariffs.

💡 Long-term Impact on the Global Economy and Trade Structure

• The Trump administration's tariff policy may bring long-term changes to the global economy and trade structure beyond short-term market volatility.

  • First, reorganization of global supply chains is expected to accelerate. US tariff impositions could be an opportunity for companies to review and diversify their supply chains. In particular, the 'China plus one (China+1)' strategy of relocating production bases concentrated in China to countries like Vietnam, India, and Mexico is expected to be further strengthened. Some companies may also expand production within the US through 'reshoring'. This supply chain reorganization may bring cost increases and confusion in the short term, but in the long term, it could contribute to forming a more resilient and distributed global supply structure.

  • Second, there is a possibility of deepening trade blockization and regional economic integration. As US protectionist policies strengthen, other countries may also show movements to strengthen their own country-centered economic blocks. Regional trade agreements such as RCEP (Regional Comprehensive Economic Partnership) and CPTPP (Comprehensive and Progressive Agreement for Trans-Pacific Partnership) are already being activated, and the EU is also consolidating its own economic block. This could lead to a 'fragmentation' phenomenon where global trade is reorganized around several major blocks.

  • Third, the importance of technology hegemony competition and industrial policy will increase. Trump's tariff policy includes strategic goals to maintain US superiority in advanced technology fields beyond simply resolving trade imbalances. In response, other countries including China are expected to focus more on nurturing their own technologies and strengthening industrial competitiveness. Competition and investment in key technology fields such as semiconductors, artificial intelligence, biotechnology, and clean energy are expected to become even more intense.

  • Fourth, changes in corporate strategies and business models are inevitable. Tariff impositions and changes in the trade environment provide both new challenges and opportunities for companies. Global companies will respond to changes through regionally differentiated strategies, strengthened localization, and accelerated digital transformation. Additionally, supply chain risk management, integration of ESG (Environmental, Social, Governance) factors, and decision-making considering geopolitical factors will become more important. Some companies may develop new markets and business models by turning crises into opportunities.

• These long-term changes raise fundamental questions about the nature and direction of globalization. There is a high possibility that the era of 'hyper-globalization' that has progressed since the 1990s is ending, and a new form of 'managed globalization' era that emphasizes geopolitical considerations and economic security is dawning. This means an economic order where resilience, security, and value chain control are more emphasized, unlike in the past when only economic efficiency was pursued.

4️⃣ In Conclusion

The Trump administration's implementation of tariffs and the resulting decline in US capital markets can be seen as an important signal suggesting a fundamental change in the global economic order, not just a one-time event. This signifies a transition to a new era of strengthened protectionism, deepened US-China strategic competition, and geopolitical elements becoming more deeply involved in economic policy.

From an investor's perspective, portfolio readjustment and risk management in response to these changes have become important. In the short term, allocations to domestic-centered companies that are less affected by tariffs, raw material and energy-related stocks, and assets with a defensive nature can be considered. In the medium to long term, strategic investments in companies leading trends such as supply chain reorganization, reshoring, and technology self-reliance may be effective. Additionally, adjusting cash holding ratios and strengthening diversification investment principles in preparation for expanded market volatility are also necessary.

From a business perspective, it is urgent to establish strategies to respond to cost increases and supply chain disruptions caused by tariffs. Along with short-term responses such as supply chain diversification, inventory management optimization, and price policy review, medium to long-term structural adjustments such as business model and production base relocations should also be considered. In particular, global companies with high dependence on the US market need to strengthen localization strategies and enhance political risk management capabilities.

From a policy authority's perspective, a balanced approach is required to mitigate economic shocks due to the spread of protectionism and enhance domestic industrial competitiveness. Rather than unconditional retaliatory tariffs, comprehensive policy packages such as responses using multilateral cooperation systems like the WTO, strategic investments in advanced industries, worker retraining, and industrial structure advancement may be effective. Especially for countries with high trade dependence like Korea, there is a need to focus more on trade diversification and strengthening technological competitiveness.

Consumers also need to prepare for price increases and changes in product availability due to tariffs. As prices of products with high import dependence are likely to rise, it is advisable to review consumption patterns and budget plans. Additionally, the possibility of supply delays or quality changes for some products should also be considered.

In conclusion, Trump's tariff policy can be seen as part of the process of creating new game rules for the global economy. Beyond the short-term market decline, deeper and more extensive changes in the economic structure are in progress. These changes are both challenges and opportunities, and a strategic approach from a medium to long-term perspective is important for responding effectively to them, rather than short-term reactions. It is time for countries, companies, and investors to seek ways to adapt to and utilize the new economic order.