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 will raise 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%.

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 calculates tariffs based on the trade deficit with each country. If a country has a tariff above 10%, the US will impose a tariff equal to half of that amount. For example, if China has a 67% tariff on US goods, the US will add an extra 34% tariff on top of the existing 20%. Most other countries, except Canada and Mexico, will face a 10% baseline tariff.

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: Canada and Mexico will be less affected due to their close trade ties with the US. However, 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, which could push the US tariff rate even higher, potentially up to 35.6%. This could lead to a trade war, further increasing prices and slowing down growth.

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 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.

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 crucial to stay informed and understand how these changes might affect your daily life.

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 tactical asset allocation: Adjust investments within a diversified portfolio to manage volatility and capture short-term opportunities (3-12 months), such as increasing or reducing exposure to equities.

• 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.