Economy & Markets
Tariffs: the reasons, responses and repercussions
What we think
The administration believes that globalization led to de-industrialization and a growing trade deficit, leaving the U.S. weaker. They appear intent on using tariffs to rectify perceived wrongs and accomplish their goals of reducing the trade deficit and rebuilding U.S. manufacturing, representing a sweeping restructuring of the U.S. economy and its trading relationship with the world. Markets were dismissive of the risks before, assuming tariffs were purely a negotiating tactic, and are moving towards a more negative outcome. The administration has indicated a willingness to put up with near-term downside (both in the economy and markets) as a necessary step in the restructuring process. Meanwhile, China stands out as a unique case in the middle of the Venn diagram of U.S. interests. The administration is targeting unbalanced trading relationships and securing strategic supply chains – China sits at the intersection of both.
Investment implications
As tariff noise continues, risk-off sentiment could persist. Gold is likely to be supported or pushed higher, U.S. equities may be choppy in the near term, and global equities (particularly in Europe and Asia) are likely to see weakness once/if tariffs kick in. The dollar will likely be pushed and pulled by the forces of tariffs (strengthening the dollar) and growth/yields (weaker growth push down longer-dated yields and weaken the dollar). Portfolio resiliency is key for investors in this uncertain market. Gold, uncorrelated hedge funds, real assets (such as infrastructure), unconstrained fixed income, and domestic-focused equities could outperform.
From year-to-date peaks, U.S. equities have sold off nearly 10%, and Treasury yields have fallen ~50bps across the curve. Investors are concerned that a sharp rise in tariffs could upset the economic and corporate outlook, a risk that markets had largely discounted. Whether looking at market valuations or surveys, investors expected tariffs to be an empty threat, purely a “negotiating tactic.” Markets are now realizing that the initial read on Trump was likely wrong, and that this administration has a more ambitious trade agenda. So what is that agenda and what impact could it have?
U.S. TRADE POLICY UNCERTAINTY AT HISTORIC LEVELS
Index, news article coverage
Sources: Bloomberg Finance L.P.; Baker, Bloom & Davis. Data as of February 28, 2025.
An initial read of policy documents, executive orders, and public statements shows an emerging strategy – one that aims to significantly change America’s trading relationship with the world. The goals are straightforward: reduce the trade deficit, raise the manufacturing share of GDP, increase median household income – all through tariffs. The administration wants to use tariffs to reverse the economic shifts that occurred during rapid globalization. This desire appears to stem from a belief that a shift away from goods production towards services made the U.S. weaker, and that the trading system is structurally unfair to the United States. This represents a notable policy shift with significant potential adjustment costs.
If the Trump administration proceeds down this path, critical questions investors need to consider are: 1) how committed is the administration (how much economic or market pain are they willing to endure); and 2) what does such a sharp rise in protectionism mean for the economic and corporate outlook?
In this note, we delve into the reasons behind the tariffs, take stock of market moves and potential responses from trading partners (with a spotlight on China), and examine potential paths forward as the world grapples with what could be a fundamental shift in the global economic order.
Reasons: What is the goal of this administration’s trade policy?
Tariffs are generally used for one of three purposes: to restrict trade, generate revenue, or achieve reciprocity if trade is unbalanced. So what is the administration after? We think it’s a combination of the three and extends beyond purely “a negotiating tool.”
Recently published strategy documents from the U.S. Trade Representative and a paper by the incoming Chair of the Council of Economic Advisers say it clearly. In their view, the U.S. runs a large and persistent trading deficit because the trading system is unfair. Other countries keep their currencies artificially undervalued against the dollar, making the dollar persistently overvalued and U.S. exports uncompetitive; and other countries use tariff and non-tariff trade barriers to block imports, making it harder for U.S. exports to be competitive.
THE U.S. TRADE DEFICIT HAS GROWN CONTINUOUSLY SINCE THE MID-1970’S
U.S. trade balance (USD trillion)
Sources: Census Bureau; Bloomberg Finance L.P. Data as of December 2023.
With these beliefs underlying their core views on trade, the administration believes that rapid globalization led to de-industrialization and a growing trade deficit, leaving the country weaker. Beyond fairness, President Trump often talks about how trade openness has hurt the middle class, with much of the gains going to “globalists.” This likely refers to the fact that median real wages, particularly in goods-producing industries, have stagnated during globalization, while most gains have gone to corporations and shareholders.
SINCE THE EARLY 1970S WAGES HAVE NOT KEPT PACE WITH GROWTH
Indexed 1950 = 100, nominal
Sources: Census Bureau; Bloomberg Finance L.P. Data as of December 2023.
