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 majority of US trading partners, with limited carveouts for some goods including electronics, and different rates for countries who have agreed deals with the US. Product-specific tariffs are also in place, including 50% levies on steel and aluminium imports and a 25% tariff on autos from most US trading partners. 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 – in some cases amended since – are currently due to come back into force on 1 August where deals have not already been agreed, an extension of the earlier 9 July deadline.

Since Liberation Day, the US has negotiated a number of trade deals. In late July, Japan and the European Union (EU) – key US trading partners – both agreed frameworks with the US which lowered the tariff on the majority of their exports to 15%, including on autos. However, steel and aluminium remain subject to 50% tariffs. In addition, both Japan and the EU agreed to invest large sums in the US economy, although the timeframe and parameters of these commitments, as well as other details of the deals, remain uncertain.

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 percentage points following prior escalation. This reduction took the US tariff on Chinese goods to a minimum of 30%, and China’s tariff on US goods 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, and there is a risk that higher US-China tariffs come back into force in mid-August.

Elsewhere, the US reached its first trade agreement with the UK. This 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 did 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; they currently sit at 25% (versus 50% for other trading partners).

The US has also agreed framework deals with Vietnam, the Philippines and Indonesia, which leave US tariffs at 20%, 19% and 19% respectively – higher than the current baseline 10%, but below the reciprocal tariff rates announced on 2 April. In return, President Trump said the countries had agreed to open their markets to the US, and in Indonesia’s case commit to buy billions of dollars of US goods. 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.

Trade barriers remain significantly higher

Despite the extended pause on reciprocal tariffs and recent deal announcements, it is important to remember that US trade barriers have still risen significantly versus a few months ago. The US’s 10% baseline tariff remains in place, alongside higher levies on a number of countries which have reached trade agreements with the US. China still faces an elevated 30%+ tariff even after recent negotiations, and most US imports from Japan and the EU will be subject to a 15% levy despite these countries striking trade deals with the US. 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). Product-specific rates have also been imposed (notably, product tariffs do not ‘stack’ on top of country levies).

As the tariff rates faced by different US trading partners vary, calculating the latest effective tariff rate* on US imports becomes more complex as the likelihood of trade re-routing to avoid higher rates has risen. 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 US trading partners on 1 August, or further trade deals also 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 pause on reciprocal tariff implementation and more recently the deals reached with several 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. However, it appears clear that the US administration intends to maintain elevated tariffs even if these are not at their ‘Liberation Day’ highs, as recent trade agreements with the EU and Japan suggest.

Investors must remember that this trade agenda will have consequences for US growth and inflation. As mentioned, a range of levies are in place, which have lifted trade restrictions to levels not seen since the 1940s. And while trade uncertainty has fallen, many questions are still outstanding – especially given that the details of some trade deals agreed by the US remain unclear, and 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 to what extent companies facing elevated tariff rates are passing cost pressures 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, market moves since the start of the year 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.