US Tariffs Increase Market Risks

Yesterday (April 2), US President Donald Trump announced sweeping new tariffs targeting nearly all US trading partners. The policy includes a 10% baseline tariff on all imported goods and country-specific “reciprocal” tariffs of up to 50% that target nations with perceived unfair trade barriers against US products. Key trading partners such as the EU, Japan, and China face new tariffs of 20%, 24%, and 34%, respectively. These are set to take effect within a week and will be layered on top of existing tariffs, raising overall rates for affected imports (e.g., China’s effective rate will increase to 54%).

These tariff announcements represent a historically significant shift. Initial estimates suggest that the new effective annual US tariff rate could rise from less than 3% in 2024 to more than 20%, marking the highest level in more than a century. If sustained, the tariffs could increase US inflation by 1.0 percentage point (ppt)–2.0 ppts and hinder global growth by 0.5 ppts–1.0 ppt, based on preliminary estimates of their 2025 calendar year impact. However, much will depend on how countries respond and the secondary effects of tariffs, such as their influence on aggregate demand. Regardless, this shift is likely to elevate market volatility and make careful risk management even more important to performance.

Markets have reacted negatively to the announcement. US stocks are down 3%–4% in early trading. Non-US markets have held up better. Government bonds rallied, and the US dollar weakened. These announcements may serve as an opening salvo of maximalist demands designed to set the stage for negotiations. The White House fact sheet on the tariffs suggests Trump has unilateral authority to lift the tariffs, allowing for potential reversals. Ultimately, the administration says it aims to lower tariff barriers on US exports, attract foreign investment, and rebuild the US manufacturing sector. If trade partners engage in negotiations, a less extreme outcome—similar to the 2018–19 US-China trade war—could emerge. Notably, Mexico and Canada are exempt from the “reciprocal” tariffs, and some goods will avoid the previous 25% levies.

The unpredictability of US trade policies and their ultimate economic impact will likely continue to weigh on consumer and business sentiment. At this point, we do not recommend investors make hasty portfolio decisions, given how fast Trump administration policies tend to change. Instead, we recommend that investors maintain equity allocations aligned with policy portfolio weights, while holding modest tilts toward more attractively valued segments of the market. It may also be appropriate to consider what assets are needed to promote diversification in portfolios, as levels of higher volatility may present attractive buying opportunities. Ultimately, US trade policies underscore the critical importance of diversification in managing risk and achieving long-term investment objectives.

Sean Duffin
Senior Investment Director, Capital Markets Research