15% "Tariff Iron Curtain" falls, will the central bank's interest rate cuts trigger a "Domino" effect and a global "demand cold wave"?

Four months ago, Donald Trump, who returned to the White House to begin his second term as President of the United States, displayed a sign filled with global tariff rates in the White House Rose Garden, shocking the world and stirring the global stock, bond, and currency markets; however, the reaction among investors to the revised tariffs he announced on Thursday was much calmer compared to the "Liberation Day" in early April.

It is worth noting that the world still faces the highest level of tariffs in the United States since the 1930s—an average benchmark rate of 15%, which is six times higher than a year ago. Trump's latest round of tariff actions sets a minimum rate of 10%, with tariffs of 15% or higher imposed on countries that have a trade surplus with the United States.

So far, the global economy has performed much better than many economists expected after Trump's initial tariff blitz. To rush shipments before the higher rates take effect, exports were front-loaded and dispatched, driving many Asian economies to exceed GDP growth expectations and somewhat shielding American consumers from the price spikes caused by tariffs.

Some economists believe this overly optimistic situation may soon change.

"For the rest of the world, this is a very serious demand shock," said Raghuram Rajan, former Governor of the Reserve Bank of India, former Chief Economist of the International Monetary Fund, and current professor at the University of Chicago Booth School of Business, in a media interview on Friday. "As global economies slow down to some extent in the face of these significantly upgraded tariffs compared to before Trump took office again, you will see many central banks beginning to consider interest rate cuts."

New U.S. reciprocal tariff rates

After months of negotiations—during which Trump simultaneously threatened U.S. allies and competitors on social media—the newly implemented tax rates are generally comparable to the reciprocal tariff levels announced on April 2, which were postponed due to a stock market crash and soaring bond yields. However, there are still some shocking measures, such as the unexpected imposition of a punitive 39% tariff on Swiss imports and an increase in tariffs on certain Canadian goods to 35%.

On Friday, Asian stock markets fell by 0.7%, the European Stoxx 600 index dropped by more than 1%, and S&P 500 futures also retreated by about 1%. Nevertheless, these declines were initially much smaller than the most severe market reactions since the financial crisis following the announcement of tariffs on April 2.

While Trump's new tariff rates provide some certainty for global manufacturers, the uncertainty surrounding tariff policies remains significant. The U.S. president is expected to introduce separate tariff measures on imported pharmaceuticals, semiconductors, critical minerals, and other key industrial products in the coming weeks, and the tariff framework for important economies such as Canada, Switzerland, India, and the European Union may still change. Meanwhile, a very unfavorable factor for the Trump administration is that U.S. courts are still reviewing the legality of these "reciprocal" tariffs The past four months have also shown that Trump is more willing to use tariffs to address geopolitical issues. While the "Liberation Day" tariff rates followed a rough formula roughly related to trade deficits with various countries, the subsequent figures appeared more arbitrary. Trump has threatened Brazil over domestic political issues, India over its energy trade relations with Russia, and Canada over its plans to recognize Palestine.

Significant Increase in U.S. Tariff Rates Makes Global Economic "Weak Moments" Inevitable

If the new tariffs from the Trump administration are implemented as planned within seven days, and the agreement reached with the EU, Japan, and South Korea regarding temporary auto tariff policies is maintained, Bloomberg Economics predicts that the average U.S. tariff rate will rise slightly from 13.3% before August 1 to 15.2%—up from just 2.3% before Trump returned to power.

"This is a very high tariff wall," said Deborah Elms, trade policy director at the Hinrich Foundation. "For U.S. businesses and consumers, costs will rise significantly, and they will inevitably respond by reducing purchases."

Trump's tariffs drive up average rates—average U.S. tariff rates reach the highest level since World War II

According to the results of a model used by the Federal Reserve's economic research department during the first trade war, Bloomberg Economics estimates that since Trump returned to the White House, the average tariff rate has increased by 12.8 percentage points, which could lead to a 1.8% decline in U.S. GDP over the next two to three years and push core prices up by 1.1%.

