Investment Strategy
Tariff update and what they mean for markets
President Trump shocked the global economy yesterday by announcing an increase in tariffs that raises the effective U.S. tariff rate by roughly 25% to an average rate of 27% on imports.
The latest tariff rate represents the largest tariff increase in over 100 years
U.S. effective tariff rate, %
Sources: J.P. Morgan Investment Bank, J.P. Morgan Private Bank. Data as of April 2025.
The tariff plan includes a 10% universal tariff and reciprocal rates rising as high as 54% against China. Consensus seemed to expect an approximately 9-10% increase, so this surprised on the upside, with U.S. equity futures down over 3% at the time of writing. The tariff rate represents the largest tariff increase in over 100 years, making it difficult to analyze the impact, as there simply is no precedent for a modern economy to increase broad trade barriers of this magnitude. Markets moved across the board with equities down sharply, bonds up, commodities down, and the dollar up against growth-oriented currencies like the RMB. This policy shift represents a substantial structural change for the global economy. The U.S. was the “consumer of last resort,” absorbing global trade surpluses. With this tariff plan, exports to the U.S. could fall substantially, forcing export-reliant economies to find new sources of growth.
For the U.S. this policy shift raises growth risks meaningfully. Using an estimate from the Federal Reserve’s model, increasing tariffs by 25% would reduce U.S. growth by up to 2.5% and increase inflation by up to 1.5% over the next two to three years. Estimates are imprecise given the lack of historical precedent, but at the simplest level, tariffs are a tax, regardless of whether they are borne by the consumer or in corporate margins, and they increase the cost of doing business and reduce disposable income. On a base of $3.3 trillion in U.S. goods imports, this year’s cumulative tariff hike could be viewed as a U.S. tax increase of roughly $660B or 2.2% of GDP. This is a tax increase that dwarfs any tax hikes in recent decades.
There are still uncertainties about the implementation and negotiation process that could happen in the coming days and weeks; however, full implementation of these policies could be viewed as a substantial macroeconomic shock. If sustained, these policies could push the U.S. and global economy into recession this year. The impact on inflation is far less clear. While most estimates point to a stagflationary impact, we point out that previous trade wars (or consumer goods tax increases) have been deflationary on average. The cost of certain goods will likely rise (and indeed that’s the point of tariffs). But on an aggregate basis, historically that impact hasn’t been inflationary beyond the initial shift; price levels shifted upwards, but ongoing prices did not continue to accelerate upwards.
The key questions are how long the tariffs stay in place and how countries negotiate or retaliate. First, how long they stay in place is largely a factor of how much economic and market pain the Trump administration is willing to endure. For investors, unfortunately, this question is impossible to answer. With regards to how much of the tariffs can be negotiated away, we have consistently pushed back against the view that the Trump administration’s tariffs are purely a negotiating tool, highlighting that the administration is trying to rewire the U.S. trade relationship with the world. That said, investors can take some solace that not all of these tariff increases are permanent. Tariffs are meant to achieve the ‘three R’s’ – revenue, restriction, and reciprocity. The product-specific tariffs are meant to block imports and ensure that the U.S. maintains domestic production of key products; therefore, these will likely stay in place. The universal tariff targets revenue generation. Although the legality will likely be questioned, these could remain.
The reciprocal tariffs are likely intended to be negotiated, but as we’ve seen through history, the reality is often messy, and the possibility that these tariffs remain or go higher is significant. For example, with the U.S. raising tariffs on the EU by 20%, the ultimate goal is likely for the EU to agree to lower their tariffs and non-tariff barriers, but in historical cases, that rarely rings true. Countries fall into one of three buckets – likely to negotiate; unlikely to negotiate but unlikely to retaliate; and likely to retaliate. Many trade wars throughout history, including the U.S.-China trade war during Trump’s first term, resulted in permanently higher tariff levels due to a combination of retaliation and a breakdown in negotiations. From a macro perspective, if countries negotiate down to a lower tariff equilibrium, that is a positive for the global economy. If they go high and stay high, it’s a negative, and if there’s tit-for-tat retaliation, it could be much worse. This will likely be a messy process.
What does this mean for China? China has become more reliant on exports as a share of GDP growth over the past number of years, especially last year, and raising tariffs to 54% is a large shock. That said, exports to the U.S. have declined to about 15% of total exports and 3% of GDP. This is not insignificant, but it can be partially offset by larger fiscal stimulus. Furthermore, tariffs are initially creating less of a shock this time than during the U.S.-China trade war in Trump’s first term, likely creating a smaller shock on business investment.
Uncertainty has hit the US hard, but not yet China
Trade policy uncertainty, indexed 2000-2015 average = 100
Sources: Matteo Iacoviello, PolicyUncertainty.com, Haver Analytics. Data as of February 2025.
