This article was first published on 4 April 2025 and is updated regularly.

The first six months of the second Trump administration have seen elevated volatility across equity, fixed income and currency markets. While US levies remain lower than announced on ‘Liberation Day’, the effective tariff rate is still historically high, as is broader economic uncertainty. 

Current state of play

A 10% baseline tariff still applies to the vast majority of US trading partners, with limited carveouts for some goods including electronics. Product-specific tariffs are also in place, including 50% levies on steel and aluminium imports, and a 25% tariff on autos. A newer 50% levy on copper imports is due to come into effect on 1 August. Pharmaceuticals, films and computer chips, as well as iPhones, are other products that the US administration has mentioned may be targeted in future.

The higher, country-specific ‘reciprocal tariffs’ announced by President Trump on 2 April (‘Liberation Day’) were paused on 9 April, to allow time for negotiation. These levies are currently due to come into force on 1 August, an extension of the earlier 9 July deadline. The US administration also recently sent letters to several trading partners, reiterating its planned tariffs and in some cases amending the scheduled rates. These notices include potential 25% levies on imports from Japan and South Korea and 50% on Brazil, plus threats of future increases if trading partners choose to retaliate.

Since Liberation Day, the US has negotiated a limited number of trade deals. The first, with the UK, lowered US tariffs on UK autos from 25% to 10% (for up to 100,000 units) as well as on UK aerospace and steel exports, in exchange for lower UK tariffs on a range of US goods exports. However, the agreement does not remove the 10% baseline tariff on most UK goods exports to the US. Details of steel and aluminium tariffs are also yet to be finalised, despite the deal; they currently sit at 25% (versus 50% for other trading partners).

The most recent US trade deal, with Vietnam, left US tariffs at 20% – higher than the current baseline 10%, but below the 46% reciprocal tariff rate announced on 2 April. In return, President Trump said Vietnam had agreed to open its market to the US. Crucially, the US will also impose a steeper 40% tariff on ‘trans-shipments’ from third countries that pass through Vietnam. There is little detail on how such trans-shipped goods will be identified.

US negotiations with China also led to a reduction in bilateral tariffs, starting on 14 April, with each country reducing its tariff rate on the other’s goods by 115% following prior escalation. This reduction took the US’s tariff on Chinese goods exports to a minimum of 30%, and China’s tariff on US goods exports to 10%. The reduction was intended to allow time for further US-China talks on economic and trade relations, and in late June the US administration suggested it had agreed the framework for a deal with China. The details of this agreement – including whether it extends beyond an early-June accord on rare earth exports – remain unclear.

Elsewhere, the US has suggested a deal with India is close, and discussions with the European Union (EU) are ongoing. Previously, President Trump suggested the EU could face a 50% tariff unless the bloc reached an agreement with the US. An additional 10% levy was also threatened for countries “aligning themselves” with the policies of the BRICS (Brazil, Russia, India, China and South Africa) bloc.

Trade barriers remain significantly higher

Despite the extended pause on reciprocal tariffs, it is important to remember that US trade barriers have still risen significantly versus a few months ago. The US’s 10% baseline tariff on nearly all countries remains in place, alongside higher product-specific rates (notably, product tariffs do not ‘stack’ on top of country levies). China still faces an elevated 30%+ tariff even after recent trade negotiations, and US imports from Vietnam will be subject to a minimum 20% levy despite a trade deal. Alongside this, Canadian and Mexican exports to the US remain subject to a 25% tariff unless they are covered by the United States-Mexico-Canada Agreement (USMCA).

With China and Vietnam currently facing more punitive tariff rates than other countries, calculating the latest effective tariff rate* on US imports becomes more complex. The likelihood of trade re-routing to avoid higher tariff rates has risen, and as a consequence, where the effective rate ultimately settles will depend on the extent to which US demand for imports falls, or is redirected elsewhere. The effective tariff rate is currently lower than its level immediately after ‘Liberation Day’ but is still meaningfully elevated compared to recent history (Exhibit 1). If reciprocal levies are reimposed on some of the US’s trading partners on 1 August, or trade deals lock in rates higher than the baseline 10% tariff, then the effective tariff rate will rise further.

Who are the tariffs aimed at helping? What are the risks?

The US administration’s framing of its trade agenda has focused on how tariffs will help restore the US’s industrial base. It has long been known that globalisation did not benefit all segments of society equally, and President Trump has spoken directly to the cohort often referred to as ‘those left behind’.

The extended pause on reciprocal tariff implementation and ongoing negotiations with trading partners suggest that the US administration is somewhat responsive to economic and financial market concerns about its trade policy. In particular, the reciprocal tariff pivot in April was well received by markets, with the S&P 500 rising nearly 10% on 9 April alone. And following news of the US-China tariff reduction, both the dollar and US equity futures rose.

