Liberation Day - first thoughts

The potential impact seems clear. Tariffs are bad for business and jobs, and Trump's proposed tariff regime – broadly in line with his election campaign – would be a major break with the recent past.

The average effective US rate might rise from around 2-3% to possibly more than 20%, the highest level since the 1930s (the exact number depends not just on still-undecided details, but also on the spending patterns of US consumers). The tariffs might raise around 2% of US GDP in revenue, potentially making the difference between growth and recession, which would hit corporate earnings in the US and elsewhere hard. Retaliation from the rest of the world would add to the negative impact.

However, from our macro perspective we think it would be premature to advise a significant change to investment strategy.

Some of the bad news will have been priced-in: the announcement was towards the pessimistic end of expectations, but the trading climate has been deteriorating since the election. The responses of other governments, and of US consumers (who may not fully realise they will have to pay much of the extra duty) will be important. So too will be what the US does with the funds raised: will Trump use them to cut the budget deficit (bad for growth and risk assets) or recycle them as lower taxes?

Some potential room for manoeuvre may be visible in the unusual methodology behind the individual country rates proposed, which exaggerates the unfairness of the current trading regime. The US does have lower tariffs than the rest of the world, but Trump's numbers overstate his case. He may not be making a precise plea for trade parity, but could be trying to provoke a response from the rest of the world, seeking to do deals. Time is needed to gauge that response.

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