A commentary on the April 2, 2024 implementation of US tariffs on imports.
On April 2 as promised, U.S. President Donald Trump implemented an executive order imposing tariffs globally. In addition to a baseline tariff of 10 percent on all imports, the order calls for individualized “reciprocal” tariffs on 60 countries with which the US has the largest trade deficits. Titled ‘Regulating Imports with a Reciprocal Tariff to Rectify Trade Practices that Contribute to Large and Persistent Annual United States Goods Trade Deficits,’ the order includes reciprocal tariffs ranging from 10 to 50 percent.
Some notes regarding the impact of the tariffs on investors:
- The countries with the highest proposed tariffs include China, members of the European Union, Vietnam, Taiwan, and Japan.
- Despite earlier pronouncements, Mexico and Canada escaped further tariffs, so goods covered by the United States-Mexico-Canada Agreement, which has been in effect since July 2020, were not impacted. As such, the effective tariff rate for cars made in North America will likely be less than the 25 percent levied on cars from the rest of the world.
- Stocks sank upon the announcement, and the major indices were down as much as 5 percent by midday April 3, including slightly less than 3 percent for the Dow Industrial Average. Markets had begun anticipating the announcement since it became clear earlier this year that additional tariffs were on the horizon; the S&P 500 Index was already down 7.7 percent from its record high on Feb. 19.
- On Friday stocks fell again when China’s finance ministry said a 34% tariff will be imposed on all U.S. imports from April 10, mirroring President Trump’s levy on Chinese goods that was announced on Wednesday.
- Government bonds, on the other hand, rallied as investors sought safe havens.
- It is an open question if the announced tariffs will remain in place for an extended period, or if they are designed to strengthen President Trump’s leverage in future negotiations with U.S. trade partners. Those negotiations could result in tariffs being reduced or even eliminated for some countries.
- The announced tariffs, if fully enacted, are much larger and broader than the tariffs imposed during President Trump’s first term. So they will likely have a greater impact on the economy. Here are two potential implications:
- Inflation is likely to trend higher, at least in the short term. Some economists estimate inflation will be about 2 percent higher in 2025 than anticipated.
- Economic growth could be as much as 1 percent lower than previously expected. Tariffs are essentially a tax on goods and services. US consumer spending and sentiment had already begun to slow, and higher costs, even if only for a short time, could cause a further reduction in spending. The results could include fewer job openings, increased lay-offs, and lower incomes. Corporate earnings could also take a hit, increasing the odds of a recession in the near term.
- Neither of these results would be bullish for the stock market, but again, so much is unclear. For example, how will the impact of the tariffs influence what the U.S. Federal Reserve does the rest of this year? Slower growth would indicate the need to cut rates more aggressively, but the Fed is mostly concerned about inflation. Would they cut rates more aggressively while inflationary pressures are already rising? There is also the possibility a recession is avoided as other countries negotiate their tariffs down to more modest levels.
Investors are naturally jittery in the face of such a dramatic market selloff. They will want to know what can be done amidst such volatility. HBKS strategies are designed to weather this type of volatility. During the first quarter of this year, while domestic stocks sold off, foreign stocks and core taxable fixed income strategies performed well providing diversification benefits to client portfolios. The S&P 500 Index was down 4.4 percent during the first quarter, yet the All Country World Ex-US Index was up 6.3 percent and Bloomberg Aggregate Bond Index was up 2.8 percent. Even within the US markets there were parts of the market that held up better than the broad market.
The uncertainty is likely to continue. As such, we are not recommending any sweeping portfolio rebalancing at this time. As we mentioned in our recent article 2025 Market Uncertainty: How Policy Changes Impact Economic Growth Prospects, the key to weathering this period lies in strategic investment decisions, a balanced approach to risk, and an understanding that economic cycles often include periods of uncertainty before clarity emerges.
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