- The overall tariff rate, which economists thought would settle around 17%, could rise to 24%, a 125-year high.1
- Asian countries are being hit the hardest by tariffs e.g. 25% on Korea, 24% on Japan, 32% on Taiwan. 1
- US Inflation will increase by 10% of the effective tariff rate, a further 2.4%.1
It seems like every weekly note we write these days is about Trump and tariffs, but it is the most pressing issue in the global economy right now and things have changed dramatically (again) this week. On Wednesday 2 April, ‘Liberation Day’ as Trump has named it, the President announced a range of reciprocal tariffs that were more significant than the market anticipated. The overall tariff rate, which economists thought would settle around 17%, could rise to 24%, a 125-year high.
US Effective Tariff Rate (%)
Source: Capital Economics
Who got hit the hardest?
Back in November when Trump was first elected, we expected a 60% tariff on China and 10% on the rest of the world. Then Canada and Mexico were in the firing lane, subject to 25% tariffs. Now it is the ASEAN countries that are being hit the hardest. ASEAN is the Association of Southeast Asian Nations and includes countries like Singapore, Thailand, and Vietnam. It is no surprise that ASEAN got targeted by tariffs given their trade surplus to the US. ASEAN runs a trade surplus of $234 billion with the US which means they are exporting that value of goods more than they are importing. This is almost in line with the EU trade surplus who export an excess of $242 billion to the US. Only China has a larger surplus than these regions at $303 billion.1
The chart below shows the new tariffs coming in. China managed to get away with a 34% tariff whilst Vietnam was hit with a 46% tariff. India was hit with a 26% tariff who themselves impose the second highest tariff on the US at c. 10%. The UK escape with the minimum 10% and the EU with 20% which could have been far worse given their trade surplus. The 25% tariffs on Canada and Mexico are only for non-USMCA compliant goods and with compliant goods expected to be c. 80% of all exports, the effective tariff ends up at only 5%.
US Selected Reciprocal Tariffs (%)
Source: Capital Economics
The impact
Sadly, the impact is unknown which leaves markets facing further uncertainty. Countries will retaliate in different ways and also seek to negotiate but let’s assume that the currently announced tariffs are what we get. Imports are 10% of consumption so the impact on inflation is just 10% of the tariff rate i.e. US CPI will increase by 2.4% this year, taking it over 4%. The tariffs will raise $770 billion for the US government (assuming that countries don’t stop exporting to the US).1 We think it likely that Trump will use that money to pay for tax cuts and other government spending that should boost US GDP by about 2.5%. The net effect of the boost in US GDP, the poor consumer sentiment from high inflation and the higher interest rates from high inflation is anybody’s guess so we won’t put a figure on it, but it should leave the US growing just at a slower rate than it did in recent years.
Bowmore portfolios
With tariffs causing a slowdown in the US, we had already been bringing in protection to portfolios and were underweight to the expensive, tech names that have sold off the most. We think the impact on other regions will be somewhat muted in terms of GDP growth and inflation so remain overweight to Japan and the UK. We are also likely to increase our exposure to the EU and China who are on accelerating growth journeys despite the tariffs, however, we continue to stay away from automakers and luxury goods in these regions as they are more susceptible to consumer sentiment.
Other Sources: 1 Capital Economics Trade War Dashboard
The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance