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

Over the first six months of the second Trump administration, tariffs have been announced, paused, and later reimposed, often as part of new trade agreements between the US and its trading partners. This has led to 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.

Current state of play

The US has imposed a range of both country-specific and sectoral tariffs over the past few months.

Broadly, the US’s country-specific tariffs fall into three categories. First, some countries have agreed framework trade deals with the US, to avoid the imposition of higher ‘reciprocal’ levies. These include major US trading partners such as the European Union (EU) and Japan, as well as others such as South Korea and Vietnam. These agreements have tended to leave US tariffs at between 15% and 20%, with certain goods facing higher rates and others exempted. In return, trading partners have lowered their own tariffs on US goods, and in some cases made large, if vague, investment promises. The UK also concluded a deal with the US in May, leaving it subject to a 10% tariff.

A second group of countries has been subjected to higher tariffs as negotiations with the US continue. These include Canada and Mexico (although not exports covered by the US-Mexico-Canada trade agreement), as well as Switzerland, India, and Taiwan. These countries face tariff rates of between 20% and 50%, although Mexico has secured a 90-day pause on implementation and India has been threatened with a higher rate. China’s negotiations with the US are ongoing, after prior escalation and a subsequent pause on elevated levies.

Finally, a third set of often smaller economies currently faces a 10% ‘baseline’ tariff, with the risk of higher levies in the future. These include Thailand, South Africa, and Saudi Arabia. Russia is not currently subject to a US tariff, but President Trump has threatened ‘consequences’ if it does not make progress on ending the war in Ukraine, which could include secondary tariffs on Russian exports.

The US has also levied sector-specific tariffs. These include 50% tariffs on steel and aluminium imports, and a 25% tariff on autos from most US trading partners (notably, the EU and Japan pay 15% levies). Copper is subject to a 50% tariff, but crucially refined copper cathode – which makes up the bulk of the US’s copper imports – is exempt. The US administration has mentioned pharmaceuticals and semiconductors as likely to be targeted by future tariffs. Some goods are exempt from levies, notably electronics.

Trade barriers remain significantly higher

The agreement of framework deals with several key trading partners has reduced near-term uncertainty about US trade policy. However, these deals lock in significantly higher US tariffs, and the ‘reciprocal’ tariffs currently in place raise trade barriers further. The effective tariff rate* is below the rate seen immediately after ‘Liberation Day’, but nonetheless remains at levels not reached for several decades (Exhibit 1).

It is also important to note that as the tariff rates faced by different US trading partners vary, calculating the current effective tariff rate on US imports becomes more challenging, given the rising likelihood of trade re-routing. As a consequence, where the effective rate ultimately settles depends on the extent to which US demand for imports falls or is redirected. Nonetheless, US tariff rates have moved meaningfully higher.

How might higher tariffs affect the global economy?

The US administration does appear to be at least somewhat responsive to economic and financial market concerns about its trade policy, as the pause on ‘reciprocal’ tariff implementation in mid-April suggested. However, recent trade deals locking in 15%+ tariffs and the reimposition of some reciprocal levies suggest the administration is fairly set on maintaining higher trade barriers.

The effect of higher tariffs on the US economy depends on whether overseas firms lower their prices to maintain US demand (which there is little evidence of thus far), and whether US corporates pass on higher costs to consumers or instead absorb these costs in their margins. But overall, higher tariffs are likely to slow US growth, increase goods inflation and reduce consumer demand, as corporates pass on at least part of the cost of tariff. Uncertainty around future trade policy, as well as rising input costs, may also be leading corporates to hold off on hiring or investment.

Thus far, higher tariff rates do not appear to have fully fed through to the US economy, with both producer and consumer price growth relatively contained. Nonetheless, inflation data over the summer has demonstrated evidence of tariffs’ impact, with prices picking up for the most trade-sensitive goods such as household appliances and clothing. Alongside this, the second quarter GDP print showed slowing domestic demand, while surveys of US firms suggest they are holding off on capex and the labour market continues to cool.

Looking ahead, tariffs’ impacts on the US economy are likely to become more obvious over the remainder of 2025, as the extent to which firms shift from not hiring workers to firing them, and how far businesses choose to pass on rising cost pressures to consumers, becomes clearer.

Outside of the US, China has so far managed to redirect its exports to other trading partners, with goods flows to other Asian economies in particular picking up. However, China faces the risk that other trading partners impose trade restrictions to avoid their economies being flooded with redirected Chinese goods, which could lead to weaker external demand. There is also a risk that China’s exports could suffer as companies in third countries look elsewhere for suppliers, to avoid more punitive ‘transshipment’ tariff rates.

In Europe, US tariffs are likely to weigh on the region’s export and growth outlook, despite a more positive domestic picture. Around a fifth of the EU’s exports went to the US in 2024, representing around 3% of EU GDP. However, higher trade restrictions look unlikely to meaningfully affect European inflation, given the EU is not currently imposing retaliatory tariffs on the US.

Who are the tariffs aimed at helping? Will they remain in place?

The US administration’s framing of its trade agenda has focused on how tariffs will help restore the US’s industrial base. Globalisation did not benefit all segments of society equally, and President Trump has focused on the cohort often referred to as those ‘left behind’, arguing that tariffs will help return manufacturing jobs to the US. Alongside this rationale, tariff revenues will partly pay for the tax cuts of the recently-passed One Big Beautiful Bill Act.

Next year’s mid-term elections may also put pressure on Republican members of Congress regarding US trade policy, if they start to worry about their reappointment prospects. 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 monitor whether this pressure is beginning to build (Exhibit 3).

Reasons not to panic

While tariffs and trade uncertainty are 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.

It is also important not to underestimate the impact of monetary and fiscal policy support ahead. European fiscal policy has already undergone a meaningful shift as the region’s governments look to lessen their defence dependence on the US, and in Germany’s case invest heavily in infrastructure. Counter-stimulus has often helped support diversified portfolio returns after economic or geopolitical shocks, as Exhibit 4 shows.

How should investors respond?

Higher trade barriers are likely to weigh on global growth, as is uncertainty about where these barriers will settle. Thus, core bonds have a crucial role to play in multi-asset portfolios as a hedge against potential equity downside. However, investors must also look elsewhere to truly insulate their portfolios. Here are some other considerations:

1. An active approach is crucial. In periods of economic fragmentation, an active approach to investing allows investors to avoid regions 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.
2. Geographical diversification is important. All global 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 in these benchmarks has grown over the past decade. Investors should ensure they are comfortable with the size and make-up of their US exposure.
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 dollar’s prospects depend on how this picture evolves over the coming months.
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.