On April 3rd, Beijing time, U.S. President Trump announced a "Reciprocal Tariffs" plan that greatly exceeded market expectations, which directly led to severe fluctuations in global markets. The U.S. stock market fell more than 5% for two consecutive days, and the VIX index soared above 45, marking the most extreme situation since the pandemic began in early 2020. Moreover, crude oil, gold, and the U.S. dollar also plummeted, with only U.S. Treasuries providing some hedging effect, but they also declined last Friday, showing signs of a liquidity shock characterized by "cash is king, sell all assets." It is evident that the impact of "Reciprocal Tariffs" is significant, not only shaking short-term market sentiment and affecting investors' confidence in the existing global order, but also influencing U.S. growth, inflation, and policy paths, as well as the economic and financial conditions of the countries subjected to tariffs, which in turn will further reflect on global markets and assets. Now, after the global market and various asset classes have fluctuated to this extent, have they fully reflected the impact of the reciprocal tariffs? Aside from sentiment, how significant is the impact on growth and liquidity, and is it possible to buy the dip? In this article, we will focus on this, analyzing the impact pathways of "Reciprocal Tariffs" on global markets and conducting quantitative assessments: Basic Situation of Tariffs: Greatly Exceeding Expectations, U.S. Effective Tax Rate May Rise Above 23%; China's Countermeasures Stronger than the EU and Canada The "Reciprocal Tariffs" greatly exceeded expectations, mainly reflected in the following points: 1) Broad coverage, imposing a baseline tariff of 10% on all trading partners; 2) High rates, with the tax rate far exceeding expectations due to VAT and other non-tariff trade barriers, in addition to simple tariff reciprocity; 3) Cancellation of tax exemptions for small packages and tariffs on other industries. The specifics include: ► The U.S. will impose a 10% baseline tariff on all trading partners starting April 5, excluding industries that have already been subjected to a 25% tariff, such as steel, aluminum, and automobiles, as well as copper, pharmaceuticals, semiconductors, timber, and certain key metals and energy products. ► For countries with larger trade deficits, "Reciprocal Tariffs" will be implemented starting April 9, with the tariff rates significantly exceeding previous VAT reciprocity expectations due to non-tariff barriers. Higher rates will be imposed on Vietnam (46%), Thailand (36%), mainland China and Hong Kong/Macau (34%), Taiwan (32%), South Korea (25%), Japan (24%), and the EU (20%). Additionally, the exemption policy for small packages under $800 will be canceled starting May 2. ► For Mexico and Canada, the exemptions under the previous U.S.-Mexico-Canada Agreement (USMCA) framework will continue. However, for goods outside the USMCA framework, an additional 25% tariff will be imposed based on the existing Fentanyl/Immigration IEEPA order. If the current Fentanyl/Immigration IEEPA order is terminated, the additional tariff will decrease from 25% to 12% ► The 25% tariff on automobiles will take effect on April 2, imposing a 25% tariff on imported cars and certain parts that do not comply with UCMA, applicable to imported passenger cars and light trucks, as well as key automotive components (engines, transmissions, etc.). According to estimates from the Tax Foundation, this will include over $430 billion worth of goods. How is tariff reciprocity achieved? According to the calculation method published by USTR[2], (the U.S. trade deficit with another country) = (tariff change * price elasticity of import demand * tariff pass-through effect coefficient on import prices * U.S. import volume from that country). Setting the price elasticity of import demand at 4 and the tariff pass-through coefficient at 0.25, a simplified formula can be derived: U.S. tariff rate on a country = U.S. trade deficit with that country / total U.S. imports from that country, to estimate the level of reciprocity needed to balance bilateral trade. How high will the effective tax rate rise? Before the introduction of "reciprocal tariffs," the effective tax rate had already risen from 2.3% to 5.7%. After the announcement of "reciprocal tariffs," we estimate that the effective tax rate will further rise to over 23%, marking a new high in the past century: ► Before the "reciprocal tariffs," the effective tax rate in the U.S. had risen from 2.3% to 5.7%. 1) In February and March, an additional 10% tariff was imposed on China, with Trump invoking the International Emergency Economic Powers Act (IEEPA) to impose an additional 10% tariff on goods from China in February and March. In 2024, goods imported from China will account for 12.2% of total U.S. imports, which we estimate will raise the U.S. global weighted average tariff rate by 2.7 percentage points. 2) The 25% tariff on steel and aluminum took effect on March 12, which may raise the U.S. global weighted average tariff rate by 0.7 percentage points. ► After the "reciprocal tariffs," the effective tax rate is expected to rise further to over 23%. 