Liberation Day: Navigating the impact of President Trump’s tariffs

We understand that there is a lot of uncertainty at the moment. As an active manager, we are closely monitoring the impact of these changes and assessing what they mean for our clients and portfolios. Despite this uncertainty, we remain committed to maintaining a long-term perspective in our objectives and investments.

President Trump's latest tariffs have taken the world by surprise. Instead of simply matching what other countries charge on US goods, the White House has decided to go further, targeting additional trade barriers.

Let's break down what this could mean for you and the economy.

What is a tariff?

A tariff is a tax imposed by a government on goods and services imported from other countries. Tariffs are used to:

• Protect domestic industries: By making imported goods more expensive, tariffs encourage consumers to buy locally produced items.

• Generate revenue: Tariffs can be a source of income for governments.

• Regulate trade: They can be used to influence trade policies and relationships between countries.

The tariff hike

The new tariffs announced on April 2nd raised the average US tariff rate to 25.3%, the highest in 120 years. This significant increase is expected to push up prices in the US by about 2% and slow down economic growth by nearly 1% on an annual basis, if permanently maintained.

These estimates don't even account for potential retaliation from other countries, which could make the situation worse.

How are these tariffs calculated?

The US looks at how much more it imports from a country than it exports to them (the trade deficit), divides that by the total imports from that country to get a percentage, and then cuts that percentage in half. That final number becomes the "reciprocal tariff" the US charges on goods from that country.

For example, in 2024, the US imported $8.4 billion worth of goods from Bangladesh but only exported $2.2 billion, creating a $6.2 billion trade deficit. Dividing 6.2 by 8.4 gives a percentage of 74%. Half of that is 37%, which is the ‘reciprocal tariff’ imposed on Bangladesh.

All trading partners received a minimum ‘reciprocal tariff’ of 10%, even if the above calculation resulted in a figure below 10%. This is with the exception of Canada and Mexico which had already received tariffs before April 2nd.

Impact on consumers and the economy

• US consumers: Can expect to see prices for everyday goods rise by about 2%. This means grocery bills, electronics, and other imported items could become more expensive.

• US Economy: The higher tariffs are likely to slow down economic growth by almost 1%. This could affect job creation and overall economic stability.

• Other countries: Asian economies like China and Vietnam could see significant economic losses, with GDP reductions of more than 0.5%.

What could this mean for the UK?

The UK trades extensively with the US, with around 15.3% of all UK exports going to America, according to the Office for National Statistics.

Key sectors like machinery, transport equipment, chemicals, and materials could face rising costs and reduced competitiveness.

The Scotch whisky industry has already experienced significant losses due to previous tariffs. Economists warn that these new tariffs could further complicate efforts to stabilise the UK's economy.

Potential retaliation

Other countries might respond with their own tariffs, and the US has indicated that it will respond with further tariffs should a country impose retaliatory tariffs. Indeed, at the time of writing, we have seen China retaliate and the US respond to China’s retaliation with more tariffs. This could lead to a trade war, further increasing prices and slowing down growth.

De-escalation

In a welcome turn of events, President Trump has recently announced a temporary 90 day pause on proposed tariffs, signalling a step back from the more aggressive trade stance previously outlined. While the pause does not eliminate the possibility of future action, it marks a moment of de-escalation that has eased market concerns and provided businesses with some short-term clarity.

This development suggests that economic and political considerations are playing a more prominent role in shaping the trade agenda. For clients, it’s a positive sign that the worst-case tariff scenarios may be avoidable, at least in the near term. We’ll continue monitoring developments closely, but for now, tensions appear to be cooling

Impact on interest rates

The Federal Reserve might face challenges due to the combination of slower growth and higher prices. They might hold off on changing interest rates immediately because of rising prices but could cut rates more than planned if a recession seems likely. Other central banks, like those in the UK and Europe, might also cut rates to protect their economies and stimulate growth.

President Trump's new tariffs are set to have a significant impact on prices and economic growth in the US. While the administration aims to protect US industries, the ripple effects could be felt by consumers and businesses alike. As the situation unfolds, it's important to stay informed and understand how these changes might affect your daily life. However, we emphasise that what’s even more crucial is that you stay calm and focus on your long term objectives.

What does this mean for our clients?

Whilst we are facing into a great deal of uncertainty, it is important to step back and remember the principles that guide our investment strategies. Reacting impulsively could have significant long term detrimental consequences. As long-term investors, we believe in the benefits of a well-diversified and actively managed portfolio.

In the short term, markets can be influenced by news, policy changes, and investor sentiment. However, over the long term, economic fundamentals and trends like demographics, innovation, and productivity play a bigger role. Keeping a long-term perspective may help you ride out temporary downturns and benefit from potential overall market growth.

President Trump's recent tariff announcements have led to lower economic growth forecasts. However, his framework has provided some clarity, allowing markets to better understand and price in risks. As the global response unfolds, markets will adjust accordingly. We believe staying invested during this time may help you benefit from potential market recoveries.

Ensuring the protection of our investments during periods of market volatility is a key focus for us in building and managing portfolios. We prioritise strategies that help mitigate risks while aiming for long-term growth:

• Diversification: Focus on long-term investment strategies, positioning portfolios for long-term growth (around 10 years). Investing through changing conditions potentially leads to positive returns. This involves investing across multiple asset classes, geographies, currencies, and industries to reduce risk and maintain long-term strategy.

• Active security selection: Utilise global managers and strategies to select the best investments, ensuring optimal returns through active research.

• Schroders: Leverage the global investment capabilities of one of the UK's largest active asset managers across asset class, geographical locations and investment styles in an unparalleled, seamless way.

In a world of greater uncertainty and interest rate volatility, we believe we are well positioned to weather market fluctuations and achieve positive investment outcomes for our clients in the long term.

We encourage our clients to stay calm and remain focused on their investment objectives. Historically, the best way to handle times like these is to stay focused, stay invested, and trust in the strength of your strategy. It's important to emphasise that with investing, it's not about timing the market, but about time in the market.

Alan Goodman, SPW’s Chief Investment Officer:

“Despite the current uncertainty affecting financial markets worldwide, this isn’t the first time markets have faced volatile periods. And it’s those investors, who remained invested to achieve their long-term goals who have benefitted. At SPW, we continue to make tactical adjustments during these times to manage risk and take advantage of opportunities for our clients.”

Financial advice:

In times of uncertainty, it’s natural to feel unsure about the best course of action. Speaking with an experienced adviser could provide the clarity and reassurance you need. If you are feeling nervous, speaking to an adviser could help you make informed decisions and navigate the path ahead with confidence. Let us offer the support you need to move forward with peace of mind. You can speak with an adviser at our sister company, SPW, who will guide you through the process and help get you started.

Simply follow this link here to book an appointment with our personal wealth support team.

Remember, you’re not required to make a financial commitment until you decide to go ahead with the recommendations in your personalised financial plan. There are no hidden fees or charges, and your adviser will explain any costs before you pay.

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Important information

This article is for information purposes only. It is not intended as investment advice.

Fees and charges may apply at Schroders Personal Wealth.

The value of investments and the income from them can fall as well as rise and are not guaranteed. The investor might not get back their initial investment.

In preparing this article we have used third party sources which we believe to be true and accurate as at the date of writing but can give no assurances or warranty regarding the accuracy, currency or applicability of any of the contents in relation to specific situations and particular circumstances.