by Daniel Brouse
May 13, 2025
A couple of months ago, I suggested that those concerned about the future of the economy should focus less on the stock market and more on the bond market. Since then, the divergence between financial market optimism and economic reality has only widened. The stock market, increasingly detached from fundamentals, now appears to be highly politicized—driven more by perception management than data.
Meanwhile, the bond market is flashing clear warning signs: long-term yields remain elevated, yield curves have struggled to normalize, and demand for U.S. debt is becoming increasingly fragile. While equities flirt with highs, the real economy is showing strain—from sluggish growth to mounting debt and weakening global demand.
Let’s take a sober look at the realistic economic outlook over the next 12 months, based on the assumption that the recently paused tariffs remain paused:
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8% probability of a 90% crash, similar in scope to the Great Depression-era collapse following the Smoot-Hawley Tariff Act of 1930. While unlikely under current tariff policy, this risk escalates significantly if trade tensions are reignited.
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80% probability of a 30%+ correction in equity markets. This reflects the reality that tariffs, inflation, high interest rates, and global uncertainty are weighing heavily on both business investment and consumer sentiment.
It’s important to clarify: the economic outlook assumes that the currently paused tariffs remain paused. If these tariffs are reinstated, the probability of a severe economic downturn rises significantly. Tariffs at the levels previously proposed—some exceeding 100%—would effectively function as a trade embargo, strangling critical supply chains, driving up consumer prices, and undermining both U.S. and global economic growth.
Conversely, if the Trump-era tariffs are struck down by the courts, the U.S. could experience a return to more stable economic conditions, with lower inflationary pressures and improved trade relationships.
Currently, a panel of three judges at the U.S. Court of International Trade is reviewing whether former President Trump overstepped his constitutional authority by imposing sweeping tariffs last month on goods from more than 180 countries and territories. The case centers on whether the executive branch exceeded its trade powers under existing statutes.
Should the court side with the plaintiffs, it could significantly restrict the president’s ability to unilaterally impose tariffs—a tactic Trump has routinely used to project strength on trade and reshape U.S. economic policy by executive order. The outcome of this case could have far-reaching implications for U.S. trade policy, presidential power, and the trajectory of the post-pandemic global economy.
In short, the bond market is right to remain cautious. While equities may be propped up by sentiment, headline-chasing, and artificial tailwinds, debt markets are pricing in something more sobering: structural imbalances, fiscal irresponsibility, and elevated geopolitical risk.
Overview
It’s time to stop confusing record stock market highs with real economic health. The bond market is telling a different—and far more credible—story. And that story is a warning. As of May 13, 2025, the United States’ average effective tariff rate on all imported goods is estimated at approximately 15%, a steep rise from the pre-2025 average of just 3%. This sharp increase—driven by both new and expanded tariffs—has significantly raised costs for U.S. importers and consumers alike, fueling inflationary pressures and aggravating supply chain disruptions.
Although the recent U.S.–China trade truce has provided a brief 90-day pause on some of the steepest tariffs, it offers only temporary relief. The broader tariff landscape remains far more restrictive than historical norms, distorting trade flows and undermining business certainty. In contrast to the stock market’s optimism, the bond market’s sustained high yields reflect deeper concerns about long-term fiscal sustainability, inflation risks, stagflation, and the fragility of global trade relationships.
Tariff Scorecard
As of May 13, 2025, the United States enforces a multifaceted tariff regime encompassing both longstanding measures and new tariffs introduced during President Trump’s second term. These tariffs vary by country and sector, with some products subject to multiple overlapping tariffs. Below is an updated overview:
China
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Pre-Existing Tariffs: Under the 2018–2019 trade war, tariffs of 10%–25% were imposed on over $360 billion of Chinese goods, targeting sectors like electronics, machinery, and consumer products.
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“Fentanyl Tariff”: An additional 10% tariff was imposed on February 4, 2025, under the International Emergency Economic Powers Act (IEEPA), citing national security concerns related to fentanyl. This was doubled to 20% on March 4, 2025.
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“Reciprocal Tariff”: A 125% tariff was added on April 9, 2025, bringing the total tariff rate to 145% on all Chinese imports.
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Temporary Reduction: On May 12, 2025, the U.S. and China agreed to a 90-day truce, reducing U.S. tariffs on Chinese goods from 145% to 30%.
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De Minimis Exemption Closure: Effective May 3, 2025, the U.S. closed the de minimis exemption for China and Hong Kong, subjecting low-value shipments to tariffs.
Canada
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25% Tariff on Most Canadian Goods: Implemented on March 4, 2025, targeting non-USMCA-compliant products.
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10% Tariff on Canadian Oil and Gas: Announced in February 2025 but currently paused indefinitely.
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Retaliatory Measures: Canada imposed 25% tariffs on $20.8 billion of U.S. goods, including steel, aluminum, and various other products.
Mexico
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25% Tariff on All Mexican Goods: Effective March 4, 2025, with exemptions for USMCA-compliant products.
European Union
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25% Tariff on Steel and Aluminum Products: Imposed on February 10, 2025, affecting imports from the EU.
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Proposed Tariffs on Additional Goods: The EU announced retaliatory tariffs on approximately €26 billion worth of U.S. exports, including agricultural products, alcoholic beverages, and household items.
Global Tariffs
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10% Universal Tariff on All Imported Goods: Implemented on April 5, 2025, this broad tariff applies to most imports, with certain exemptions.
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25% Tariff on Steel and Aluminum Products: Effective March 12, 2025, this tariff applies globally, with no country or product exclusions.
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25% Tariff on Automobiles and Auto Parts: Announced on March 26, 2025, and effective April 3, 2025, this tariff targets global imports, excluding USMCA-compliant products.
Sector-Specific Tariffs
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Semiconductors: Tariffs increased from 25% to 50%, effective January 1, 2025.
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Solar Cells and Materials: Tariffs on solar cells increased from 25% to 50% on September 27, 2024. Tariffs on solar wafers and polysilicon rose to 50%, effective January 1, 2025.
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Steel and Aluminum Products: Tariffs increased from 0–7.5% to 25%, effective August 1, 2024.
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Batteries and Components:
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Lithium-ion EV batteries: Tariffs rose from 7.5% to 25%, effective September 27, 2024.
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Non-lithium-ion battery parts: Tariffs increased from 7.5% to 25%, effective September 27, 2024.
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Lithium-ion batteries for non-EVs: Tariffs will rise from 7.5% to 25%, effective January 1, 2026.
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Critical Minerals: Tariffs of 25% were imposed on various critical minerals, including manganese, cobalt, aluminum, zinc, chromium, tungsten, and others, effective August 1, 2024.
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Medical Products:
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Syringes and needles: Tariffs increased from 0% to 100%, effective September 27, 2024.
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Rubber medical and surgical gloves: Tariffs will rise from 7.5% to 50% on January 1, 2025, and to 100% on January 1, 2026.
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Proposed and Investigated Tariffs
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Digital Service Taxes (DSTs): Investigations initiated against France, Austria, Italy, Spain, Turkey, and the UK.
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Copper, Timber, Pharmaceuticals, Semiconductors, Processed Critical Minerals, and Trucks: Section 232 investigations initiated to assess the impact of imports on national security.
This comprehensive tariff landscape reflects the Trump administration’s focus on protecting domestic industries and addressing trade imbalances. However, it has also led to increased tensions with key trading partners and raised concerns about potential impacts on global supply chains and consumer prices.