1) The 25% tariff on automobiles is expected to raise the effective tax rate by 2-3 percentage points; 2) The 25% tariff on goods not covered by the U.S.-Canada-Mexico Agreement may raise it by 3.5-3.7 percentage points; 3) The reciprocal tariffs are expected to raise it by 12-18 percentage points. Based on the current effective tariff rates of the U.S. with major trading partners, we estimate that reciprocal tariffs may raise the effective tax rate by up to 18 percentage points, but if we exclude the import volumes of automobiles, steel, aluminum, copper, pharmaceuticals, and other goods, the actual increase may be around 12 percentage points. Implementation of Tariffs and Subsequent Developments. The baseline tariffs took effect on April 5, with higher "reciprocal tariffs" set to take effect on April 9. Subsequently, if the countries subject to tariffs reach an agreement through negotiations, there may be a possibility of reductions. Treasury Secretary Besant informed Congress on April 1 that the tariffs on April 2 would be the "ceiling" [3], aimed at leaving room for negotiations among countries to lower actual tariff levels. As of April 5, some affected countries, such as Singapore [4], Malaysia [5], and South Africa [6], indicated they were seeking negotiations with the United States or not seeking retaliatory tariffs, while Vietnam expressed willingness to reduce tariffs on U.S. goods to zero. Among the countries implementing countermeasures, China, Canada, and the European Union account for 7%, 17%, and 18% of the total U.S. export scale, respectively. On April 4, China announced countermeasures, imposing a 34% tariff on all U.S. goods [7], with the scope and intensity of countermeasures significantly higher than before [8]. The European Union announced countermeasures on March 12, with the European Commission stating that tariffs would be imposed on goods worth €26 billion (approximately $28 billion) [9]. According to the current level of countermeasures, the tariff impact on China, Canada, and the European Union is estimated to be around $53 billion, $40 billion, and $7.1 billion, respectively. Impact on the United States: Short-term Shock Sentiment, Medium-term Stagflation Pressure, Long-term Confidence Impact; Limited Downside for U.S. Treasuries, U.S. Stock Valuations Rapidly Contracting with Some Attractiveness, Dollar Under Pressure The significantly unexpected "reciprocal tariffs" have multifaceted impacts on the U.S. economy and U.S. assets, which can be summarized into three dimensions: short-term, medium-term, and long-term. ► Short-term direct shock sentiment, leading to risk-averse trading and even liquidity shocks. This has already been evident in the significant market declines over the past two days, where investors facing enormous uncertainty first choose to seek safety, reducing positions, especially those with substantial profits, which explains why the Nasdaq and tech giants experienced larger declines. Additionally, as various assets continue to decline, attention should also be paid to the "secondary damage" that the decline itself may cause in terms of liquidity shocks, such as margin calls, risk control requirements for liquidation, or even forced liquidations. On Friday, aside from the dollar rising, U.S. stocks, gold, and U.S. Treasuries all fell, indicating early signs of liquidity risk, suggesting that investors were "abandoning" all assets in favor of cash. However, from various liquidity indicators, aside from the surge in VIX, the SOFR-OIS spread, commercial paper spread, credit spread, and currency cross-currency swaps did not show significant increases, remaining far from previous crisis situations ► Mid-term increased economic stagflation pressure may drag down growth by about 0.7ppt and raise inflation by 1.5-2ppt. 1) According to PIIE estimates, a 10% baseline tariff plus a 60% tariff on China could drag down U.S. GDP by about 0.42ppt in 2025; Tax Foundation estimates, when combined with tariffs on steel, aluminum, automobiles, and other tariffs outside the US-Mexico-Canada Agreement, could drag down U.S. GDP by about 0.7ppt, but the actual extent will depend on how much the tariff negotiations and tax reduction policies can offset this effect. The budget resolution passed by the Senate on April 5 includes over $5 trillion in tax cuts, which still differs from the $4.5 trillion reserved for tax cuts in the House budget framework[10]. 2) A sudden increase in tariffs will increase inflation pressure on the U.S. supply side. According to previous PIIE estimates[11], a 10% global baseline tariff plus a 60% tariff on China, combined with countermeasures, could raise U.S. inflation by nearly 2 percentage points in 2025; according to research from the San Francisco Fed, the import proportion of goods in PCE is about 6.4%, and if effective tariffs rise by 20-28ppt, it would raise the PCE price level by 1.3-1.8 percentage points. Combining these two methods, the current tariff policy may raise inflation by 1.5-2 percentage points, leading U.S. inflation to reach 4-5% by the end of the year (our model predicts this year's CPI to be 2.6-3.1%). If tariffs maintain this intensity, under this scenario, the Federal Reserve will find it very difficult to cut interest rates within the year, which will also increase the risk of recession or even stagflation (current benchmark interest rate 4.25-4.5%), and will only "watch helplessly" as growth slows, blocking the transmission path of offsetting growth pressure through interest rate cuts, which is the main problem caused by tariffs (similar to 2022). ► Long-term impact on confidence in policies and global order. We discussed this in "The Two Accounts of China and the U.S." and "[The Core of American 'Exceptionalism' and 'The East Rises, The West Falls'](https://mp.weixin.qq.com/s? It has been mentioned in the article (https://mp.weixin.qq.com/s?