Investment Strategy
Proposals versus policy: How to deal with uncertainty
U.S. stocks and core bonds produced positive returns on the week. But where we ended the week doesn’t capture the anxiety felt amid whipsawing headlines out of Washington, DC.
Tariffs, a cancellation of Chinese contracts at the Panama canal and a U.S. takeover of Gaza were just some of the proposals that caught markets’ attention this week. Below we review each, and offer thoughts on what you can do in portfolios to potentially insulate against the associated risks.
The week started with tariffs. Last weekend, President Trump announced tariffs approximately five times the size of his first term’s trade actions. They are also equivalent to almost half of U.S. imports and effectively a 5% universal tariff. If these tariffs are implemented and sustained, it would be a meaningful negative supply shock to all parties.
The announcement also stipulated that 25% tariffs on most goods imported from Mexico and Canada would be implemented on February 4. This didn’t end up happening.
After some negotiation—Mexico agreed to send 10,000 National Guard officers to the border to stem the flow of fentanyl and migration into the United States, and Canada appointed a new fentanyl czar, listed cartels as terrorist organizations and launched a joint “strike force” with the United States—deals were struck to delay tariffs on both Mexico and Canada by a month.
What did ultimately go into effect from the weekend announcement was a 10% additional tariff on all goods from China.
In response, Beijing announced its own tariffs on the United States, including a 15% levy on less than $5 billion of U.S. energy imports and a 10% fee on American oil and agricultural equipment, set to kick in on February 10. The delay in implementation potentially leaves room for negotiation, and President Xi Jinping’s response appeared carefully calibrated to avoid creating further headwinds for China’s economy.
Tariffs imposed by China and the U.S.
$ billions
Sources: China Customs, Bloomberg Finance L.P. Data as of 2025.
Why are tariffs being used? Rather than hypothesize, let’s look at the White House’s stated reasons in its factsheet.
1) America’s economic position enables it to use tariffs as a trade tool. Exports make up a much smaller component of U.S. GDP (7%) than its trading partners (Canada 27%, Mexico 33%, China 19%), making the potential negative growth shock of tariffs less impactful to U.S. growth.
Why can the U.S. levy tariffs?
Merchandise exports % of GDP
Sources: Haver Analytics, IMF. Data as of December 31, 2023.
2) Illegal immigration has surged into the United States. Border encounters peaked at ~350,000 in a single month in late 2023. That number has since fallen, but still remains double the pre-COVID level. Encounters at the southwest land border with Mexico make up ~75% of the total over the last three months, while those at the northern border with Canada account for only ~10% (interestingly, 15% of encounters come from non-land borders).
Border encounters declining, Mexican border makes up bulk of encounters
Number of border apprehensions, inadmissibles, and expulsions
Sources: Sources: U.S. Customs and Border Protection, Haver Analytics. Data as of December 31, 2024.
3) Fentanyl remains a nationwide crisis. Roughly 21,000 pounds of fentanyl were seized at the Southwest land border in 2024, compared to only ~3,000 pounds in 2019. Deaths from synthetic opioids including fentanyl more than doubled in the U.S. over the 4 years from 2019-2023. In 2024, the U.S. Treasury found that “since 2019, Mexican TCOs (transnational criminal organizations) predominantly import fentanyl precursor chemicals and related manufacturing equipment by air and marine shipping from the People’s Republic of China (PRC).”
2024 U.S. fentanyl seizures
Lbs
Sources: U.S. Customs and Border Protection. Data as of December 31, 2024.
4) Money laundering. According to the Treasury’s 2024 national money laundering risk assessment, Chinese money laundering networks are “now one of the key actors laundering money professionally in the United States and around the globe.” The State Department estimates that $154 billion in illicit funds pass through China each year.
These four issues from the White House factsheet were used as the justification for the tariff announcement, and the ties to China and Mexico seem clear enough. However, it is less clear how those issues directly relate to Canada. It made up only 10% of U.S. illegal immigration encounters, has had only about 50 pounds of fentanyl seized by the United States in 2024, and is not explicitly mentioned as a major money launderer in the 2024 risk assessment. However, recent comments from President Trump provided additional rationale for Canada’s tariff inclusion, such as the inability to bank in Canada1, and the blanket issue that the United States buys more from Canada than Canada does from the United States.