With this backdrop, the administration appears intent on using tariffs to rectify perceived wrongs and accomplish their goals of reducing the trade deficit and rebuilding U.S. manufacturing. Another stated goal is to protect strategic industries such as steel and aluminum from foreign imports to protect domestic production and supply.
THE U.S. HAS DE-INDUSTRIALIZED SINCE CHINA ENTERED THE WTO
Index (100 = 2000)
Source: Bureau of Economic Analysis. Data as of December 31, 2024.
While the goals are clear, how to achieve them is less well-defined. So far, tariffs have gone up on China, Canada, and Mexico, as well as globally on products such as steel and aluminum. The administration announced that reciprocal tariffs will go into effect on April 2nd.
What is the end game? The lack of a clearly articulated plan and the haphazard process for announcing tariff rates and implementation dates have led to market uncertainty and worries about the extent and impact of this trade war. Product-specific tariffs are intended to protect strategic industries. Prices of these goods will likely go up because that is the purpose – to make foreign imports more expensive and allow domestic suppliers to remain competitive. They are intended to restrict trade and not be part of reciprocity negotiations.
Reciprocal tariffs, however, are a “negotiating tool,” in the sense that the ultimate aim is to get foreign countries to lower their tariffs and/or buy more from the U.S. However, the reality of trade negotiations makes for a range of messy outcomes. Deals are the goal, but bilateral tariffs could go up and stay up. There are several historic parallels where trade wars resulted in higher long-term tariffs. For example, the U.S.-China trade war 1.0, or the 1960s U.S.-Europe “Chicken Wars,” which is why there are still no European pickup trucks in the U.S.
THE TRADING RELATIONSHIP BETWEEN THE U.S. AND MANY PARTNERS IS ESPECIALLY IMBALANCED, MAKING RECIPROCITY A KEY ISSUE
Source: Census Bureau; Haver Analytics, United Nations Trade and Development (UNCTAD), Peterson Institute for International Economics (PIIE). Data as of December 2023. Note: Uses simple average (effectively applied rates) Tariff rate differential = partner country's tariffs on U.S. goods - U.S. tariffs on partner country's goods *trade-weighted average computed by PIIE.
Furthermore, the process of raising tariffs to reciprocal levels entails different tariff levels across thousands of product categories, creating a complicated backdrop for negotiations. Negotiating individually across trading partners is a massive undertaking. Importantly, this is not just about the bilateral tariff rate. The administration thinks tariffs are just one of the ways countries impact trade, hence the talk about value-added tax (VAT). To see who might be impacted, focus on the bilateral deficit. In this respect, China is the key target, but Vietnam, Ireland, Germany, Taiwan, Korea, India, Mexico, and Thailand, among others, could see higher tariffs.
Responses: Why are markets moving as much as they are? How are trade partners reacting?
Anecdotally and from market moves, investors were clearly dismissive of the risks and discounted tariffs as a “negotiating tool.” A January survey of our clients in the region suggested most were not expecting Trump’s tariffs on China to reach his promised 60% level, reflecting general ambivalence about the impact should they actually get implemented. Market pricing told a similar story. Compared to 2019, headlines around trade generated far less movement this time – almost as if the market became desensitized.
APAC CLIENT SURVEY RESPONSE TO QUESTION: WILL PRESIDENT TRUMP IMPLEMENT 60% TARIFFS ON CHINA IN 2025?
%
Source: J.P. Morgan Private Bank. Data as of January 2025.
However, recent market moves are more nuanced than purely reacting to President Trump turning the tariff switch “on” or “off.” While tariffs are generally associated with a stronger U.S. dollar relative to other currencies, markets have instead been more focused on the negative growth impact, propagating a selloff in U.S. equities and decline in U.S. Treasury yields, which have dragged the dollar lower. Developments elsewhere have also confounded clear directionality for markets:
- A shift in Europe’s attitude towards fiscal expansion, led by Germany’s planned defense spending, alongside a rally in European equities, have supported Euro strength.
- Persistent services inflation and relatively hawkish Bank of Japan takeaways have supported Japanese yields and pushed the yen stronger, alongside safe haven currency demand.
- Chinese equities have rallied, led by tech names buoyed by positive sentiment around China’s AI developments. China’s recently-concluded National People’s Congress (NPC) suggests a moderately supportive policy direction. The yuan has been kept broadly stable.
Repercussions: What are the paths forward?
Markets are clearly moving towards a more negative outcome – which leads to the question of just how bad tariffs are for the U.S. economy and at what point is enough in the price. The adjustment process and economic damage from such a policy path, while negative, is hard to gauge, not only in terms of growth and inflation, but also on corporate profits. At what point could the pain force the administration to back off? Statements from the administration so far indicate a greater willingness to put up with near-term downside (both in the economy and markets) as a necessary step in the restructuring process.
