As you will have seen, President Trump has announced swingeing tariffs for America’s trading partners that were quite a bit worse than what markets were expecting. A universal tariff of 10% will be applied from April 5th and higher rates will apply for 60 nations from April 9th. The UK has escaped relatively unscathed, attracting the 10% rate, whereas the EU has been hit with a rate of 20%, China 34% and Japan 24%. The UK is in illustrious company with the 10% tariff rate, with the Taliban managing to get the same rate, along with the Heard Island and McDonald Islands who’s only inhabitants are penguins. The way that the tariff rates have been calculated are in equal measures economically damaging and illiterate. Yet here we are.
We’ve not seen this level of protectionism since the early 1900s, and it will see the average tariff rate rise from c.2.5% in America to somewhere over 20%. These measures are likely to raise many hundreds of billions of dollars for the US government by penalising those trade partners that have substantial trade deficits with America. The cost of this will be job losses, higher prices and lower economic growth. China has already responded by announcing 34% tariffs on US goods and the EU and Japan are likely to respond with their own tariffs in the coming days, further exacerbating economic pain. Winston Churchill once commented about tariffs that ‘For a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle’. Words that have stood the test of time.
Markets have responded poorly to an upending of the global trade order, with a fall of 5% in the American markets on Thursday and a further fall of 3% on Friday (as of 3pm UK time). UK, European and Asian stock markets have fallen sharply as well, though it is American markets that are so far bearing the brunt of the damage. Government bonds and gold have increased in price, continuing to show the benefits of having a diversified portfolio.
It’s important to remember that Trump is a mercurial character and is fond of using blunt leverage in order to strike a deal. It is likely that the tariffs that are due to come into effect will be watered down if countries come to the negotiating table and reduce tariffs or trade barriers on America.
From a UK perspective, the c.£10bn of fiscal headroom that Rachel Reeves left herself at the Spring Statement has likely evaporated given the change in economic outlook. Speculation will mount about further tax rises or spending cuts at the October budget. However, an argument can be made that it’s suddenly quite a lot more appealing for manufacturing to take place in the UK at a 10% tariff rate rather than Europe at 20%. This could improve the economic prospects of the UK once the dust has settled.
It’s important to recognise the role emotion can play in investing, but recognising it is the first step in taking advantage of it. Fear, desperation, panic, capitulation, despondency and depression are all emotions that we are going to feel about the markets over the coming period. However, calm and rational thinking will prevail, and it gives the patient and logical investor a great opportunity to generate attractive long-term returns.
All of this is occurring as we enter the new financial year when many are thinking of ISA and pension contributions. It can be difficult to think about these matters at times like these, but investors should not let market emotions change their long-term investment strategies. As Warren Buffett once said, ‘look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it’.
As ever, please do get in touch with your usual advisor if you have any questions.
Dan Boardman-Weston
Chief Executive
04/04/25
