‘Liberation Day’ – Assessing the Impact

Donald Trump’s ‘Liberation Day’ proved to be a significant event for global trade and the economy. On April 2nd, President Trump announced a new ‘reciprocal’ tariff policy (taxes on imports). This means the US will impose tariffs on imports to the US from all countries. This is significant because the policy changes will impact the global cost of doing business, and consequently economic growth, asset prices, and financial markets.

Below we dig into the details, and then consider how the implications have affected markets and our investment outlook going forward.

What are the new US tariffs? 
The new tariff plan has two parts:

1. Baseline tariff: Starting April 5th, the US will impose a 10% tariff on imports from all countries. Canada and Mexico are excluded from this additional tariff, but the existing 10-25% tariffs on certain goods from these countries announced earlier this year will remain for now.

2. Country-specific tariffs: Starting April 9th, major trading partners like China, the Euro area, Japan, Korea, and Taiwan will face additional tariffs based on the US trade deficit with each country. A US trade deficit occurs when the US imports more goods than it exports to a specific country. The announced tariffs were: 34% for China (in addition to the 20% tariff already implanted earlier this year), 20% for the Euro area, 24% for Japan, 25% for Korea, and 36% for Taiwan. The cumulative tariff rates (post the recent announcements) can be seen in the chart below.

In our view, when combined with tariffs announced earlier in the year, these new tariffs increase the average tariff rate the US imposes on the rest of the world by about 12-13%, leading to a total average tariff rate of 19-20% including the earlier announced tariffs.

There is still a large amount of uncertainty around whether there will be further changes to these tariffs. There could also be potential retaliations from other countries, which could in turn lead to a further increase in US tariffs in the short term, as well as negotiation from countries wishing to reduce or mitigate the new US tariff regime. If the tariff framework remains as is, it would represent the most significant level of tariffs since the early 1900s.

How has the market reacted, and why? 
The market has reacted negatively to the news of the new tariff regime.  On Thursday, global equity markets fell across the globe, with larger falls seen in the US (c.-5.5%) compared to Europe (c. -2.6%)  and the UK (c.-1.5%), while the US 10-year Treasury bond yield (interest rate on government bonds) fell by more than 0.1% (meaning a sharp rise in bond prices), as investors fled riskier asset and sought safe havens.

This market movement is aligned with what we expected in the event of more severe tariffs being announced and is consistent with increased caution from investors, preferring safer assets such as bonds in favour of more growth sensitive assets such as equities.

Why did the market react so poorly to the tariff news?  The market was expecting a true ‘reciprocal’ approach to tariffs, when in fact Trump decided to impose tariffs based on a simple formula focused on the size of the trade deficit that the country has with the USA (more on this below).  Needless to say, the disconnect between market expectations and Trump’s announcement led to a challenging day in markets, as traders and investors assessed the size of the impact.   While Trump believes tariffs will be ‘beautiful’ and lead to a US manufacturing renaissance, mainstream economics suggests that the immediate effect will be to increase costs on consumers, increase inflation, and cut into corporate profit margins - and the market reacted accordingly. 

How have we changed our short-term economic forecasts, our investment outlook and market positioning? 
Clearly, the tariff news is unhelpful for consumers, corporate profits and growth in the near term.  As a result of the new tariff regime, we have revised our US economic forecasts as follows:

• Lowered US economic growth forecast for 2025 by a further 0.5-1.0% (to a level of 1.0-1.5%)

• ​Increased US inflation expectations for Q4 2025 by a further 0.6-1.0% (to a level of 3.6-4.0%)

• Increased the likelihood of a US recession from 25% to 35%.

However, while recognising the significant uncertainty created by Trump’s tariffs, we believe the above effects will be temporary.

We expect the US economy to keep growing, avoiding a recession, and equity prices to recover over the course of 2025.

The Noise

This week has been about tariffs, tariffs, and more tariffs! Here are some anecdotes around tariffs which we found interesting:

• How did Trump and his administration calculate tariffs? Normally trade economists, who have trained for years, meticulously propose trade tariff policies. Yet Trumps’ trade tariff numbers seem so nonsensical that many have speculated that these numbers were AI generated. Unnamed officials at the White House confirmed that tariffs were calculated as follows, which lines up with the tariffs he imposed: 

• ​The US has decided to apply tariffs in some truly unusual places. Whilst the main news headlines have covered tariffs to EU, UK, and other major economies, there are some tariffed regions which have raised eyebrows; The Heard Island and MacDonald Island are barren external territories near Antarctica, and are only inhabited by penguins, have had a 10% tariff on goods levied.

Source: https://www.theguardian.com/us-news/2025/apr/03/donald-trump-tariffs-antarctica-uninhabited-heard-mcdonald-islands 

• ​The US Dollar and FED interest rate policy expectations also saw significant shifts on the tariff news:

  • The US Dollar dropped 2.4% compared to a basket of currencies, marking its worst day since 2022. Normally, in times of crisis we see a strengthening of the dollar as it has historically been seen as a safe haven, but it appears to have lost its appeal.

  • Traders are now pricing three or four quarter-point interest rate cuts from the Federal Reserve. This means borrowing costs in the US are likely going down to manage Trump’s inflationary policies.

The Numbers

GBP Performance to 04/04/2025

Source: Bloomberg, data as at 04/04/2025