The impact of the US trade war

A dramatic shift in US trade policy has sparked renewed uncertainty for investors. This note explores the scale of the new tariffs, market reaction, and key risks to watch.

On Wednesday 2 April Donald Trump announced a wave of new import tariffs covering 185 countries and territories that will take the average tariff on US imports to its highest level in more than a century. While a tariff announcement was well trailed, the scale, breadth and method of determining the tariffs left markets stunned, with large falls in equities, commodities and the US Dollar.  

In the early months of 2025, political uncertainty rose steadily as the world attempted to decipher what a Trump second term would look like. The expectation remained that the checks and balances that Congress applied during Trump’s first term would apply to the current term. 2 April arguably changed that, and the focus has shifted decisively to economic and market uncertainty as investors struggle to decipher the real impact of the tariffs on growth, inflation and corporates.

Average US tariff on imports

^{Figure 1: Average US tariff on imports (1891-2025)
Source: U.S. International Trade Commission, Barnett Waddingham}

Trade war so far

Donald Trump had already implemented several new measures that had raised US tariffs to their highest level since the Second World War; focused on Canada, Mexico, China and certain sectors (such as autos). The 2 April tariffs were expected to be much wider but were billed as “reciprocal” by the US administration, including the President, suggesting that countries with trade barriers against the US would face a higher tariff. However, the actual measures were entirely unexpected and cannot be reasonably called “reciprocal” as they take no account of other countries' trade barriers.

The tariff was set to be equal to half the size of each country's trade in goods surplus with the US as a proportion of their total exports to the US. Trade in services is not considered. A country that only exported goods to the US and imported nothing would face a 50% tariff, as the tiny African nation of Lesotho and the French territory of Saint Pierre and Miquelon (population 5,819) now do. Finally, a 10% baseline tariff ensured even countries that the US runs a trade surplus with were hit, including the UK. Of the 20 largest economies in the world only the UK, Brazil, Australia, Turkey and Saudi Arabia managed to escape with a tariff below 20%. 

Trade surplus with US / Exports to US

^{Figure 2: Tariff applied by country relative to trade surplus with US. Size of bubble reflect size of exports to US
Source: United States Census Bureau, Office of the United States Trade Representative, Barnett Waddingham}

There are two key, unanswered questions that remain:

1. Will this level of tariffs remain in force? The on/off nature of the Canadian and Mexican tariffs is a precedent for delays or some degree of renegotiation.

2. The level of retaliatory tariffs that other countries will apply to the US or each other. China, whose goods were hit by a total 54% tariffs, was the first major economy to retaliate, announcing a 34% tariff on US goods on 4 April.

Economic and market impact

The economic impact of such large tariffs on global growth are unambiguously negative. Not only is it an enormous tax hike for the US economy, but the disruption to supply chains means that it has even greater costs than an equivalent rise in corporation tax. 

While tariffs will raise prices in the US in particular, the overall impact on global inflation is more ambiguous. If the ultimate effect is to reduce demand and tips the economy towards recession, inflation could fall. How will Central Banks react to this risk? 

As a result, markets saw a significant fall in risk assets; US equities saw their fifth worst two-day performance in the last 80 years, bond spreads rose dramatically from recent lows, and oil prices are down approximately 15% through to midday on 7 April.

Regional Equity Returns

^{Figure 3: Regional Equity Returns
Source: FTSE, Barnett Waddingham}

Perceived safe haven assets have had mixed performance since the announcement. Government bond yields have generally fallen as the prospect of central bank rate cuts has increased, but gold has fallen in value. The US Dollar continued its recent downward trend as investors became more concerned about the longer-term outlook of the US as a safe haven.

Outlook for investors 

It remains far too early to give a clear view on the impact of tariffs on the market. The note has so far focused on the negative impacts of tariffs but has ignored the more market positive impacts of tax cuts and deregulation that are still expected to be implemented by the US administration. Therefore, if investors focus only on the current tariff news, they run the risk of being exposed to the downturn and selling out before an upturn.

However, without a doubt, the downside risk has increased. Volatility has significantly increased and we expect it to remain elevated. Investors with a leveraged exposure to markets should review their collateral adequacy and ensure that they are prepared for large market movements in either direction. This includes exposure to currency and so we'd recommend considering currency hedge levels and adequacy.

Overall, we have lowered our outlook for risk asset classes over the next 12-24 months following the announcement. We already had underweight allocations towards credit due to concerns over historically low spreads and have now downgraded our outlook for global equity returns to neutral.

Corporates in general enter this crisis with strong balance sheets and this allows some time for them to manage the short-term volatility from tariffs, before focus turns to US policy measures that are more favourable for markets such as tax cuts and deregulation. However, a requirement to massively re-focus supply chains will inevitably create challenges and an increase in defaults.

We were already of the view that inflation would stay modestly above central banks’ targets and tariffs add to that likelihood over 2025. However, the longer-term view is more balanced as the slow down in growth from tariffs could well bring down inflation levels, particularly outside the US, with a corresponding reduction in base rates.