Trump’s tariffs and the impact on global markets

All about tariffs

There had been debate as to whether President Trump would introduce either baseline or targeted tariff rates and, in the end, he did both, seemingly based on a formula reflecting the size of relative US trade deficits with countries, rather than trade barriers.

Equity prices were down sharply and government bond prices up as investors took flight to comparative ‘safety,’ with (ironically) US stocks seeing the greatest selling pressure, experiencing their biggest one-day falls since the onset of the Covid pandemic in 2020.

What has happened

It remains to be seen whether President Trump will use his executive order as a starting point for negotiations, or if he will further increase the level of tariffs should any trading partners retaliate (as China already has).

The initial tariff level for all countries will be 10%, but from this Wednesday, 9 April, tariffs will go up further for those countries with which US has higher trade deficits, with China set to suffer a further 34% tariff after a 20% increase was put in place earlier this year.

It is the size of the US trade deficit that has been the primary focus in the US, perceived as an injustice against the US.

These new tariffs are not based on those presently levied against the US but instead use a calculation premised on the US trade deficit for a given country relative to what the US imports from that country. The formula appears flawed, as trade deficits do not always represent deliberate uneven competition, and instead can often reflect a natural imbalance arising from what goods a country makes and has particular expertise or advantage in.

Tariffs undoubtedly add unwelcome tensions to global trade, leading to increase in the price of goods imported and sold, which perpetuates inflationary pressures at a time where inflation had (finally) appeared to be coming under control. This in turn impacts disposable incomes, hindering economic growth.

So, what next?

We will now see whether countries move to negotiate and compromise, in which case we may have already seen ‘peak tariffs,’ or if they adopt retaliatory tariffs, risking higher-for-longer tariff wars.

In any negotiation, one side can choose to ‘all-in’ from outset (as America appears to have done) and then pull back to seek a compromise solution, with common ground for agreement.

For all the events last week, the overarching question still remains whether President Trump is seeking an ideological trade reset or a quickly negotiated compromise, and this remains unclear, despite the quote from White House Press Secretary Karoline Leavitt saying “the President is always up to take a phone call, always up for a good negotiation”.

Our thoughts

At times like this it is important to remain calm and focus on fundamentals which, up until recent weeks, had been broadly constructive over the last year or so. There will no doubt be more twists and turns in the coming days and weeks ahead, as the Trump administration seeks to reset the US’s trading relationship with the rest of the world.

The short-term impact will most likely be higher inflation and lower growth for the US, which is counterproductive to the fundamental objective of prioritising US businesses and citizens. It is also questionable whether US industries have the spare capacity or supply of skilled labour to ‘Make America Great Again.’

This does mean that the probability of a US and Global recession has increased, and this certainly appears to have caused markets to panic.

However, as we have seen before, panic and selling on sentiment can also create opportunities for those prepared to hold their nerve and focus on the longer-term.

The psychology of investing

At times like these it certainly feels uncomfortable to be holding investments that are falling sharply in value, and this inevitably leads to fear. However, we only have to cast our minds back to five years ago, where the early concerns over the impact of the Covid pandemic saw equity markets fall by around 35% in a short period, only to recover strongly by the end of the calendar year, with 2020 actually ending up in positive territory.

These falls are, at present, on paper values only and are only ‘crystallised’ if investors fail to hold their nerve and sell. For almost all of our clients, their investment time horizon remains the rest of their lives, and for most, this should give time for markets to recover.

We also encourage investors to hold a sensible emergency fund invested in cash, and at times like these this proves invaluable as anyone requiring money can liquidate cash to meet capital expenditure projects and, hopefully, avoid having to sell assets at a low point in the market. When asset values recover, profits can then be taken to replenish the cash used during this period.

These periods also present opportunities for investors that only appear obvious several months or years later when we are able to look back with a greater sense of calm. We often have clients say to us ‘I am going to wait until markets recover until I invest again’ which is an understandable reaction given the psyche of the human mind, but one which makes little sense and is a bit like waiting to buy an item you want after the sales have ended.

It is periods like this that focus on the importance of taking financial advice, so that you can work with your Financial Planning Consultant to take informed decisions that are thought through, thereby avoiding decisions that you may come to regret.

I suspect we may be in for a sustained period of market volatility, and I encourage you to reach out to you adviser to discuss any issues or concerns you have, and to certainly talk through any actions you might be considering.

Unfortunately, we ‘can’t control what we can’t control’ but, by seeking advice, you should have a better chance of making smart decisions that should deliver lasting value over the longer term.