Trump's Tariffs

What are tariffs?

Tariffs are a form of tax imposed by governments on imported goods. They can serve multiple purposes:

Protecting domestic industries – by raising the cost of imported goods, locally produced items become more appealing to consumers, and this helps shield domestic industries from foreign competition
Tariffs can be a means to generate revenue for an economy
A tool to exert economic power over other countries

While tariffs are generally imposed by governments to help protect local industries or achieve political goals, they often are ultimately paid for by the end consumer through higher prices and this can also lead to higher inflation in the economy. Likewise, governments of countries who have had tariffs applied to their exports will often retaliate which can spark international trade wars, causing disruptions in global supply chains and raising costs for businesses and consumers worldwide.

Trump’s tariff announcements

Over the weekend, President Trump announced his intention to implement tariffs on Mexico, Canada and China. He outlined plans to levy an “across the board” 25% on Mexican and Canadian goods (excluding energy), and an additional 10% tariff on Chinese exports to the US (on top of those already in place), with effect from 4 February. However, following a series of phone calls between Mexican, Canadian and US leadership, tariffs on these economies have been delayed for a month. China have announced retaliatory tariffs on selective US exports which remain in place at the time of writing. Trump also spoke about the amount and equity of EU goods exports to the US, suggesting that tariffs on EU goods might be introduced soon.

Market impact

Market reactions on Monday caused a small fall in stock prices due to fears of the tariffs impacting global economic growth. Long-term US bond yields dropped (meaning the price increased) due to concerns over slower growth, while short-term yields rose (meaning the price fell) due to short-term concerns over inflation from the impact of higher prices. Overall, these moves were not significant.

Trump’s tariff announcements are expected to strengthen the US dollar, as investors seek “safe-haven” assets during this time of uncertainty. This can make imports cheaper for American consumers but also makes US exports more expensive, hurting American exporters. Additionally, a stronger dollar can lead to capital outflows from emerging markets, weakening their currencies and increasing their debt burdens. Higher tariffs can also push up inflation, prompting the Federal Reserve to maintain higher interest rates, which further supports the dollar.

What does this mean for our outlook from here?

At the beginning of the year, we were cognisant of the potential for tariffs to be implemented by the incoming Trump administration. Our assessment of the impact of the tariffs announced over the weekend is that they might add 0.4% to US inflation and detract -0.2% for US economic growth (or Gross Domestic Product/GDP) relative to our previous expectations. This would take our forecasts to c2.8% for inflation at the end of the year and 2.2% for US growth. Although here we are focusing on the direct impact on US economic growth from tariffs, it is important to remember the broader context of a strong and growing US economy as it moves through a period of gradual falling inflation - the potential impacts on the US look likely to be relatively small. There are risks to this view being wrong, in particular it assumes that the secondary impacts of the tariffs are limited and it makes no allowance for the impact of a retaliatory process developing with the EU or China.

Tariffs, whether just a threat or actually imposed, create uncertainty. The duration of the tariffs is crucial to understanding how this could impact over the longer-term – sustained tariffs will have a larger economic impact. Currently, it is still highly uncertain how long these tariffs might be implemented for but our view is that the tariffs will likely be scaled back in future months. The economic effects of these tariffs on Mexico and Canada are much greater than the potential retaliatory tariffs on the US, making them more likely to agree to changes or make deals with the US to reduce these impacts.

The Noise

The Bank of England (BoE) cut interest rates by 0.25%, lowering short-term borrowing costs to 4.5% in the UK, in their February 2025 monetary policy meeting. This doveish rate cut seeks to reignite the UK economy, which contracted in the last quarter of 2024. BoE governor, Andrew Bailey, said they wouldn’t have lowered rates if disinflation had not been underway. We note that Bailey was cautious about the pace of future rate cuts, given the economic outlook for the rest of the year remains unclear due to Trump’s trade tariffs. This marks a step forward for borrowers, with this rate cut suggesting a more positive picture for the housing market looking forward, which should boost optimism for prospective buyers according to national estate agent group, Fine & Country.
Job openings (JOLTs) in the US fell to 7.6mn in December 2024, compared to 8.2mn in November 2024, which indicates a gradual cooling of the US labour market. This figure from the US Bureau of Labor Statistics undershot market expectations of 8mn. The most notable decreases, contributing to this lower-than-expected figure, were in business services (down 25,000), healthcare (down 180,000), and finance and insurance (down 136,000). This decline in job openings suggests that employers may be scaling back hiring plans amid economic uncertainty which in turn weighed on investor sentiment. The short-term market impact meant the US treasury market slid to their lowest level in a month as yields increased (higher yields point to falling prices).