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

The first few months of the second Trump administration have seen volatility spike across equity, fixed income and currency markets. While the US’s ‘Liberation Day’ tariffs have been paused and negotiations with China have led to a 90-day reduction in US-China tariff rates, the effective tariff rate remains historically elevated.

Current state of play

A 10% baseline tariff still applies to all US trading partners other than China, Canada, Mexico and Russia, with limited carve-outs for some goods. Product-specific tariffs are also in place, including 25% levies on steel, aluminium and autos imports. Pharmaceuticals, films and computer chips are other products that the US administration has mentioned may be targeted in future.

However, the higher ‘reciprocal’ tariffs levied on other countries were paused for 90 days on 9 April, to allow time for negotiation. The market response to this pause was positive, with stocks reversing some of their earlier losses.

The US has since negotiated one trade deal, with the UK, which lowered or removed product-specific tariffs on autos and steel in exchange for lower UK tariffs on a range of US goods exports. However, the limited deal does not remove the 10% baseline tariff on most UK goods exports to the US.

Most recently, US negotiations with China have led to a 90-day reduction in bilateral tariffs, starting on 14 April, with each country reducing its tariff rate on the other’s goods by 115%. This takes the US’s tariff on Chinese goods exports to 30%, and China’s tariff on US goods exports to 10%. The 90-day lowering is intended to allow time for further US-China talks on economic and trade relations.

Despite these reductions, 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 tariffs. China still faces an elevated 30% effective tariff rate even after recent negotiations. 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 still facing a more punitive tariff rate than other regions, calculating the 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’ (Exhibit 1), but still meaningfully elevated compared to recent history.

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 negotiations with China demonstrate that the US administration is somewhat responsive to economic and financial market concerns about its trade policy. In particular, the reciprocal tariff pivot was well received by markets, with the S&P 500 rising nearly 10% on 9 April alone. And following news of the US-China 90-day tariff reduction, both the dollar and US equity futures rose.

Investors should remember, however, that the 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 given US ‘reciprocal’ tariffs, including on China, remain paused rather than cancelled.

The economic data already shows that this trade uncertainty has put companies into a ‘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 at next year’s mid-term elections. The University of Michigan consumer survey, split out by voter persuasion (Exhibit 2), will be one of the key releases to watch to see whether this pressure is building.

Reasons not to panic 

With trade uncertainty so elevated, investors may be tempted to run for the hills and 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 in recent weeks have demonstrated how sharply markets 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, in response to the US’s auto tariffs, the UK is changing 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 economic and market importance of potential counter-stimulus should not be overlooked – it has often helped support diversified portfolio returns after 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, and requires an active approach to investing. Selectivity 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.}