NEW YORK – In a stunning defiance of economic gravity, global financial markets are soaring to record highs, shrugging off the implementation of the largest U.S. tariff hike in nearly a century. Wall Street’s remarkable resilience in the face of a massive new tax on imported goods is forcing a radical and uncomfortable re-evaluation of the free-market principles that have governed the global economy for the last 40 years.
The current market picture is one of serene strength. Wall Street and world stocks are trading at or near all-time highs, U.S. high-yield corporate bond spreads—a key measure of fear in the market—are the tightest they have been since before the 2008 global financial crisis, and the U.S. Treasury market remains remarkably calm. This placid surface, however, masks a turbulent undercurrent: a fundamental challenge to long-standing economic orthodoxy.
The market’s calm acceptance of President Donald Trump’s trade war is not what the economic textbooks would have predicted. Tariffs are, at their core, a tax. According to an analysis by the Budget Lab at Yale, the new U.S. trade regime will cause the average effective tariff rate to surge from a mere 1.2% last year to approximately 18%. This represents a tax hike worth around 1.8% of GDP, one of the largest in modern U.S. history.
For decades, the prevailing economic doctrine—often called the “Washington Consensus”—has held that such a move would be poison for the economy. This set of principles, which has guided Western liberal democracies and global markets since the late 1980s, championed lower barriers to trade, deregulation, and lower taxes as the sacrosanct tenets of economic growth. The theory was simple: higher taxes sap consumer spending power, stunt business investment, and crush the entrepreneurial spirit.
Yet, the market’s reaction suggests that, for now, investors are willing to ignore these long-held beliefs. After a brief, sharp plunge following the president’s chaotic “Liberation Day” tariff announcement in April, the stock market has mounted a powerful recovery. This suggests investors were less bothered by the tariffs themselves than by the shock of the initial announcement and the amateurish way the policy was rolled out.
This unexpected resilience raises a profound and potentially dangerous question: if the sacred line on tariffs has been crossed without immediate market collapse, what other economic commandments are now up for debate? Could governments, emboldened by the market’s muted reaction, look to raise revenue from other sources once considered anathema to free-market capitalism, such as wealth taxes on the super-rich or new controls on the free flow of capital?
To be fair, we are just entering this new era, and the full impact of the tariffs has yet to be felt. Some economists warn that even if the tariffs don’t trigger a sudden recession, they may lead to a “slow burn” of lost economic potential, with years of elevated volatility and lower investment returns.
But investors, for the moment, are not looking that far ahead. What they see right now is a surprisingly resilient U.S. economy, a solid corporate earnings season, and, most importantly, a red-hot wave of optimism surrounding the transformative potential of artificial intelligence and Big Tech. This powerful narrative has, for now, overshadowed the risks of a global trade war.
The old orthodoxies may be in the rearview mirror, but the road ahead is uncharted. The market’s current strength is a high-stakes bet that the power of technological innovation can outweigh the predictable drag of a massive protectionist shift. It is a bet that challenges everything we thought we knew about how the global economy works.
