Standing in the Rose Garden, flanked by economic advisors and American-flag-draped scaffolding, he announced a revised plan. Global markets, already reeling, took another dive. Investors were no longer wondering whether a trade war was coming. It had arrived.

While the optics were vintage Trump — dramatic, improvisational and meant to dominate headlines — the economic reverberations were anything but theatrical. What began as a policy maneuver has morphed into a structural threat to the global trading system. Tariffs are back, and this time they’re not just tools of adjustment — they’re weapons in a broader contest of power, identity and ideology.

US President Donald Trump’s reintroduction and expansion of tariffs — some reaching levels not seen since the Smoot-Hawley Tariff Act of 1930 — is not only redrawing the contours of global trade but also shaking investor confidence. While supporters hail tariffs as instruments of economic sovereignty, critics warn of trade fragmentation, inflationary spillovers and a long-term erosion of American soft power.

Strategic ambiguity

Markets don’t just price risk — they respond to ambiguity, the space between clear direction and evolving signals. In today’s trade environment, that ambiguity isn’t always incidental. Increasingly, it appears woven into the fabric of strategy itself.

In 2016, the Peterson Institute for International Economics in Washington modeled the potential fallout of Trump’s proposed tariff policies: a 10% blanket duty on all imports and a 45% tariff on Chinese goods. Their findings projected a loss of up to 4.8 million US jobs, consumer price increases of 1.5–2% and a drag on GDP growth. At the time, those numbers sounded extreme. In today’s context, with tariffs on Chinese electric vehicles, steel and other goods now hitting 100–125%, they look like an understatement.

The real toll isn’t just the tariffs themselves. It’s the policy whiplash. Companies trying to forecast costs, build supply chains or schedule investments are doing so in an atmosphere where predictability is impossible. The cost isn’t just economic — it’s strategic. Business decisions are delayed, capital is misallocated and uncertainty becomes a tax on growth.

Trump doesn’t merely disrupt trade flows. He weaponizes volatility. For investors, that changes the game. The risk premium isn’t about fundamentals anymore. It’s about forecasting the next move in a hurricane.

Navigating uncertainty and volatility

US stock prices have fallen in part due to tariffs, but not solely because of their direct economic impact. Rather, it’s the uncertainty surrounding them that rattles investors. The graph below, which compares Google search trends for “Taylor Swift” and “tariffs,” highlights a revealing contrast: While tariffs spiked in attention during early February, markets largely shrugged off the risk at first, reflecting a psychological disbelief that such extreme measures would actually materialize. Investors assumed Trump’s threats were more rhetorical than real — a negotiating tactic rather than policy. But as the first wave of tariffs took effect and signals of escalation mounted, that confidence dwindled. What followed wasn’t just a repricing of fundamentals, but a sentiment-driven correction. Markets don’t just price policy — they price belief. And once belief cracks, volatility follows.

Investors initially responded to the announcement of Trump’s tariff escalation with unease. Bond markets registered a wave of selling as foreign investors began pulling out of the United States.

Treasuries have been driving yields higher. This is an unusual pattern in times of uncertainty. The US 30 Year Treasury yield briefly jumped above 5%, a stark increase from 4.4% just a week earlier. The S&P 500 flirted with bear market territory, having dropped nearly 20% from its February high.

But the narrative shifted quickly. A series of coordinated messages from the Trump team, including a dramatic pause-and-roll-back announcement on Truth Social, calmed market nerves. Trump announced a 90-day moratorium on some of the harshest tariffs, coupled with a “reciprocal” tariff of 10% for select nations.

It’s like doing economic weather forecasting in a hurricane.

Despite the temporary rally that followed, the market remains wary. Investors need reassurance that tariffs are a temporary measure, not a permanent fixture. This uncertainty, combined with unpredictable policy decisions and geopolitical tensions, has made volatility a new standard in the market.

Global repercussions: China, Brazil and the game of retaliation

The international response has been swift and strategic. China, the primary target of Trump’s economic ire, has found new allies and new markets. Beijing has deepened its ties with Brazil, increasing imports of soybeans, beef and cotton. This shift is more than economic — it’s geopolitical. As the US alienates partners, China is building influence in Latin America through infrastructure investments, trade deals and diplomatic overtures. Since 2009, China has surpassed the US as Brazil’s largest trading partner and has invested more than $70 billion into the nation.

The new tariffs have given China another chance to court American allies disillusioned by US unpredictability. Beijing is likely to press for deeper economic integration in Asia. Chinese President Xi Jinping, keen to mitigate the damage of a prolonged trade war, has signaled readiness to use stimulus measures, including potential rate cuts and export subsidies, to support his nation’s industry. Meanwhile, China is also considering reciprocal restrictions, such as bans on US poultry and consultancy services, suspension of fentanyl cooperation and even media bans targeting Hollywood imports.

The possibility of full economic decoupling between the US and China, once considered extreme, is now openly discussed in Chinese policy circles. Xi faces difficult tradeoffs: Strongly retaliating could escalate the conflict but remaining passive risks looking weak. Chinese officials are betting that American voters and businesses will push back once inflation and employment numbers start to deteriorate.

