President Trump declared the 2nd of April as “Liberation Day”, which signalled a seismic shift in US trade policy.
On the campaign trail, we saw President Trump’s affinity for tariffs, with him labelling the word “the most beautiful word in the dictionary” and noting that he sees tariffs as a way of achieving multiple objectives: levelling the playing field with trade partners, raising government revenue, and boosting domestic manufacturing.
Last weekend, we saw the instigation of a 10% base tariff for every country (regardless of their trade position with the US), along with reciprocal tariffs aimed at targeting those countries considered to have been taking advantage of the US either through large trade imbalances or applying high tariffs to the import of US products.
Notable examples where we have seen an increase in effective tariff rates are China (34%) and the European Union (20%), while the UK received the minimum applicable tariff of 10%. The list was extensive, covering all of the US’s major trading partners and their perceived tariff and non-tariff trade barriers.
It’s important to highlight that the new tariff rates will be additive to any pre-existing tariffs, so in the case of China, the new 34% tariff will be in addition to the earlier 20% tariff rate, which means the effective tariff rate on Chinese goods coming into the US will be 54%.
These tariff rates were above market forecasts, and we’ve seen global markets react negatively as a consequence.
It’s likely that this will challenge global growth over the short term, and optimism among businesses and consumers will be dampened, as always happens when uncertainty abounds. Whilst the impact and response from each country is still unknown, a model of the potential impact of tariffs from the Fed puts the hit to GDP growth in the US at 2.3% and an increase in inflation at 1.5%. It is rare that a recession is caused by government policy error, but this has certainly increased the odds of a US recession.
What should you do? As during the 2007 credit crunch, the 2020 Covid-led market crash, and every other moment of market turbulence we’ve lived through, the best approach is to do nothing.
Your portfolio is diversified in a way that tries to buffer it from market shocks, but there are no techniques that prevent a portfolio from dropping. We can’t predict the future, but we do know that the hard and fast drops usually result in quick recoveries. We saw exactly that in 2020. The absolute worst strategy is what so many people will be doing right now—selling shares when they are at their lowest.
Trump has a record of making big statements and then rowing back from them. It’s not possible to know what he is thinking right now, but every politician on the planet wants to restore some economic calm to the world, as will Trump despite his bluster.
We are around if you wish to discuss anything, but this should just be another storm we will ride out in the short term, and we remain focused on prosperity in the long term.