Peak policy uncertainty is likely behind us, with the average effective tariff rate recently settling near 15%, and markets have primarily shifted focus away from policy.
August could be another busy month of tariff deadlines. Peak policy uncertainty is likely behind us, with the average effective tariff rate recently settling near 15%, and markets have primarily shifted focus away from policy.
However, several key dates in August will be key to watch:
- August 1st: New “reciprocal” tariffs on several countries, including major trade partners, are set to come into effect: 25% on Japan and Korea, 30% on Mexico (non-USMCA), 30% on the EU, 35% on Canada (non-USMCA), 50% on Brazil, and 50% on copper (in addition to previously implemented tariffs). With these measures, the average effective tariff rate could rise from 15% to 22%, based on 2024 import levels, marking the highest estimated rate since early April.
- August 12th: This marks the deadline for negotiations with China, although an extension is possible. While 100%+ tariffs are unlikely to come back, the U.S.-China relationship is strained, with the deadline bringing a new chance for escalation. On the bright side, China has increased access to rare earths, with U.S. rare earth magnet imports from China surging 660% from May to June, which has helped ease tensions.
- Mid-August: The Federal Circuit Court of Appeals may announce its ruling on the legality of the President’s use of IEEPA for some tariffs. A decision favoring the administration could uphold “reciprocal” and fentanyl tariffs of 10% or more. If the court sides with the Court of International Trade, which initially struck down the tariffs, the average effective tariff rate could drop to just 6%. However, other legal pathways exist for the administration to implement its tariffs.
The administration is hinting at a new baseline tariff of 15-20%, but this will depend on how the above unfolds.
What does this mean for investors?
Markets have appeared unfazed by the latest tariff threats. The S&P 500 hit a fresh high on July 21st, up 7.2% YTD, with markets refocusing on long-term themes like AI. However, the June CPI report indicates that tariff impacts are emerging and may intensify over the next few months, even before tariff rates potentially move higher. The impact on corporate earnings remains unknown – businesses may pass on the cost of higher tariffs to preserve margins, but price hikes could reduce sales in this environment.
There are plenty of other reasons to be optimistic about U.S. economic resilience and corporate earnings. However, it is still a good time to focus on active management and diversification as well as avoid overconcentration, which can help investors navigate the choppy waters of more tariff news. Allocating to select alternatives can provide a hedge against inflation and offer uncorrelated returns.