__biz=MzI3MDMzMjg0MA==&mid=2247775845&idx=2&sn=0c45c278c93b849c0628a11180f56f62&scene=21#wechat_redirect) that the three macro pillars supporting the United States and the U.S. stock market over the past three years, in addition to large fiscal spending and AI, include the continuous global capital inflow rebalancing. However, the randomness and even destructiveness of policies will increase market concerns about the long-term confidence in U.S. policies, which may lead to some capital outflows and a weakening of the dollar. U.S. Treasuries: Short-term risk aversion drives interest rates down, but this logic will be constrained by stagflation risks and the delayed interest rate cuts by the Federal Reserve. After the announcement of "reciprocal tariffs," the 10-year U.S. Treasury yield fell from 4.17% to 4.0% (with a minimum of 3.86%). 1) Inflation expectations rather than actual rates are the main driving factors, with actual rates dragging down by 3.2bp and inflation expectations falling by 14.2bp, indicating that growth is not the main concern; 2) Interest rate expectations rather than term premiums are the main driving factors, with interest rate expectations falling by 9.4bp and term premiums falling by 1.3bp, leading to renewed concerns about growth and rising expectations for interest rate cuts. The implied probability of a rate cut in June in CME interest rate futures is already close to 100% (the probability of a 25bp cut is 63.9%, and the probability of a 50bp cut is 30.6%). However, Powell stated that the Federal Reserve will focus on curbing inflation. If the market gradually realizes that the likelihood of a rate cut in June is low, it may constrain the downward space. If inflation continues to rise as mentioned above, the downward space for interest rates will be limited. In extreme cases, the Federal Reserve may remain on hold this year, and we expect U.S. Treasury yields to correspond to 4.2%~4.5% (with a 10-year U.S. Treasury yield expectation of 3.9~4%, plus a term premium of 30~50bp, corresponding to U.S. Treasury yields of 4.2~4.5%). Therefore, subsequent tariff negotiations and countermeasures will be key, and the current tax increase may not necessarily become the final result, with the possibility of significant changes to "zero tariffs" in some countries not being ruled out. U.S. Stocks: Short-term risk premiums are significantly impacted, and Nasdaq valuations have fallen to 20 times, gradually becoming somewhat attractive, with the extent of earnings downgrades depending on tariffs. Since April 2, U.S. stocks have fallen more than 5% for two consecutive days, with the rise in risk premiums being the main reason. The risk premium of the S&P 500 index has risen to a new high of 1.5% since June 2023. If compared to the high point of 2.7% in 2022, it corresponds to a dynamic valuation of around 15-16 times (currently 18.3 times); in contrast, technology stocks have relatively fully accounted for expectations, with the Nasdaq index risk premium of 0.6% being closer to the low valuation point of 1% in 2022, corresponding to a dynamic valuation of 20 times, which still has about 8% space compared to the current 21.8 times Earnings expectations slightly declined this week, with the projected earnings growth rates for the S&P 500 and Nasdaq indices in 2025 being revised down from 11.8% and 22.2% to 11.6% and 21.9%, respectively. The extent of the earnings drag depends on the final outcome of tariffs. Considering the current countermeasures, we estimate that the earnings growth rate for 2025 may drop from the previous 10% to 5-6%. US Dollar: Long-term policy confidence leads to capital outflows, which may put pressure on the dollar. EPFR shows that after experiencing two weeks of outflows in early March, overseas equity funds have seen inflows into US stocks for the second consecutive week. This week, passive fund inflows have slowed, while active fund inflows have accelerated. Short-term liquidity shocks and investors' pursuit of cash may support the dollar, but if investor confidence in policy and growth cannot be reversed, it will be difficult to maintain strength in the long term. Impact on the Chinese Market: Increased necessity for fiscal stimulus to offset; short-term volatility may provide re-entry opportunities The additional 34% tariff on China under "reciprocal tariffs," combined with the previous 20% on fentanyl, raises the total to 54%. If we add the 20% from Trump's first term, the total tariff will reach 74%. Overall, the reciprocal tariffs and China's countermeasures have exceeded expectations, and combined with global market turmoil, short-term volatility is