Navigating US policy dynamics

Late yesterday afternoon, with the goal of increasing domestic US production and balancing cross-border trade deficits, President Trump announced significant tariffs on imports from dozens of countries around the world. While the situation is fluid, below are the details as of the time of writing.

What happened?

• The “Liberation Day” tariff announcement delivered hikes on the aggressive side of expectations.
• Universal and reciprocal tariffs: US President Trump is imposing a minimum 10% tariff on all imports and nation-specific additional duties on around 60 countries that contribute the most to US trade deficits. Country-specific duties will be applied to nations that the White House considers “bad actors” in trade. A 25% tariff on all foreign-made autos was also announced. At the time of writing, Canada and Mexico appear exempt from reciprocal tariffs (on USMCA-compliant goods).
• All tariffs will be implemented by April 9.

Relative “winners” and “losers”

• Biggest “winners”: The announcement did offer a couple of silver linings. Both Canada and Mexico were absent from the list of reciprocal tariffs. The White House indicated that the USMCA exemption would stay in place. USMCA-compliant goods should continue to experience no tariffs, but non-USMCA-compliant goods will be levied a 25% tariff, except for oil and potash, which will be subject to a 10% tariff.
• Other relative winners: Most Latin American countries will only face a 10% tariff. Among developed countries, the UK, Singapore, and Australia will also face a 10% tariff.
• The biggest “losers” are China and other countries in Asia. For example, China will experience additional tariffs of 34% (on top of the 20% new tariffs imposed in recent months). Several countries in Asia will experience new tariffs of about 30% on average.
• Other losers: The European Union will face a 20% tariff.
• The US economy is another notable loser. The tariffs imposed are significant. The effective weighted-average tariff rate will increase by about 15% to 20-25%, the highest level since the 1940s. The shock on the economy is equivalent to a 4% VAT (Value Added Tax) hike.

Economic impact: Negative… but room for cautious optimism?

• More US weakness but no recession: Tariffs—along with fiscal consolidation efforts, immigration policies, and economic uncertainty—are expected to contribute to a meaningful slowdown in US growth, which could fall below 1% within the next 12 months. In this context, the Fed will likely be able to cut its policy rate by at least 75 basis points in the next 12 months despite transitory upward pressure on inflation that will result from tariffs.
• Trump's limited “economic pain” budget: Today’s measures, and the slowdown in US growth they imply, likely mean that the Trump administration has only limited remaining leeway to impose any additional tariffs. This reinforces our base case outlook for a trade deal with Canada in coming months (with a 2/3 probability).
• Global stimulus coming: We expect most countries impacted by US tariffs to launch fiscal stimulus and adopt more accommodative monetary policies to mitigate the impact of tariffs. We anticipate that global growth will remain relatively resilient, although several countries appear vulnerable, especially in Asia.
• Negotiated reduction of tariffs ahead?: We expect several countries to reduce tariffs currently levied on US products as a strategy to encourage the reduction of reciprocal tariffs announced by the US today. Tariff de-escalation can help limit downside financial market risks. India has already announced its intention to reduce tariffs on US goods.
• US recession risks remain contained: Although downside risks are pronounced, strong economic fundamentals and the view that we are getting closer to “maximum Trump” in terms of tariffs mean that the US economy is not expected to tip into recession.
• For Canada, the balance of risk is skewed to the downside: A trade deal may not be particularly beneficial for Canadian manufacturers or may take longer than expected to be reached. We assign a 40% probability of a recession in Canada in the next year. While a recession would likely lead to more interest rate cuts by the Bank of Canada, the bulk of the policy response will likely come from fiscal stimulus.

Implication for markets:

1. Short term: Bouts of risk aversion are likely to prevail in the near term—suggesting the risk of continued high volatility. Bonds are expected to remain attractive, especially US treasuries.
2. Important to remain disciplined: Investors should stay focused on a well-diversified long-term portfolio as the best strategy to navigate periods of elevated risk.
3. Longer-term growth prospects remain robust: Long-term global growth prospects remain robust, supported by global investment in tech, infrastructure, housing, supply chain resiliency, and military spending.
4. Be mindful of lingering inflation risks over the medium term, particularly in developed economies, due to strong investment prospects and labor shortages.

While the initial uncertainty may create some market volatility, we’ve seen this before. Over the past five years alone, asset markets have successfully overcome several shocks: Covid-19; decades-high inflation; and spiking interest rates. Investors who rode out these shocks came out ahead. Today, it is again important that investors remain focused on their long-term objectives and aligned to their strategic asset allocation.