‘Liberation Day’ shackles world trade and financial markets

While the tariffs were long anticipated, few expected the president to go this far. Coined as ‘Liberation Day’, Trump’s tariff package includes a baseline 10% tariff on imports from all countries. Additionally, Trump plans to implement individualised reciprocal higher tariffs on countries with which the US has the largest trade deficit. Reciprocal tariffs for important trade partners are now set at levels of 20% for the EU, 24% for Japan, 32% for Taiwan, and 34% for China. The baseline tariff of 10% will be imposed on April 5, followed by the ‘individualised reciprocal tariffs’ starting April 9.

However, what Trump may consider ‘Liberation Day’ is ‘Retaliation Day’ for the rest of the world. As European Commission President Ursula von der Leyen aptly stated, ‘all instruments are on the table.’

The US stock market has underperformed the rest of the world since Trump’s inauguration and the start of his trade war. Yesterday added to that statistic. Financial markets reacted with shock and both equity markets and yields dropped in response to Trump’s speech. Clearly, investors are signalling a preference for policies without tariffs and these new tariffs are the largest we have seen to date. Why are investors so averse to tariffs? There are three main reasons.

• First, tariffs are essentially a tax. Higher tariffs will therefore either reduce the purchasing power of consumers or lower profit margins of corporations. Most likely, it will be a combination of both.
• Second, this new tax will lead to rising inflation in the US. This can force the Federal Reserve (Fed) to keep interest rates at elevated levels. In that case the Fed is unable to stimulate the US economy with lower rates, while that economy is negatively impacted by the tariffs, and the room for stimulus is less than in the previous cycle.
• Third, there is still considerable uncertainty. It is not clear what the trade policy is a week or month from now. That is because negotiations will start as of now. This can have lower tariffs as a result, though retaliation could also lead to higher tariffs. So, still uncertainty for financial markets, companies, and consumers. If uncertainty persists over an extended period, it affects behaviour, which will have a negative impact on the real economy.

The impact of the newly imposed tariffs extends beyond the US stock market, potentially reshaping global economic dynamics. While investors continue to wrap their heads around the uncertainties surrounding US trade policies, one thing remains certain: ‘Liberation Day’ does not liberate the US but shackles world trade instead. The outcomes will be particularly severe for nations that rely heavily on trade with the US such as Mexico and Canada. Although the US is also a large trade partner for China (Asia factory) and the EU, US exports are a limited part of total GDP in these regions, therefore the effects will be smaller.

Nevertheless, the impact for the US economy and the world economy will be negative if tariffs are implemented as announced. For the US economy, the likelihood of a stagflation scenario (high inflation and low economic growth) increases, along with the odds of a recession. For a more in-depth review of the economic implications of the tariffs, read our analysis of the economic implications by the ABN AMRO Economic Bureau.

While the April 2nd tariff announcement has offered some clarity on US trade policy, continued uncertainty and market volatility are expected for the foreseeable future. The coming weeks will likely focus on trade negotiations and retaliatory measures. Trump has shown before that he is willing to backpaddle in turn for concessions.

We advise against making large changes in times of market uncertainty. For long term investors, attempting to time the market can be a costly undertaking, especially during market turmoil. Market corrections of 10% are not unusual and by remaining invested, an investor captures both the peaks and troughs in the financial markets.

Additionally, it is important to have a well-diversified portfolio. We are currently slightly overweight on both equities and bonds. Within bonds we have a preference for high-quality bonds, like government bonds. They benefit from lower yields and protect the portfolio in the current situation.

In February, we made a rotation in our portfolio by reducing our positive stance on the US and the information technology sector. So far, this has been a good call. Currently, we are neutral between the US, EU and emerging markets as we do not want to make large bets amidst high uncertainty periods. Finally, we are reassessing our scenarios and will act accordingly, though we want to emphasize that negotiations could also result in lower tariffs, which will be positive.

We will continue to monitor the situation closely and provide updates as necessary to keep you informed of any developments.

Roel Barnhoorn

Global Head Bonds team and member of the ABN AMRO Investment Committee