inevitable. However, especially if fiscal stimulus increases after the volatility, it may provide re-entry opportunities. ► What is the impact of reciprocal tariffs on China? The overall economy may be affected. With a 54% tariff increase, combined with the removal of exemptions for small packages under $800, the impact of reciprocal tariffs from other countries affecting transshipment trade, and previous tariffs on steel, aluminum, and automobiles, the overall tariff increase may reach 55-60%. If we refer to the previous round of US-China trade friction with an assumed price elasticity of 0.8-1, it may lead to a 45-60% decline in China's total exports to the US. Considering that China's exports to the US account for about 15%, China's total exports may decline by 7-9%, with exports accounting for nearly 20% of GDP, the overall economy may be affected. On the market level, it may impact sentiment and earnings, with industries such as home appliances, electronic equipment, and shipping being more exposed; Hong Kong stocks may experience significant sentiment shocks, but the earnings impact is small. 1) Corporate earnings: This week, the Hang Seng Index and MSCI China Index's projected EPS for 2025 declined by 1.3% and 0.3%, respectively, compared to last Friday. We estimate that the net profit margin may decline by 0.5 percentage points from previous assumptions and by 0.2 percentage points from 2024, with revenue growth potentially turning negative. The earnings growth rate for the Hong Kong stock market in 2025 may drop from the previous expectation of 4-5% to negative growth. Whether it will decline further will also depend on the intensity and speed of policy adjustments In terms of sectors, the home appliances, electronic devices, and shipping industries in the U.S. are more significantly affected due to their higher revenue share from the U.S. Compared to the A-shares, the revenue share from the U.S. for the Hang Seng Index constituents is 3.2%, lower than the 5.0% for the CSI 300. Additionally, the new economy sectors in Hong Kong, which are less dependent on external demand, have a higher proportion, therefore the impact of tariff increases on Hong Kong stocks' earnings may be relatively small. 2) Market sentiment: Short-term market sentiment has been disturbed, with the risk premium of the Hang Seng Index rising to about 6.5% after the announcement of reciprocal tariffs. During the last round of escalating U.S.-China trade tensions, the risk premium of the Hang Seng Index once reached 7.7%, corresponding to around 20,500 for the index (not considering the impact of earnings downgrades). If policy responses are proactive and the trend in AI technology strengthens, it will provide some hedging. 3) Capital flows: Since the beginning of the year, DeepSeek has sparked enthusiasm for the revaluation of Chinese assets, leading to a temporary inflow of trading and passive funds. However, under the condition that the fundamentals have not significantly improved, active foreign capital has cumulatively flowed out of the Chinese stock market by $5.28 billion this year. Increased external uncertainties will also lead foreign capital to continue reducing their position exposure. However, considering that the current global foreign capital allocation to Chinese stocks is already underweight by 1.2 percentage points, and the overall allocation ratio has decreased from a peak of 14.6% in October 2020 to the current 6.5%, unless the U.S. introduces more financial investment-related restrictions on China, the pressure for significant outflows of foreign capital is not large. ► How to hedge policies, and what scale is needed? We estimate that to offset the drag on GDP, an increase in the deficit ratio or a depreciation of the RMB is required. Since the shift in the 924 policy last year, private sector leverage has stabilized somewhat, but its sustainability remains to be consolidated. Although the AI boom led by DeepSeek has brought new growth points, it will take time and space to completely resolve the overall deleveraging issue in the private sector, thus fiscal intervention is needed. The current U.S. tariff increases on China have exceeded expectations, highlighting the importance of fiscal hedging. Measured by the impulse of the broad fiscal deficit, historical experience shows that when exports are weak, policies are strong, and domestic demand provides downward protection against economic slowdown risks. Specifically: 1) Fiscal supplementation: After the tariff increase is raised by 55-60%, to offset the GDP drag from exports, a deficit ratio increase of 1.5%-2% may be needed for hedging. 2) Exchange rate hedging: Under the current circumstances, a depreciation of the RMB by 6.5%-10% may be needed for hedging. 