Liberation Day: Another Tariff Blizz

Tariffs have been a key wildcard for markets so far in 2025, with unprecedented uncertainty paralyzing businesses to make spending and hiring plans and pushing consumers to pull back on consumption. This has dampened consumer and corporate confidence, and fueled market volatility.

Liberation Day announcements provide some clarification, but the announcements are more severe and wide ranging than expected. The tariffs go far beyond his first term and hit everyone – friend or foe across all sectors, with few exemptions.

Markets can adjust to protectionism, not chaos. Since Trump’s inauguration, there has been uncertainty surrounding the rationale for tariffs: 1) a negotiation tool 2) a way to lower the deficit and generate revenues 3) restoring US manufacturing and restructuring trade imbalances. This in turn influences the size, scope and duration of tariffs.

1. What was announced:

• Trump unveiled his reciprocal tariff plan that hits virtually every country with a 10% baseline tariff. This will go into effect on April 5.
• For countries where the US has large trade deficits, an individualized, higher reciprocal tariff will go into place on April 9.
• Europe and Asia were hit the hardest. China will be tariffed at 34% (this is in addition to the 20% already added), EU at 20%, Japan at 24%, India at 26%, South Korea at 25%, Vietnam at 46% and UK at 10%
• Canada and Mexico were spared, meaning what has been passed stays (25% on non-US Mexico-Canada Agreement goods, 10% on energy and potash) and no additional tariffs are added.
• Exemptions were made on sectors like pharmaceutical drugs, semiconductor chips, lumber, and copper, for now.

2. Implications: 

• Downside risks to growth and upside risk to inflation - renewed fears of inflation are being stoked and there are fueled worries of stagflation and talk of a greater recession risk. Even if tariffs are ultimately reduced, the near-term shock and uncertainty is likely to drive a near-term slowdown in the US. Tariffs are a tax on the consumer, weighing on real disposable income and cutting into spending. Further, the risk of equity price declines could hit consumer spending via the wealth effect. Trade policy uncertainty will remain elevated, which will continue to negatively impact business investment and activity.
• Euro area could see a meaningful slowdown in growth through both direct and indirect impacts of tariffs and with trade policy uncertainty weighing on domestic investment and consumption. Services PMIs are already weak and much of the manufacturing PMI rebound has been driven by ‘front-loading’ in anticipation of tariffs. Eurozone inflation also has the strongest disinflation trends. On the positive side, our Chief European Economist, Tomasz Wieladek, anticipates the ECB could cut more than is priced (4-5 cuts), to take rates to around 1.25- 1.5% in 2025. This may offer some support to both equity and bond markets.
• Greater earnings uncertainty – unlike 2018 companies are likely to be less willing to absorb tariffs and this may be passed to consumers. However, any margin compression and the knock on to corporate sentiment, hiring and investment could push up the unemployment rate and draw the Fed into action.

Tomorrow (4 April) we also get non-farm payroll data. This will be another important data point for markets. So far, US labor markets have been cooling but are not weak (the unemployment rate is still low and we have employment growth). Inflation may not give the Fed a window to cut, but a deterioration in “hard” employment could. 

Market uncertainty is likely to remain elevated in the weeks ahead, as investors consider downgrades to growth and earnings forecasts, the risk of retaliation and escalation in tariffs and the potential for negotiation. Regardless of US policy, we are seeing the continued global recalibration of the global economy – from a changing of supply chains, to competing on artificial intelligence and a move to energy and security independence. While this will mean elevated volatility, it should also throw up long-term opportunities.