Elsewhere in Asia, Vietnam stands out as highly exposed, with exports to the U.S. accounting for roughly 25% of GDP, Japan 3.5%, and Korea 7%. An increase in tariffs that reduces exports to the U.S., especially without a concurrent rise in global demand, represents a negative drag for these economies. Emerging markets in particular could be subject to a lot more challenges as the nature of these tariffs are global, rather than just between the U.S. and China like in the last trade war.
After the initial market reaction, where do things go from here?
The dollar has been one of the biggest question marks and the one that has bucked consensus the most. Tariffs are initially strengthening the dollar against growth-oriented currencies (CNH, MXN, AUD), but the broad dollar is flat overall. Given the global nature of this trade war, the expected outsized shock to U.S. GDP, and the overweight position in U.S. assets among global investors, outflows may still stand to weaken the dollar. The balance of risks around trade flows pushing the dollar higher and capital flows pushing the dollar lower keeps the outlook neutral in our view. Divergence across currencies is expected to rise; we remain constructive on EUR given fiscal support in the region, and on JPY, as rate differentials may continue to narrow from both sides. From a portfolio perspective, the importance of USD diversification has increased, underscoring the need for more balanced allocation across geographies.
Gold is higher on the announcement and, in our view, could go higher still. Gold has once again proven its effectiveness as a hedge against risk events, surpassing the $3,150 per ounce level and achieving a remarkable year-to-date return of 20%. We remain positive on gold, given the persistence of trade uncertainties and a strong demand outlook from both central banks and retail investors.
In fixed income, we observed risk-off moves across the board. Interest rates have tumbled, with the U.S. Treasury 10-year yield falling by 20bps. The market is pricing the Fed cutting rates to 3.5% by the end of the year, with the first cut fully priced by June. We have turned more positive on bonds given growth risks and the diversification they can provide to a portfolio. We think growth risks will likely outweigh inflation risks as the primary driver, pushing yields lower.
In equities, U.S. equities are already down 3.5%, and given the substantial risks to the U.S. outlook, there is reason to be cautious in the near term. Overall, Asia will likely see a large macro impact due to its reliance on exports and, in particular, to the U.S.; however, across individual markets, there’s reason to see a mixed outlook. For Chinese equities, increased tariffs to 54% are likely to negatively affect U.S. export-oriented sales and weaken the RMB. However, some of this impact may be mitigated by increased fiscal support for the domestic economy and a weaker currency. Earnings for major internet platforms are unlikely to be significantly affected by U.S. tariffs, but a weaker currency could be a negative. We continue to view Chinese equities as fairly valued at current levels, and underpricing the tariff impact.
In Japan, the tariff impact at 24% is expected to be absorbed through price increases by exporters and their supply chains, negatively affecting profit margins. Due to a higher degree of localization in the U.S. for Japanese companies, the overall negative earnings impact is manageable but not insignificant at mid-high single digits, if sustained. A weaker U.S. economic growth trajectory would further weaken demand conditions for exporters alongside a stronger Yen. The recent decline in Japanese equities has factored in some of these risks, but not all. We would be adding more aggressively to the TOPIX at 2,350-2,400. Corporate governance reform and increased shareholder returns remain long-term, positive domestic structural drivers.
On a relative basis, India's headline reciprocal tariff rate is lower than expected. Indian equities are more sensitive to the domestic economy, where monetary policy has become more accommodative. With the U.S. dollar no longer strengthening, there is room for further rate cuts to support domestic growth. MSCI India at 2,600-2,650 presents a good opportunity to increase exposure to Indian equities. Overall, India seems better positioned relative to most Asian equities post the tariff announcements today.
Overall, the tariff outlook will likely remain uncertain as negotiations and policy shifts continue to happen, and markets will likely continue to reflect that uncertainty through risk-off sentiment. We advise investors to focus on geographic and asset class diversification, building portfolio resilience (through income from bonds, gold, and alternatives such as hedge funds and infrastructure), and capturing tactical ideas and elevated volatility through structures.
All market and economic data as of April 3, 2025 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
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Index definitions:
S&P 500 Index: market capitalization weighted index of the five hundred, largest, publicly traded companies in the United States.
TOPIX Index: It is a metric for stock prices on the Tokyo Stock Exchange (TSE). It is a capitalization-weighted index that lists all firms in the "first section" of the TSE, a section that organizes all large firms on the exchange into one group. The second section of the TSE pools all of the smaller remaining companies.
MSCI India Index: Measures the performance of the large and mid-cap segments of the Indian market. With 113 constituents, the index covers approximately 85% of the Indian equity universe.
Important Information
President Trump shocked the global economy yesterday by announcing an increase in tariffs that raises the effective U.S. tariff rate by roughly 25% to an average rate of 27% on imports.
Alex Wolf
Head of Asia Investment Strategy
Published Apr 3, 2025
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