3) Enterprises going abroad: The recent U.S. tariff increases on China have heightened attention to transshipment trade. In the long term, it is still necessary to rely on enterprises going abroad to alleviate the trade imbalance, similar to how Japanese companies sought a "second growth curve" by going abroad in the 1990s, which may help enterprises break through tariffs and restructure supply chains from the bottom up. ► How to judge market trends? Short-term volatility may increase, but it may provide re-entry opportunities. We previously indicated that the market rally since the Spring Festival has mainly relied on the emotions and risk premium improvements brought by narratives, requiring continuous catalysis from the technology sector. The Hang Seng Index has already factored in relatively sufficient expectations in the 23,000-24,000 range, and we do not recommend chasing high prices. Therefore, fluctuations or even corrections are not unexpected, which aligns with our ongoing judgment (《 How far has the revaluation of Chinese assets progressed? ”). In the short term, external disturbances are intensifying, and it is inevitable that the market will be under pressure due to emotional shocks, especially in the technology sector, which previously had significant floating profits. During the last round of escalating China-U.S. trade frictions, the Hang Seng Index risk premium once reached 7.7%, corresponding to around 20,500 for the Hang Seng Index (not considering the drag from profit downgrades), and subsequent performance was influenced by policy developments. Therefore, what is more important now is the strength and speed of domestic demand hedging; if the domestic demand hedging is strong, it can also provide good re-entry opportunities. In terms of allocation, shift to dividend assets in the short term, and switch back to technology after suitable adjustments; in the medium to long term, technology remains the main line, while broad consumption needs fiscal support. 1) For the technology sector, the previously profitable technology stocks are under greater pressure due to emotional shocks; however, considering the medium to long-term trends in the technology industry and the limited direct exposure, technology remains the main line, and re-entry can be considered after adjustments reach a certain stage. 2) For the remaining broad consumption and pro-cyclical sectors, they rely more on macro policies and overall leverage repair; if fiscal measures can provide a hedge, pro-cyclical sectors related to domestic demand will have better opportunities. 3) In addition, export-related sectors have greater exposure, with household appliances, electronic equipment, and shipping, which have a higher proportion of revenue from the U.S., being more significantly affected. Impact on Emerging Markets: Vietnam, Thailand, and South Korea with high exposure to the U.S. are significantly affected; pay attention to capital outflows and exchange rate risks From the perspective of exposure to U.S. external demand and the current reciprocal tariff rates, Vietnam, Taiwan, Thailand, South Korea, and India are significantly affected by these reciprocal tariffs. 1) In terms of exposure to U.S. external demand, the emerging economies with the highest proportion of exports to the U.S. in 2024 are Vietnam (27.8%), Israel (27.7%), and Taiwan (23.0%), while Saudi Arabia (4.8%) and Indonesia (7.9%) have relatively small exposure to U.S. external demand, making the external demand shock from tariffs relatively controllable. 2) In terms of reciprocal tariff rates, the highest rates are for Vietnam (46%), Thailand (36%), and Taiwan and Indonesia (both 32%), while Argentina, Brazil, and Saudi Arabia impose a uniform baseline tariff of 10%. Considering these two dimensions, the emerging economies most affected by the reciprocal tariffs are primarily Vietnam, Taiwan, Thailand, South Korea, and India, but this also makes these economies more likely to reduce tariffs on the U.S. in exchange for exemptions. In addition to the external risks brought by tariffs, the internal issues of emerging economies, such as short-term growth, inflation, and their ability to withstand external risks (such as foreign exchange reserves, current accounts, and fiscal conditions), are more likely to be the root of the risks and are also key to determining the future differentiation of emerging economies ► From the perspective of its own economic fundamentals, according to IMF forecasts, Brazil, Indonesia, and other economies are expected to grow strongly with controllable inflation pressures, while Malaysia, South Korea, and other economies show relatively weak growth, and the OIS implied interest rate cut in the next year is small, indicating greater fundamental pressures. ► From the ability to withstand external risks, countries like Turkey, Chile, and Colombia face both current account and fiscal "twin deficits" and rely on external financing (reflected in high external debt ratios in 2024) but have insufficient foreign exchange reserves, leading to greater default risks, representing the "weak links" in emerging markets. Considering the four dimensions of fundamentals, default risks, policy strength, and tariff impacts, our scoring table for emerging markets indicates that Thailand, South Korea, India, Vietnam, and others may be key risk points in emerging markets. Currently, the impact of equivalent tariffs is still concentrated in the indiscriminate hedging phase, more transmitted through investor sentiment to emerging markets. Looking ahead, attention should be paid to the potential risks of capital outflows and currency depreciation on emerging economies, especially the aforementioned "weak links." Source: CICC