Investors should remember, however, that the US administration’s trade agenda will still have consequences for growth and inflation. As mentioned, a range of tariffs remain in place, which still lift trade restrictions to levels not seen since the 1940s. And trade uncertainty is unlikely to recede in the near term – especially as the US’s reciprocal tariffs remain paused rather than cancelled, and given that the US administration continues to threaten higher rates on certain countries and products.

The economic data already show that this trade uncertainty has put companies into wait-and-see mode, limiting capex and hiring plans. The extent to which firms shift from not hiring workers to firing them, to protect their margins, will determine the extent of the growth hit caused by this uncertainty. It is also currently unclear whether companies still facing elevated tariff rates will absorb import cost pressures or pass them on to consumers in the form of higher prices.

Slowing growth, rising unemployment and potentially higher prices might pressure the US administration to further moderate its trade agenda in future, particularly if Republican members of Congress start to fear for their reappointment in next year’s mid-term elections. The University of Michigan consumer survey, which reports consumer sentiment as well as labour market and inflation expectations split out by voter persuasion, will be a key release to watch to see whether this pressure is building (Exhibit 2).

Reasons not to panic

With trade uncertainty so elevated, investors may be tempted to cut their risk asset exposure. There are two reasons to question whether this is the right strategy.

First, while trade uncertainty is still likely to weigh on the growth outlook, recent market moves have demonstrated how sharply risk assets can rally following a more positive turn in the news flow. Avoiding being top and tailed by headlines is critical.

Second, it is important not to underestimate the prospect of monetary and fiscal policy support ahead. Governments across the world may choose to react to the likely growth hit of tariffs via increased spending or tax cuts, to support domestic businesses and consumers. In this scenario, the market focus may shift to inflationary risks, rather than potential growth downside. Supply chain disruption and less efficient global trade patterns could also push inflation higher, as could exchange rate moves.

US tariffs will also likely hasten the de-regulation agenda that is underway in many countries. For example, the UK has changed its regulations around electric vehicles (EVs) to ease the pace at which manufacturers must shift their sales away from conventional cars and towards EVs. This type of regulatory easing is also set to play a role in the rest of Europe, as a channel through which to support industry. The European Commission had already laid out plans to ease data protection and supply chain reporting requirements for small- and medium-sized firms.

The economic and market importance of potential counter-stimulus should not be overlooked – it has often helped support diversified portfolio returns after economic or geopolitical shocks, as Exhibit 3 shows. Thus, investors should avoid being buffeted by headlines, and instead ensure their portfolios are set up to be adequately resilient across a range of potential outcomes.

How should investors respond?

The likely hit to global growth caused by higher trade barriers and elevated uncertainty means core bonds are a necessary hedge against potential further equity downside. However, while fixed income is a critical component of a resilient portfolio, investors must also look elsewhere to truly insulate their portfolios. Here are some other considerations:

1. An active approach is crucial. All passive strategies – including those tracking the MSCI World index or the Bloomberg Global Aggregate index – are highly exposed to US risk, given how the weight of the US has grown in these benchmarks over the past decade.
2. Geographical diversification is important. In periods of economic fragmentation, an active approach to investing allows investors to avoid markets or sectors more exposed to trade uncertainty, as well as to lean into segments of the market that may have overcorrected in response to the recent trade news. Income-oriented strategies may also prove to be relatively defensive.
3. Think about currency exposure. The decline in the US dollar since trade tensions began to rise is noteworthy. Prior tariff announcements, or more generally risk-off days, have historically coincided with dollar strength. In our view, the dollar’s strength has been built on the foundations of US macroeconomic growth outperformance, interest rate differentials and stock market outperformance, which saw the world’s capital increasingly gravitate towards US assets. These foundations are now being somewhat challenged by trade-related uncertainty, and the prospects for the dollar depend on how these differentials evolve over the coming months. Our foreign exchange team have for some time argued that the US dollar smile (where the dollar strengthens in both extreme good and bad times) has become a dollar smirk (where the dollar’s downside protection can no longer be relied upon).
4. Have adequate inflation protection in a portfolio. Recent record highs in the gold price indicate that investors are looking for assets limited in supply, to protect against tariff-related price pressures. For those able to access real assets, these alternatives have often proved best able to outperform during inflationary periods. Elsewhere, investors can look to commodity strategies, as well as macro hedge funds, which tend to outperform when volatility is elevated. Some regional equity markets are less exposed to inflation risk than others – for example, the UK’s FTSE 100 and FTSE All-Share were among the very few markets to post positive total returns in 2022 as inflation spiked, thanks to their large energy weight and defensive tilt.

_{* The effective tariff rate is a weighted average of the tariffs applied to all US goods imports, reflecting the various tariffs applied to different products and countries.}