Trump Tariffs 2.0

From placing an initial round of tariffs on close trading partners Mexico and Canada in March as a tactic to evoke policy changes regarding border control and fentanyl trafficking as well as addressing broader economic objectives, to recently imposing worldwide baseline tariffs, the President is seeking to level the playing field and reset global trading relationships. However, the effect of the tariff actions immediately sent markets reeling; over the past two days, investors became increasingly concerned that an escalating trade war will slow economic growth and increase the risks of resurging inflation.

Re-cap of key tariff actions

• March 4 – Announced a 25 percent tariff on products from Mexico and Canada. However Canadian energy resources only taxed at 10 percent. Tariff of 20 percent placed on Chinese imports.
• March 5 – Temporarily exempted auto imports from Canada and Mexico from tariffs.
• March 6 – Announced that tariffs not applied to goods that were compliant with the United States-Mexico-Canada Agreement (USMCA) until global reciprocal tariffs were to be launched on April 2.
• March 12 – Tariff of 25 percent placed on all aluminum and steel imports.
• April 2 – “Liberation Day”. Under the International Emergency Economic Powers Act (IEPPA) of 1977, Trump imposes a 10 percent baseline tariff on all countries effective April 5. Additional individualized reciprocal tariffs above the baseline will be placed on imports from countries with whom the U.S. has the largest trade deficits, effective April 9. These additional reciprocal tariffs would include China (34 percent), Vietnam (46 percent), Japan (24 percent), European Union (20 percent) and India (26 percent). Goods not subject to reciprocal tariffs include steel/aluminum/autos/auto parts already subject to tariffs, and copper, pharmaceuticals, semiconductors, lumber, bullion, energy and other minerals not available in the U.S. For Canada and Mexico, the existing tariff program remains in effect: USMCA compliant goods, zero percent; non-compliant goods, 25 percent, and auto parts imported for U.S.-based production will have a tariff imposed in May. If Canada and Mexico demonstrate meaningful progress on border control and fentanyl trafficking issues, tariffs on imports may be reduced to 12 percent.

Market reaction

The immediate response from the markets following Liberation Day was swift, and markets were down both Thursday and Friday. U.S. indices ended the week down about 9 percent as measured by the S&P 500. Shares of multinational companies and those who are significant importers of materials and goods used for manufacturing or distribution (e.g., Apple, Nike, Dollar Tree) and tech firms (Nvidia) were hit hard. The S&P fell into correction territory from the recent February high. The VIX, or “fear gauge” surged and closed the week at over 45. As is often the case during sell-offs, Treasury bonds rallied with the 10-year Treasury yield dipping below 4 percent.

Concerns over slowing economic growth in the wake of the tariffs and impending trade war impacted oil prices in which Brent crude dropped 10.9 percent for the week to settle at $64/barrel, and the U.S. dollar also fell.

Global markets also fell for the week, MSCI World was down 2.8 percent and the MSCI Emerging Markets Index was down 1.6 percent. However, Non-U.S. Developed markets are still positive year to date aided in part by the dollar.

Investor perspective

As is often the case during periods of dislocation caused by macro events, markets reacted swiftly to the downside as digestion of the various outcomes unfolded. There are both ongoing retaliatory risks, as seen by China’s announcement of a 34 percent tariff on U.S. imports, and prospective trade negotiations that will impact the economic and market outlook. A material slowing of the economy could result in the Federal Reserve changing monetary policy. While there may be a spike in inflation caused by the tariffs, the Fed has, at least for now, signaled it will remain patient in terms of near-term rate adjustments, although a weakening economy would test that resolve.

In turbulent market environments, it is best to reflect that we have experienced and weathered numerous severe risk-off cycles. The sweeping tariff changes may be poised to alter the global trade landscape but are only the most recent of many previous dislocating market events and underscore the importance of resilient diversified investment portfolios. It is also important to stay focused on the long term. This near-term market reaction follows several positive years of equity market returns, while Treasury bonds continue to provide positive yields and returns so far in 2025.

We will continue to monitor events and provide updates as events unfold.