Which tariffs have been rolled back?

President Trump delayed the introduction of the “reciprocal” tariffs announced on 2nd April by 90 days, just over 13 hours after they came into effect. To be clear, that still means all countries’ goods exports to the US are subject to a 10% tariff (aside from Canadian and Mexican goods carved out by the USMCA trade agreement), there is a 125% tariff on Chinese goods, and sector-specific tariffs up to 25% will apply (autos, steel, and possibly others which may not yet be announced – pharma, semis, copper, lumber, energy). That leaves the weighted average tariff rate at around 21% (it was 2.5% in January). Now that’s based on the 2024 country shares in US imports; with a 125% on China and 10% elsewhere there’s going to be a lot of trade rerouting in 2025 and the effective tariff rate will be lower. Still, it would leave it far above the upper end of the range forecast before Liberation Day. Even if we assume there’s a path to Chinese negotiations starting and the 125% tariff falls back to 54%, that’s still a weighted average tariff rate at 14% which is at the upper end of that forecast range. 

What does the roll back mean for the economy?

This is still a big hit to prices (perhaps 0.75-1% on consumer inflation) at a time when inflation expectations have become unanchored. Both Federal Reserve (Fed) Chair Powell's comments on Friday and the latest minutes from America’s central bank struck a hawkish tone and affirmed that the Fed will not necessarily see tariffs as a one-off increase in the level of import prices that they would look through, as market optimists have suggested. Both consumer and CEO confidence are on the floor, markets have still taken a knock and the S&P is still 11% below its February peak. We have heard that corporate boardrooms have been left dumbstruck and, while trade policy uncertainty may have peaked, it will remain elevated over the next 90 days. Given the well documented effect of uncertainty on business spending, it makes it likely that investment projects and hiring plans will be delayed. The US economy was already starting to slow. Last night’s news means the odds of a recession in the next 12 months have reduced again but remain elevated, and growth is still likely to be weaker than we expected before Liberation Day. 

As well as discussing how quickly markets can rebound from corrections, Co-Chief Investment Officer Ed Smith offers a careful assessment of what could turn the current correction into a full-blown ‘bear market’:  

1. Banking stress: it’s currently very low; and comparisons with the 1930s Smoot-Hawley tariffs, launched in the midst of possibly the greatest banking crisis ever, miss the mark.
2. Debt market stress: increases in corporate borrowing costs have been limited; this is an important channel for contagion to the wider economy, and is so far staying low.
3. Recession risk: we have increased our subjective assessment of this risk from 25% to 45% for the US since ‘Liberation Day’; business investment will be the key channel to watch – but the key takeaway is that we still don’t see recession as more likely than not.   

You can read more about our views on the latest economic and market developments and what they mean for you at this link to our Insights page.

Not yet a client and interested in investing with us? Get in touch to see how we can give you peace of mind and help you grow your wealth for the long term.