US Tariffs and Their Impact

While the implementation of tariffs was expected and a key element of President Trump’s economic manifesto, the ‘Liberation Day’ announcement on Wednesday, 2 April, unveiled trade measures toward the more extreme end of expectations and this has weighed upon global stock markets.

The Announcement

The measures announced the implementation of new tariffs, including a baseline 10% tariff on all imports starting from 5 April, with higher rates targeting specific countries, such as 34% on Chinese imports, 20% on European goods, and 24% on Japanese products, set to begin on 9 April.

Impact on Financial Markets

The severity of the measures has surprised financial markets, and the ramifications are still being felt with the US stock market (S&P 500 Index) suffering a sharp decline of approximately 8.7% in the past 2 days, the largest drop since the Covid pandemic.  Asian markets, such as Japan where the car industry will be heavily impacted and the EU markets have also seen sharp falls. Limited initial weakness in the UK market, which will have the base 10% tariffs imposed, has been followed by sharper declines as the risk of global recession is seen to be elevated.

Increased costs for businesses, disruptions in supply chains and retaliatory tariffs from other nations have contributed to the turbulence in markets, with certain industries such as manufacturing, mining/natural resources and technology feeling the pressure.

Impact on The Global Economy

Beyond the stock market, the tariffs are likely to have widespread effects on the global economy. Higher import costs can lead to inflationary pressures, as businesses pass increased expenses on to consumers through rising prices. Countries affected by these tariffs may respond with their own trade restrictions, reducing international trade volumes and slowing global economic growth. Additionally, companies with complex international value chains may experience significant disruptions, leading to lower productivity and potential job losses. Emerging markets that rely on exports to major economies like the US may face economic downturns, while industries dependent on imported raw materials could see profitability shrink due to higher input costs. Ultimately, prolonged trade restrictions can erode economic confidence, dampen investment activity, and contribute to an uncertain business environment.

In response to the US tariffs, China has already signalled its intention to retaliate, implementing higher tariffs on US imports, including a 34% tariff on key US goods such as agricultural products and technology. This escalating trade conflict between the two largest economies in the world is likely to intensify market uncertainty, as investors brace for further retaliatory measures.

While there remains a possibility that President Trump could soften certain aspects of his tariff policy, the uncertainty surrounding global trade is likely to weigh on business and consumer confidence, particularly in the US in the short term. While widely seen as a risk to economic stability, there is the view that implementing such a severe policy early in the term, the administration may be positioning itself for more favourable economic conditions ahead of the 2026 midterm elections, offsetting the impact with tax cuts and deregulation.

With the US economy facing potential near-term weakness, the Federal Reserve Bank, which has been cautious about further interest rate cuts, may be compelled to accelerate monetary policy easing. Lower interest rates could reduce borrowing costs and create a more favourable environment for implementing tax cuts later in the year, supporting consumer and business activity.

The Outlook

For financial markets, heightened volatility is expected to persist in the near term, increasing the appeal of safe-haven assets such as gold and government bonds. We may also see a rotation away from some of the higher growth areas such as technology which have performed impressively over recent years to more defensive sectors such as healthcare, consumer staples, and utilities, areas heavily represented in UK markets. Both UK and European equity markets remain in positive territory year to date, with the FTSE All Share and Euro STOXX Index up 3.2% and 7.9% respectively.

Inevitably the falls seen across global equity market this week have been unsettling and the uncertainty created by the unpredictability and severity of President Trump’s policies increases the difficulty of positioning investment strategies effectively. It is worth noting however that while the US stock market has declined during 2025 this comes after a period of prolonged growth.

A diversified approach remains the best form of protection against the impact of economic, political and market shocks and this has been illustrated by the resilience of selected stock market sectors and lower risk assets such as government bonds where prices have risen.

The long-term impact of the tariffs could be significant due to the impact on global trade and as result markets can be expected to experience further volatility with concerns over a trade war, global economic slowdown and inflation. However, there is some hope that the tariffs are a tool to bring countries to the negotiating table, in which case the outlook should improve, and market volatility could present longer term investment opportunities.

4 April 2025