US–China strategic rivalry and the resurgence of tariffs

The US’s decision to impose steep tariffs on Chinese goods is far more than a simple economic policy — it’s a deliberate geopolitical move aimed at shaping the balance of global power. Behind the headlines, these tariffs are part of a calculated effort to slow China’s advance in strategic industries like semiconductors, while bolstering America’s own technological edge and economic resilience.

The US is leveraging economic tools to limit China’s access to critical technologies. At the same time, Washington is using this pressure to spur domestic innovation and deepen ties with key allies. In the language of game theory, this is a high-stakes, non-cooperative dynamic akin to a constrained Nash equilibrium, where both nations weigh not only immediate economic costs, but also the long-term consequences of escalation, retaliation and shifting global alliances.

Tariffs, then, serve a dual role: They are both a shield against unfair trade practices and a sword in the contest for geopolitical dominance. But this strategy is not without costs.

We are witnessing a broader shift: Tariffs are reemerging as central tools of US trade policy, with profound implications for the global economy. No longer confined to correcting trade imbalances, tariffs are now instruments of statecraft that fuel fragmentation in global supply chains, drive up inflation and weaken America’s soft power.

The erosion of trust doesn’t just hurt trade — it hampers America’s ability to coordinate export controls, enforce sanctions and set global standards. These are not always visible on a balance sheet, but they are crucial levers of influence. As US soft power fades, so does Washington’s ability to lead on the global stage.

This strategy’s risks become especially acute when tariffs are applied too broadly or without coordination. Overreliance on tariffs can boomerang, raising costs for American consumers, weakening innovation networks and unraveling the very supply chains that support strategic industries.

Game theory models suggest an evolutionary tipping point when overuse of tariffs begins to degrade the benefits for both sides, leading to a lose-lose outcome. The alternative? A more balanced approach: narrowly targeted tariffs on non-essential imports, paired with multilateral coordination and major domestic investments in innovation and infrastructure.

High tariffs can be an effective tool, but only when wielded with precision. To avoid spiraling trade wars and global inefficiencies, they must be embedded in a broader framework of diplomacy, institutional cooperation and long-term strategy. Otherwise, the US risks economic blowback and a diminished role in the world it once helped shape.

Winners and losers

Advocates for tariffs argue that these measures will revitalize US manufacturing and reduce the trade deficit. However, historical and contemporary data suggest that the outcomes of protectionist policies are more complex. Even countries like Germany and Japan, which ran large trade surpluses, have seen a steady decline in industrial employment due to the forces of automation and global competition. The US is no exception; manufacturing employment showed only marginal gains during the 2018–2019 tariffs, while soybean farmers and other exporters saw steep losses.

Despite these challenges, some countries have emerged as relative winners. Brazil’s agribusiness sector, for example, has benefitted from China’s increased demand, while nations like India, Indonesia and Vietnam are positioning themselves to absorb manufacturing capacity that is leaving China.

Nevertheless, most multinational firms remain deeply exposed to Chinese markets. Companies like Tesla, which derive a substantial portion of their revenue and supply chain inputs from China, would face significant disruptions to their operations, higher production costs and potential retaliation in the form of restricted market access. These ripple effects highlight the broader economic consequences of escalating trade tensions.

For businesses caught in the middle, the question is no longer whether to adapt, but how. The old model of just-in-time global integration, optimized for cost and efficiency, is giving way to a new calculus that emphasizes resilience, redundancy and political risk. Firms are rethinking everything from supplier networks to regional diversification strategies. Some are adopting a “China Plus One” approach, maintaining Chinese operations while expanding into Southeast Asia or Latin America. Others are investing in nearshoring to North America, especially Mexico, to hedge against geopolitical shocks. These shifts aren’t merely logistical — they represent a fundamental reconfiguration of global capitalism in response to a less predictable trade environment.

Politics over prices

As the US enters what may become a sustained phase of protectionism, the consequences are unlikely to be confined to equities or quarterly forecasts. Investors must increasingly price in not just tariffs, but the ripple effects: supply chain shifts, inflationary pass-throughs and the long-tail risk of geopolitical escalation.

Some hold out hope that the Trump administration will return to its first-term pragmatism, defined by symbolic tariffs and tactical deal-making. But the signals point to something more entrenched: a second-term agenda shaped less by negotiation than by ideological conviction.

This is no longer just a trade story. It is a structural shift in how economic policy is shaped, where domestic politics, not global efficiency, drives decision-making. And in that paradigm, volatility isn’t a phase — it’s the new normal.

If tariffs push fragile borrowers toward default, credit markets, not equity indices, may reveal the true depth of disruption. Stock prices may oscillate with headlines, but bond markets, more tightly linked to real economy risks, could be where the damage crystallizes.

What comes next? Another tactical retreat? Or a lasting transformation of trade policy that reshapes global commerce, undermines investor confidence and tests the resilience of the post-1990s economic order?

[Lee Thompson-Kolar edited this piece.]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.