Tariffs on the rise: Implications for your portfolio

Tariffs were originally introduced in the United States in 1798 to raise federal revenue and enhance domestic competitiveness. Between 1798 and 1913, tariffs accounted for 50% to 90% of U.S. federal income.¹ Today, that figure is only 2%. For revenue, income taxes are now preferred to tariffs because they are progressive rather than regressive. Additionally, competitiveness, trade rerouting, floating exchange rates and retaliation generally limit the domestic benefits of modern-day tariffs.

So why the resurgence? Our base case is that new U.S. tariffs are on the way as part of an effort to enhance supply chain security.

Overall, we expect the United States to increase tariff rates on imports from China significantly, from 20% to 50%. While we do not believe blanket duties on all imports are likely, tariffs on specific goods or trading partners are. Trade partners would likely retaliate with tariffs of their own, exacerbating the negative shock to global trade.

This makes tariff policy perhaps the biggest risk to global growth today. Still, it should be noted that individual importers often receive exceptions to tariffs, which can soften their economic impact. Importantly, we remain positive on U.S. assets, with some sectors and asset classes standing to benefit from tariffs.

To better understand the situation, we will outline the state of supply chains today and the potential policy paths forward, along with our expectations.

Where global trade stands today

Since China joined the World Trade Organization in 2001, the share of goods that are produced in the United States and then consumed domestically has fallen by about 10 percentage points.

The United States has offshored both low value-add production and inputs needed for critical industries. It is now extremely reliant on imports of critical minerals used in artificial intelligence (AI), electric vehicles (EVs) and renewables, importing as much as 90% of rare earth metals and manganese.

Control of these industries gives China a new bargaining position with the United States, given the risk of supply chain disruption. This is a clear difference compared to the trade war in 2018–2019. On December 2, 2024, China’s Ministry of Commerce announced what amounts to a ban on exports of germanium, gallium and antimony (three strategically important metals) to the United States, and tightened graphite exports. It is a warning sign that China is willing to use these critical dependencies to respond to U.S. trade restrictions.

Potential paths forward

While policymakers could attempt to de-escalate trade tensions and allow supply chains to continue integrating globally, the trend we see is in the opposite direction. We believe the United States will continue with a two-pronged approach of tariffs and industrial subsidies, combining short-term barriers to global supply chain integration with a long-term plan for building industrial capacity domestically (or with U.S. allies).

In the short term, raising tariffs slows further integration. However, over time, supply chains are often rerouted through other countries—making it very difficult to guarantee that the United States will not have to rely on production from China.

Domestic production would be the best way to reduce this dependence, and the United States is investing in those capacities. U.S. construction spending on manufacturing more than doubled after the announcement of the CHIPS and Science Act and the Inflation Reduction Act in 2022. Whilst still uncertain how the incoming administration will alter these bills, we expect them to further support the buildout of manufacturing capacity. This increase was concentrated heavily within the semiconductor sector (see Figure 11). For goods that are hard to produce domestically, such as rare earths, the United States may also look to diversify supply chains to friendly countries.

Investment implications

Tariffs are likely to lead to higher inflation without corresponding economic growth. The New York Federal Reserve found that the 2018–19 U.S.-China trade war raised prices by 0.3%.⁴ In the next two years, we expect prices to rise by 40 basis points⁵ as a result of higher tariffs on imports from China—notably, this assumes no tariffs on imports from other countries.

Because of this higher inflation, we think the Federal Reserve will leave interest rates higher than it otherwise would have. We see the Fed cutting its benchmark rate to 3.5%–3.75% by the end of 2025, with risks skewed to the upside, and we expect the 10-year U.S. Treasury rate to reach 4.45% by year-end.

We expect U.S. equities to continue to outperform the rest of the world in 2025. The net impact of the tariffs and the implications of the administration’s policy goals are likely to benefit the industrial sector as well as the utility sector, where infrastructure buildout will be required.

We expect the dollar to remain strong. U.S. dollar strength is likely to be particularly acute relative to the euro and the Chinese renminbi, as it was in the last trade war.

We can help

We continue to monitor developments in tariffs and trade policy. To learn more about our insights and how these developments affect our investment views, contact your J.P. Morgan team.