The U.S. has a negative trade balance with Canada, but a positive one excluding oil products
U.S. trade balance with Canada, $ billions
Sources: UN Comtrade, Bloomberg Finance L.P. Data as of January 14, 2025.
Actions so far show willingness from Mexico, Canada and the United States to work toward progress on the stated issues. On the other hand, the lack of immediate negotiations with China show the administration’s desire to act first and negotiate later. More evidence of the hard line taken by the United States on China was seen through Secretary of State Marco Rubio’s visit to Panama.
The U.S. applied pressure in Panama in an attempt to decrease Chinese influence. Panama is contemplating the cancelation of its contract with Hutchison Ports PPC, a subsidiary of Hong Kong–based CK Hutchison Holdings Ltd., which operates two key ports near the Panama Canal. This consideration arises amid the Trump administration’s concerns about China’s growing influence over the canal, a vital waterway where 75% of cargo is U.S.-bound or originating.
U.S. and China depend most on the Panama Canal
Top five countries, long tons of cargo transiting the Panama Canal in 2024
Sources: Panama Canal Authority, Bloomberg Finance L.P. Data as of December 2024.
The canal is a significant revenue source for Panama, contributing nearly $5 billion (or 4%) annually to the country’s GDP. As its biggest trade partner and source of foreign direct investment, the United States holds significant economic leverage over Panama.
The situation underscores the geopolitical tensions surrounding the canal, with the United States viewing China’s involvement as a potential military and economic threat.
President Trump proposed a U.S. takeover of Gaza. The idea was largely welcomed by Israel’s Prime Minister Netanyahu as a means to enhance security following the conflict with Hamas. However, the proposal was condemned by members of the international community as an infringement on Palestinian rights and a potential violation of international law.
The proposal has sparked debate about Gaza’s future and the broader Israeli-Palestinian conflict, with ceasefire talks ongoing.
What does all this mean for investors? The events of this week don’t change our constructive U.S. equity view, but they highlight the increased uncertainty and geopolitical risk of the current environment.
The end goals for tariffs, China relations and foreign policy more broadly remain unclear. Progress with Mexico and Canada implies tariffs may be more of a negotiating tool (for now) with our closest neighbors. However, the tariffs on China (and their lack of delay) signal they are more likely an economic tool aimed at protecting national security.
In the face of uncertainty, investors might consider owning assets that can potentially enhance portfolio resilience, perhaps through income and/or uncorrelated returns.
An asset that has shined throughout the uncertainty is gold, for example. However, it's important to note that gold can be subject to price volatility and does not generate income like dividends or interest from other investments. The precious metal steadily climbed to all-time highs, while tariff-affected currencies swung wildly.
Amid the currency volatility, gold rose to all-time highs
Currency moves since January 31, 2025, %
Source: Bloomberg Finance L.P. Data as of February 6, 2025. Note: all currencies measured against the U.S. Dollar.
Beyond the diversification benefits that gold may bring to portfolios, we see two additional reasons why gold’s rally could continue in the year ahead:
- Demand from less price-sensitive buyers: 81% of central banks surveyed in 2024 by the World Gold Council said they plan on increasing their gold allocations over the next 12 months. Notably, 0% plan on decreasing their allocations.
- Limited supply: Current estimates, including the gold reserves still underground, total 244,040 tonnes of gold that will ever be available on Earth. If brought together, all the gold deposits would fill just a little over three Olympic-sized swimming pools.
To explore ways to enhance your portfolio’s resilience specific to your own set of goals, contact your J.P. Morgan team today.
1Note on banking in Canada: Foreign-headquartered banks can either operate in Canada as subsidiaries or branches. Banks that are authorized to operate on a branch basis are not permitted to accept deposits of less than $150,000, limiting deposit intake to just the largest clients (source: Norton Rose Fulbright).
All market and economic data as of February 2025 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.
We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.
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Here are some strategies to consider for managing your portfolio in light of recent news about tariffs and geopolitical developments.
Alan Wynne
Global Investment Strategist
Harry Downie
Global Investment Strategist
Published Feb 7, 2025
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