Tariffs: Takeaways, Implications, and Path Forward
On April 2, President Trump announced a set of tariffs that mark one of the most significant shifts in global trade policy in recent history. While the near-term impact is negative for risk appetite, it is essential to recognize that economic surprises and market dislocations are also opportunities. Markets and businesses adapt, negotiations unfold, and policy decisions evolve.
Key Takeaways from the New Tariffs
- A universal 10% tariff floor – All imported goods will be subject to a minimum 10% tariff.
- Higher tariffs for trade surplus nations – Countries with large trade surpluses with the U.S. face steep tariff increases, some nearing 50%.
- China was hit with an additional 34%, bringing its effective tariff rate to 54%.
- Tariffs on Canada and Mexico were left unchanged (25% on non-compliant goods, 10% on Canadian energy).
- Auto imports face a 25% tariff.
- Pharmaceuticals and semiconductors are temporarily exempt.
The announced tariff rates surpassed many economists’ expectations, making the effective rates reach the highest levels in recent history.
Source: Estimates provided by JP Morgan, Strategas, Bloomberg. Data as of 04/02/2025
Short and Long-Term Implications
Risk appetite falls and inflation spikes further.
New tariffs create an uncertain global macro backdrop and the near-term effect is a clear negative for risk appetite. The inflation rate could see an upward pressure and significant noise as businesses pass some of the costs to consumers.
Foreign policy tensions could escalate.
As affected nations consider retaliatory measures or shift away from US products and partnerships, there would be slower growth in the short-term and less trade flow if implemented for the long term.
Congress now has the revenue to lower corporate and individual income tax rates.
With tariffs providing a new revenue source, policymakers may likely need to implement large-scale tax reductions to counterbalance the economic impact of the tariffs as the administration uses both sticks (tariffs) and carrots (tax, regulation, and industrial policy) to incentivize firms to invest domestically.
Uncertainty around strategic adjustments.
Despite the severe immediate impact and uncertainty, it’s crucial to recognize that this is not set in stone.
These tariffs could be a negotiation tactic.
If the goal is to force trade partners to the table, the final tariff levels could be adjusted downward through diplomatic agreements. Trading partners will push for exemptions and lower rates using retaliatory processes, leading to a drawn-out and intricate back and forth.
New market opportunities should emerge.
While disruptions are painful, periods of trade realignment often create openings for innovative businesses. Companies may adapt their supply chains or shift focus to untapped newer markets which could blunt the impact.
If history is any guidance, short-term spikes in volatility have only been an opportunity for markets and hopefully this time it won’t be any different.
Source: Bloomberg
Tariffs likely will drive dispersion between the performance of different industries, companies and investment managers. Competence, ingenuity, and investment selection will be key. While tariffs present challenges, dislocations also present opportunities for talented managers to produce alpha.
*USMCA – US-Mexico-Canada Trade Agreement
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