The economic impact will largely be determined by what results following U.S tariff increases – negotiation and resolution, or retaliation. While some could back down and buy more U.S. goods, others could retaliate – like Canada, Europe and China already have. If negotiations result in lower bilateral tariffs, there can be positive outcomes, but if tariffs stay up, or if a retaliatory trade war results, there could be serious negative repercussions for the U.S. and the global economy. A key factor is how willing countries are to follow through on deals to open markets, allow their currencies to appreciate, or buy more U.S. goods.
If retaliation largely results, the next question is where the so-called “Trump put” comes back into play. No one really has an answer, but we point to a few differences between this administration and Trump 1.0. First, re-election is no longer a primary goal, which allows the administration to pursue more sweeping policy shifts; second, it appears that President Trump believes this is genuinely the correct policy path for the country, and views himself as willing to push back against powerful corporate vested interests and see this agenda through.
China spotlight
Where does this leave China? China stands out as a unique case in the middle of the Venn diagram of U.S. interests. The administration is targeting unbalanced trading relationships and securing strategic supply chains – China sits at the intersection of both.
U.S. IMPORTS FROM CHINA HAVE FAR EXCEEDED CHINA’S SHARE OF GLOBAL TRADE
%
Source: International Monetary Fund (IMF). Data as of December 2024.
Thus it is no surprise that the administration has already raised tariffs by an additional 20% on top of existing tariffs from the last trade war. New policies have also been announced targeting investment restrictions and shipping.
CHINA FALLS AT THE INTERSECTION OF RECIPROCITY AND NATIONAL SECURITY
U.S. trade balance in goods and services by selected countries, millions, $USD
Source: Haver Analytics, OECD, Bloomberg Finance L.P., J.P. Morgan Private Bank. Data as of June 2024.
While a deal is possible, it does not appear to be a near-term priority for the administration, and indications are that the White House plans to address bilateral trading relationships with other trading partners before eventually addressing China. So far, Chinese markets have shrugged it off, but with a large part of China’s GDP growth coming from exports in recent quarters, a rise in protectionism would take a toll.
U.S. TARIFFS ON CHINA HAVE INCREASED BY MORE THAN THE ENTIRE PREVIOUS TRADE WAR
U.S. and China effective tariff rate, %
Source: PIIE, media sources, U.S. Federal Register, Bloomberg Finance L.P. Data as March 2025.
In terms of how China could respond to these risks, we look towards its economic and policy backdrop. The NPC delivered a moderately positive outlook for the economy and markets. To recap the key messages:
- 2025 GDP growth target kept at 5%.
- Fiscal deficit set at a higher 4% of GDP for the first time.
- Supporting domestic consumption at the top of the agenda.
- Policymakers have pledged to do more to support the private sector and rectify excess supply.
Fiscal policy, particularly the expansion of the central government balance sheet, was emphasized. After taking into account the various special bond issuance programs and quasi-fiscal spending, we estimate that overall support from fiscal policy to the economy could rise by as much as 2ppt, some of the highest levels outside of Covid and the 2008 crisis.
The second positive highlight is the emphasis on domestic consumption, with a doubling of policy support for the ‘trade in’ program, which was successful last year.
AN EXPANSION OF THE TRADE-IN PROGRAM MAY LIFT RETAIL SALES IN 2025
RMB billions
Source: Bloomberg Finance L.P., J.P. Morgan Private Bank. Data as of February 2025.
In addition to the moderately supportive policy direction, we also note that the tone from the meeting is more pragmatic. Policymakers highlighted weakness in domestic demand and extreme uncertainty on the external front. We think this means that they likely have prepared further policy support that can be rolled out if domestic demand does not recover or if the trade war worsens. Potential housing market policies include financial guarantees for property developers, and expanding the central bank’s direct support for housing de-stocking. More concrete deregulation could also boost business confidence.
Investment implications
As tariff noise continues, risk-off sentiment could persist. Gold is likely to be supported or pushed higher, U.S. equities may be choppy in the near term, and global equities (particularly in Europe and Asia) are likely to see weakness once/if tariffs kick in. The dollar will likely be pushed and pulled by the forces of tariffs (strengthening the dollar) and growth/yields (weaker growth push down longer-dated yields and weaken the dollar).
As we highlighted in our 2025 Outlook, portfolio resiliency is key for investors in this uncertain market. Gold, uncorrelated hedge funds, real assets (such as infrastructure), unconstrained fixed income, and domestic-focused equities could outperform.
All market and economic data as of March 14, 2025 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
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Let’s delve into the reasons behind tariffs, take stock of market moves and potential responses from trading partners, and examine the paths forward amid a potential shift in the global economic order.
Alex Wolf
Head of Asia Investment Strategy
Julia Wang
Global Market Strategist
Weiheng Chen
Global Investment Strategist
Published Mar 14, 2025
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