By
Derek Hamilton
April 16, 2025
On April 2, President Trump revealed his tariff plan on what he called “Liberation Day,” the results of which were shocking and much more severe than we and markets had expected. In addition to a 10% universal tariff, Trump announced reciprocal tariffs on several countries. These actions were in addition to the 25% sectoral tariffs on steel, aluminum, and autos, as well as the 20% tariffs on Chinese goods enacted earlier this year. Subsequently, on April 9, hours after the reciprocal tariffs took effect, Trump instituted a 90-day pause on the reciprocal tariffs, reverting rates back to the 10% universal base rate while raising tariffs on imports from China to 145%. If you parse the numbers, this equates to the largest tariff increase in history.
Even though the worst-case outcome seems to have been avoided, we believe the US and global economies will weaken. We like to think of this as a tax on the economy, with most of the burden shared by businesses and consumers. In addition, uncertainty can create a drag on economic growth, which we have written about in the past and we reiterate in the chart below.
We believe most of the reciprocal tariffs will not go into effect following the 90-day reprieve. This is not guaranteed, however, and Trump could raise tariffs on specific countries if negotiations go poorly. The administration has also indicated additional tariffs are expected for imports in many different sectors, including auto parts, pharmaceuticals, semiconductors, and lumber. These lingering issues are likely to depress economic growth as companies could hesitate to hire and invest in this environment. Global demand is likely to be weaker as decreased spending by US consumers and businesses should decrease imports, which could then depress US exports. Retaliatory tariffs would only add to these headwinds.
Of course, President Trump could change his mind and remove all the tariffs, though we are doubtful of this possibility, as he likely views this as an opportunity to reshape global trade. Any relief from the Federal Reserve lowering interest rates or from fiscal stimulus is expected to come too late. As a result, we believe market volatility will be with us for a while.
Economic policy uncertainty* and GDP
Year-over-year percentage change, 1-year moving average
*6-month lag
Sources: Macquarie, Macrobond, Matteo Iacoviello, Economic Policy Uncertainty, US Bureau of Economic Analysis (BEA)
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