At the same time, this will inevitably bring downside risks to exporters reliant on U.S. demand.

Bloomberg Economics believes that Canada and Mexico, due to their exemption under the United States-Mexico-Canada Agreement (USMCA), "are capable of withstanding the impact," and they have an additional 90 days to negotiate. The EU, Japan, and South Korea—all subject to a 15% tariff—are in a much better position than previously feared by the market regarding their foreign trade exports.

In contrast, Switzerland, another long-time trading partner of the U.S., faces a high tariff of 39% on its exports to the U.S., causing the Swiss franc to weaken.

The tariff news on Thursday did not involve China, the U.S.'s largest trading partner. Trump will soon decide whether to extend the scale of the tariff truce; previously, both sides had just concluded negotiations in Stockholm. A U.S. official stated earlier this week that both sides agreed to temporarily maintain the current tariff levels, a move that is part of the U.S.-China trade truce following China's cutoff of rare earth magnet supplies after the April 2 tariffs.

Trump has also added a key provision imposing an additional 40% tariff on goods identified as transshipped, clearly targeting China, but this provision lacks clear guidelines on how to determine transshipment trade.

"These tariff measures do provide clearer clarity, but there remains considerable uncertainty for manufacturers," said Jonathan Kearns, chief economist at Challenger Ltd. based in Sydney "So far this year, we have seen multiple changes in the U.S. tariff system, and there may be more changes in the future. In this ongoing uncertainty, American companies will be more cautious in their investments and planning compared to global companies."

Kerns, a former central bank official, predicts that the price transmission effect on American consumers will be greater in the coming months.

The Trump administration hopes that the latest tariff system will generate fiscal revenue, reduce the trade deficit, and encourage multinational corporations to set up factories in the U.S.—while not driving up prices or causing demand to collapse.

"Global trade is now being reorganized based on the principles of fair and balanced trade—all efforts are for the economic and national security interests of the country," U.S. Trade Representative Jamison Greer wrote in a statement. "This new trade system will reduce the U.S. trade deficit and bring better outcomes for American workers, their families, and communities."

However, since Trump announced the tariff plan in the Rose Garden in April, he has faced market criticism for overpromising trade agreements—he and his aides had promised to reach numerous agreements, with at least one person even claiming to "wrap up 90 agreements in 90 days."

Economists have also continuously warned that American households will bear the costs—specifically, the burden will depend on how much profit exporters are willing to absorb to maintain sales and how much tariff costs American importers are willing to bear.

This time, the Federal Reserve faces a dilemma

"Unlike the first trade war in 2018, when Chinese exporters and non-U.S. exchange rates bore most of the adjustment costs; this time, tariffs are generally aimed at the global market with a minimum tax rate of 10%, so it is likely that some of the costs will be passed on to American consumers," said Selena Ling, an economist at Singapore's OCBC Bank. "This could complicate the monetary policy situation faced by the Federal Reserve."

Federal Reserve Chairman Jerome Powell resisted pressure from the White House this week, rejecting the calls from two Federal Reserve governors for a rate cut in July, stating that the central bank needs to be vigilant about inflation risks.

"A reasonable baseline expectation is that the impact of tariffs on inflation may be temporary, reflecting a one-time upward shift in price levels, but it is also possible that these inflationary effects could be more persistent—this is a significant potential risk that needs to be assessed and managed," Powell said after the interest rate decision on Wednesday, Eastern Time.

It remains to be seen whether U.S. tariff policies will trigger broader trade barriers globally. While the European Union has imposed tariffs on Chinese electric vehicles, other countries are also considering similar restrictions on cheap goods, but most countries have largely avoided Trump's protectionist approach "Although we have not fully returned to the pessimistic system of 'survival of the fittest', we have taken several significant steps in that direction," said Stephen Olson, former U.S. trade negotiator and current researcher at the ISEAS-Yusof Institute.

"Don't think this is the end of the Trump trade story," he added. "Trump may see this as an ongoing reality show. For the foreseeable future, the market must be prepared for more 'deals' or further waves of tariff increases that are almost certain to come."