President Donald Trump believes the imbalance between the US and its trading partners can be best addressed by imposing tariffs on Imported goods. His hope is it will promote investment and regeneration in domestic production. But they could have significant implications for international trade and the market.
What are the key points of President Trump’s tariffs?
President Trump has Imposed "reciprocal" tariffs on all US trading partners. Some of the key tariffs imposed are:
- 10% on the UK,
- 20% on the EU,
- 24% on Japan,
- 34% on China (plus an existing 20%), and
- 46% on Vietnam.
This is in addition to the 25% tariffs on the automotive, steel, and aluminium sectors.
He did not announce additional tariffs on Mexico or Canada beyond the existing 25% with exemptions for energy and USMCA-compliant goods.
The effective tariff rate – the trade-weighted impact of all tariffs on importers - has increased to 20% to 25%, higher than the expected 10% to 20%. This is the highest rate since the Smoot-Hawley tariffs of the early 1930s.
What will the impacts of the Trump tariffs be on inflation and growth?
If importers, wholesalers, and retailers are unable to absorb the full costs of this increase, we would expect the rate of inflation to rise, the magnitude will be dependent on the time that the tariffs remain in place and any retaliatory tariffs imposed on the US.
Similarly, we would expect US growth expectations to be challenged in particular where companies choose to consume part or all of the increases, again the quantum of this will vary dependant on the time and magnitude of the tariffs and reciprocal tariffs that remain in place.
Several uncertainties remain
What is the Trump presidency’s policy process?
The level and duration of tariffs remain unclear. Stated reciprocal tariffs don't match actual tariffs on US goods, reflecting a simplistic approach.
How will the tariffs be implemented?
It is unclear how tariffs will stack, how rules of origin will be applied, and the required granularity of reporting. For example, a car from China could face multiple tariffs (20% China-specific, 34% reciprocal, 25% auto, plus 25% on steel content) and it is not fully clear how and when they will apply.
What is Trump’s long-term tariff strategy?
It is uncertain if tariffs are a bargaining tool or a permanent policy. We expect some countries may negotiate lower bilateral rates through trade and security concessions. If tariffs remain at the announced levels for a longer period, the impact on global growth and inflation is likely to be material.
If however, as we saw on Monday, the positive market reaction in anticipation of a positive outcome with respect to the Japanese PM Ishiba and President Trumps conversation and commitment to further negotiations implying an adjustment to the tariff levels going forwards. This euphoria was quickly dampened on Tuesday with the outright rejection of the European proposals.
The level of countermeasures to Trump’s tariffs
China was the first to retaliate, and the market moved quickly to reprice this and the reciprocal tariffs that President Trump imposed. This may indeed temper other responses ahead of initial negotiations.
Whether responses are delivered through like-for-like tariffs or via other protectionist/domestically supportive policies is still to be seen.
One of the concerns that we have is the potential for Europe to levy reciprocal tariffs on services, like financial and Insurance as well as IT forming a much larger impact and moving the potential growth and inflation implications significantly.
What are the implications of Trump’s tariffs on how we position our portfolios?
We are not looking to make any immediate changes to the portfolios in response to these tariff announcements.
Our equity risk exposure is diversified across and within regions and is well-positioned to dampen the anticipated volatility.
Within fixed income, we have exposure to short-dated credit, even as spreads widen the all in yields and sensitivity to interest rate moves remain attractive. We have been building into portfolios for some time now mid-maturity UK and US government bonds as risk-off anchors as well as embedded inflation linked positions that will provide protection if we see inflation rates increase further. Diversification within fixed income will help to mitigate heightened volatility.
We are overweight infrastructure which acts as defensive equity and has a element of interest rate sensitivity, in addition to commercial property that will also have a element of inflation protection
As we gain more clarity on the scope and implementation of these tariffs, as well as global responses, we will continue to look for opportunities that may arise.
We will provide further updates when more information becomes available, or the existing status becomes clearer, and we can refine our analysis of the situation.
In the meantime, if you have any questions for the team, please reach out to your normal Charles Stanley contact.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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