On April 2, President Donald Trump announced a new, sweeping set of global tariffs: A 10% baseline global tariff on all countries goes into effect on April 5, and an increased rate for designated individual nations will begin on April 9. The news sent an initial shockwave through the markets on April 3, and elevated concern for inflation pressures and the US entering a recession.
While the news was met with uncertainty, the coming days offer an opportunity to provide greater clarity, notes Washington Policy Analyst Ed Mills. There’s the potential for some tariffs to be reduced, delayed or removed all together based on negotiations with individual countries. Mills points out that the Trump administration’s tax plan, which includes extending the cuts from the Tax Cuts and Jobs Act, will need a revenue plan to offset it.
Mills offers that under the current conditions, the incremental tariffs will hit technology and apparel industries more than markets may have anticipated.
“As uncertainty surrounding the trade war will likely continue over the coming weeks, we expect that market volatility will remain elevated,” said Raymond James Chief Investment Officer Larry Adam. “While never comfortable, pullbacks are a part of the fabric of the market.”
Dating back to 1980, markets have experienced one 10% decline per year, on average, with an average maximum intra-year decline of ~13-14%. Despite this, the S&P 500 has had an average annual gain of ~10%.
“Staying with your long-term asset allocation framework, keeping a long-term horizon and not making abrupt changes is what is most important throughout periods of volatility,” stated Adam.
What to watch for in the early days
As with previous tariff announcements, the days following the April 2 tariff decision could feature certain tariff removals, extensions or delays from the Trump administration.
Canada and Mexico not on the "reciprocal tariff" list
Notably absent from the list of countries on the “reciprocal tariff” list are Canada and Mexico, though their existing country-specific 20% tariffs remain in place.
Application of additional tariffs
The increased rate tariffs are “in addition to any other duties, fees, taxes, exactions, or charges applicable to such imported articles.” This is especially relevant for China, given the existing 20% tariff – bringing its total rate up to 54%.
Are any goods exempt from the tariffs?
Goods subject to Section 232 tariffs (steel, aluminum, autos and auto parts) and those set to be subject to Section 232 tariffs (copper, pharmaceuticals, semiconductors, lumber), as well as bullion, energy and “other certain minerals that are not available in the US” are exempt from incremental tariffs. Imports from Russia, North Korea, Cuba and Belarus are also exempt.
How do tariffs change our view on the US economy?
With the April 2 changes, the US weighted average tariff rate, encompassing the full spectrum of trading partners, jumps from less than 3% to more than 20%, and depending on assumptions, it could be as much as 31%. This is the highest level in more than 100 years – even higher than the 19% imposed by the infamous Smoot-Hawley tariff law of the 1930s. In response, imports will decline, so it is purely a question of how much of a decline there will be for each country and product category. Consumers and businesses will 1) substitute imported goods for domestically made goods, as well as 2) move from goods that are made in the higher-tariff countries, such as China, to goods that are made in relatively lower-tariff countries, such as Mexico.
Given that there has never been such a steep, abrupt tariff increase in US history, this is truly unprecedented. Even Smoot-Hawley does not provide a directly comparable case study, given the vast changes in the nature of the US economy and global trade patterns over the past century. The result of the administration’s more aggressive tariff action significantly raises the risk of a sharper than expected slowdown, possibly even a recession. It should also lead to significantly higher inflation than we were expecting.
While tariffs will cause substantial near-term economic headwinds, there are still some factors that could support the economy:
- The labor market remains tight, with jobs that are generally plentiful, even considering the high-profile headcount reductions in the federal government.
- The consumer remains on solid footing, evidenced by historically low debt servicing ratios and supported by the still-healthy labor market.
- The AI/data center buildout remains a potent driver of infrastructure development, industrial activity and electricity demand.
- Increased tax revenues from tariffs could help to support additional tax cuts.
Depending on how long the higher tariffs remain in place, the Federal Reserve (Fed) is going to be in a challenging position – weakening growth and higher unemployment suggest more rate cuts while accelerating inflation suggests more policy restraint. Growth concerns are likely to dominate. While the Fed cannot prevent a recession from happening, prompt rate-cutting action could keep a recession mild rather severe if growth slows more than expected. Again, there are substantial question marks based on what happens with trade negotiations.
See the full Washington Policy April 2 report and Investment Strategy Q&A.
Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Indices are not available for direct investment. Index performance does not include transaction costs or other fees, which will affect actual investment performance. Past performance is not indicative of future results. S&P 500: This index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. It consists of 400 industrial, 40 utility, 20 transportation, and 40 financial companies listed on US market exchanges. This is a capitalization-weighted calculated on a total return basis with dividends reinvested. The S&P represents about 75% of the NYSE market capitalization.
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