April Fool’s Day was on 1 April, but the next day, US President Trump unleashed Liberation Day, imposing tariff rates of 10 per cent on UK, Australia and Singapore, 20 per cent on EU and 54 per cent on China. Market analysts called it obliteration day, since the US stock market fell 4 per cent the next day, wiping $9 trillion of global stock market capitalization in the next two working days.

JPMorgan estimated that the tariff rate level was upped to roughly 22 per cent, higher than the infamous Smoot-Hawley tariffs that sparked the 1930s Great Recession. This is equivalent to a 2.4 per cent tax increase on Americans, the largest hike since 1968, lifting the chances of recession this year from 40 to 60 per cent. How significant is Liberation Day on the global economy, the dollar and global markets? JPMorgan economists estimated that a 20 per cent increase in US tariffs, including retaliation from China and the Euro area may reduce US GDP by 2 percentage points and global GDP, including EU and China, by 1 percentage point.

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That would put the US into recession territory, Europe to zero or negative growth, and Emerging Market and Developing Economies (EMDEs) to just over 3 per cent growth, the slowest for years except for the 2020 pandemic shock. Fast-growing economies like Bangladesh and Vietnam would be hit badly as tariff increases for them are at 37 and 46 per cent respectively.

US Council of Economic Advisers Chairman, Stephen Miran, laid out three key tariff objectives on the future of global trade and dollar: a negotiating tool, tax revenue source and a wall to protect onshoring of US manufacturing. Miran understood that US soft power is not just on its military might but also the hegemonic power of the dollar. As the world’s reserve currency, accounting for just under 60 per cent of international payments and official reserves respectively, the real carrot in using the dollar lies in its higher rate of return, superior liquidity and as a haven or low risk currency standard.

Although the United States has huge external debt, most of it is denominated in US dollars, which means that she can repay debt by simply printing more dollars. Dollar holders are compensated by higher returns, with a 9-10 per cent average annual return on USD assets based on a 60 equity/40 bonds portfolio ratio over the last two decades. This has consistently outperformed Euro asset portfolio return of 4-5 per cent per annum and 2-3 per cent on Yen portfolio. Given the fact that US dollar liquidity is excellent or superior to Euro or Yen interbank market liquidity, having the largest military power reinforces US dollar hegemony over rivals such as the Euro, Yen or Chinese RMB.

Nevertheless, the true determinants of US dollar superiority over other reserve assets are higher equity returns from tech company growth, superior bond yields, and moderate inflation relative to low inflation in the Eurozone and deflation in Japan. In the last 10 years, US stock market annual returns have been between 9- 10 per cent (double equity returns in RMB stock markets), mainly because US companies have consistently outperformed in earnings, technology and innovation, enjoying currency stability and fewer systemic risks. However, all these may change with the President Trump’s seismic policy changes in his second term.

As Trump escalated tariffs on China to 104 per cent and China matched with 84 per cent on US imports, the markets see-sawed with huge uncertainty, with economists like Paul Krugman arguing that inflation will spike, which would keep interest rates higher in an independent Fed policy stance. US Treasury 10-year bonds spiked back to 4.5 per cent on April 9, which former US Treasury Secretary Larry Summers attributed to “a generalized aversion to U.S. assets in global financial markets.” Higher US dollar interest rates would increase the fiscal debt interest burden, already $881 billion in 2024, higher than defense expenditure. Higher inflation and domestic interest rates would also slow down the US economy further, which would in turn weigh down on the stock market.

The pause in tariff hikes for everyone except China saw the Dow Jones soaring once again, so it’s clear that all this was really pointed at China. Nevertheless, if trade with China as the second largest economy is hurt, so will US corporate profits. Much of the high returns on US stock market have relied on the Magnificent Seven tech companies (Apple, Microsoft, Alphabet/Google, Amazon, Nvidia, Meta/Facebook, and Tesla), many of which have enjoyed Chinabased revenues from either imports or direct sales to China. Apple has 18-20 per cent of total revenue from China, relying on Chinese assembly of iPhones. Nvidia has 20-25 per cent revenue from China, particularly from sales of downgraded chips.

Tesla has 22-25 per cent revenue from China with half of global output manufactured in China. Whilst the others have less Chinese exposure, almost all have huge exposure to global markets. Apple’s non-US revenue is 66 per cent, Microsoft 50 per cent, Alphabet 54 per cent, Amazon 40 per cent, Nvidia 60 per cent, Meta 55 per cent and Tesla 55 per cent. In short, tariffs will hurt the global economy, which hurts Magnificent 7 revenue and profits, which in turn will hurt the stock market, damaging the dollar. How will it all play out? No one seriously knows for sure. The Singapore Prime Minister boldly summed up by saying “the era of rules-based globalization and free trade is over.” The war of elephants has begun, and the grass will be trampled.

Having weaponized the dollar, with rumoured threats of either escrow or tax on dollar holdings, investors will seek to hedge, hence the elevated price of gold. Too strong a dollar hurts US exports, encouraging imports. Tariffs increase the cost of imports, but exporting countries can devalue to offset that somewhat. Hence, the US must escalate threats to avoid “currency manipulation”. Going forward, if there are only sticks and no carrots in holding or trading in dollars, and returns in US dollar assets decline as corporate profits are hit, the risks of another financial crash are growing. Hello tariffs, goodbye dollar profits.

(The writer is Distinguished Fellow of Asia Global Institute, University of Hong Kong, and Chairman of the George Town Institute of Open and Advanced Studies, Wawasan Open University, Penang.)