On what he dubbed ‘Liberation Day’ in the US, President Trump invoked a national emergency to implement far-reaching and aggressive tariffs on all trading partners. Here, we assess the immediate implications for markets and the broader macroeconomic picture going forward.
What has been announced?
The long-anticipated executive order will raise the average tariff rate for US imports to well over 20%, up from 2.5% last year[1]. The order includes both a baseline universal tariff of 10% on all imports and a reciprocal tariff on many key trading partners:
- 54% for China
- 46% for Vietnam
- 32% for Taiwan
- 26% for India
- 20% for the EU
- 10% for the UK
While comments from US Treasury Secretary Scott Bessent suggest some scope for bilateral tariff negotiations[2], the scale of the announced hikes indicates that average US tariffs are likely to increase sustainably to somewhere in the range of 15–20%. The likelihood of retaliation from key trading partners raises the risk of escalation — as the executive order states that retaliations will be met with further tariff increases.
What are the economic implications?
- In the US, our forecast for 2025 inflation of 3.1% had already factored in a meaningful increase in tariffs. If tariffs remain at the higher-than-expected announced levels for the rest of the year, we would expect inflation to reach around 4%.
- The likelihood of an outright recession in the US has risen sharply. We had already assumed that consumer spending growth would fall to about 1% due to layoffs in government (federal, state, and local) and adjacent industries (healthcare and education). The new tariffs will likely increase both inflation and inflation uncertainty, prompting a rise in precautionary savings. The extent of this impact is unknowable due to a lack of precedent. However, it is not difficult to envision a further pullback in consumer spending growth to 0% — or possibly lower — if savings rates rise meaningfully.
- Europe and Asia will likely suffer a growth shock, given their heavy reliance on net trade. The European Commission estimates that a 25% tariff could lower euro area GDP by about 0.5% [3]. A trade war would mark the third consecutive shock, following the Covid-19 pandemic and Russia’s invasion of Ukraine. Lower interest rates should help offset some of the drag.
- The longer-term impacts of a sustained US withdrawal from global trade and finance could be profound: less flexible supply chains leading to higher inflation, reduced dependence on the dollar as a reserve currency (potentially resulting in higher US yields), and a heightened focus on supply security.
- If globalisation was a rising tide that lifted all boats, a US retreat will reduce consumer welfare across nations. Much will depend on whether other nations continue to champion the benefits of trade and bind together more closely — or choose to withdraw into protected domestic spheres.
What has the market reaction been?
- Markets fell significantly on Thursday (3 April), with the S&P 500 down 4.8% - its worst one-day decline since June 2020.
- Asian markets also reacted negatively, with significant sell-offs in Japan's Nikkei 225 and South Korea's Kospi. Southeast Asian economies, heavily reliant on exports, faced substantial tariff increases, raising concerns about regional growth.
- Industries with global supply chains, particularly technology and consumer goods, experienced notable declines. Companies such as Apple, Walmart, Nike, Amazon, and Nvidia saw significant share price drops in after-hours trading, reflecting investor concerns over rising costs and supply disruptions.
- Markets had already seen a mixed start to 2025 — while the US, and particularly its ‘Magnificent Seven’ tech giants (Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia, and Tesla), struggled in Q1, Chinese and European stocks performed much better.
- Globally, yields on government bonds have fallen as markets price in lower global growth, and the dollar fell as investor sentiment towards the US weakened further.
How are Sarasin positioning portfolios?
- Against this backdrop, our positioning remains cautious but open to the opportunities that these market sell-offs may create.
- We had already acted to reduce risk last month — first by cutting overall equity exposure to neutral, and by underweighting credit (corporate bonds), where spreads had become historically tight. We are holding the proceeds in cash, giving us flexibility to add to positions if market declines become excessive. We also continue to hold strategic positions in gold across balanced mandates.
- Within our equity exposure, our quality tilt is clear. We have been actively reducing our exposure to consumer names, given concerns around the impact of the US administration’s policies on employment and inflation.
- Finally, our new security theme positions us for opportunities arising as global politics and economics fragment. These could include food and other natural resources, relative tariff ‘winners’, cybersecurity, and national champions. We also maintain exposure to companies that help mitigate and limit climate disruption.
[1] www.whitehouse.gov/presidential-actions/2025/04/regulating-imports-with-a-reciprocal-tariff-to-rectify-trade-practices-that-contribute-to-large-and-persistent-annual-united-states-goods-trade-deficits/
[2] www.youtube.com/watch?v=yO0GFiJ5ADc
[3] www.euronews.com/business/2025/03/20/trade-tariffs-could-push-up-eurozone-inflation-by-05-ecbs-lagarde-warns
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