Tariff delays: Uncovering the most impacted sectors

This week’s market moves were dominated by tariff news and expanding defense budgets in Europe.

In the United States, large-cap stocks are heading toward their worst weekly close since September. The S&P 500 (-3.6%), NASDAQ 100 (-4.0%) and small caps (Solactive 2000 -4.2%) all traded down amid tariff volatility.

It was a tale of two equity markets this week. In Europe, Germany is set to amend its constitution to exempt defense and security spending from fiscal limits, unlocking hundreds of billions of euros for investments. Chancellor-in-waiting Friedrich Merz plans a €500 billion infrastructure fund for transportation, energy and housing over 10 years. This shift in fiscal policy aims to bolster European defense in response to changes in U.S. policy. The move is expected to provide a boost to the European economy, and equities in the region rallied. The DAX Index (+7.8%) had its best one-day performance since 2022 on Wednesday, and is heading toward its best weekly finish since 2020.

In fixed income, the yield curve steepened as the 2-year yield (3.96%) dropped three basis points, and the 10-year yield (4.28%) rose seven basis points. In Europe, the European Central Bank cut rates by 25 basis points to 2.65% on Thursday, and signaled an arrival at a more neutral policy stance. That, combined with the fiscal spending, has made investors more bullish on the growth outlook. As a result, yields across Europe rose, and benchmark German 10-year bunds soared 30 basis points, the most since 1990 (or the biggest sell-off since the fall of the Berlin Wall). Stronger growth extended to the currency, and the euro gained to its strongest level since November.

Below, we dive deeper into what changes have come to tariff policy and what it means for portfolios.

Tariffs: Where we are and what it means

Tariffs have dominated the headlines this week, with new levies, old tariffs removed or adjusted, and everything in between. To help you stay up to speed, we recap where trade policy stands and then put the tariffs in context by the numbers below:

Here’s what was announced this week:

• Tuesday, March 4: 25% tariffs went into effect on all goods from Mexico and Canada (Canadian energy will be taxed at 10%), as well as an additional 10% tariff on all Chinese goods.
• Wednesday, March 5: United States-Mexico-Canada (USMCA) compliant auto imports from Canada and Mexico would be exempt from tariffs until April 2.
• Thursday, March 6: The 25% tariffs on goods and services under the USMCA trade agreement were delayed until April 2.

Needless to say, there have been a lot of moving parts and announcements. Below is a snapshot to date of the tariff announcements you should know.

There have been a lot of figures thrown around this week, so to help make things tangible, we put the tariffs in context by the numbers:

• The United States imported approximately $3.25 trillion worth of goods in 2024; $1.3 trillion of those imports were from the targeted tariff countries (Mexico, Canada, China).

• The total trade deficit (exports minus imports) was approximately $1.2 trillion.
• Of that $1.2 trillion trade deficit, nearly half ($529 billion) is attributed to the countries targeted by recent tariffs.

• Looking one level deeper at the sector level, manufacturing—which includes computer components, transportation, machinery, petroleum products and more—from tariff-targeted countries drives most of the imports. Of the $1.3 trillion worth of products the United States imported from China, Mexico and Canada in 2024, manufacturing accounted for $1.1 trillion, or 86%.

We dissected the biggest drivers of the imports across subsectors. Notably, each of the countries targeted by tariffs is a dominant provider of subsector imports.

• Mexico accounts for $95 billion of U.S. car imports (about one-third of U.S. total car imports).
• Canada accounts for $98 billion of crude petroleum imports (more than half of U.S. total petroleum imports). For more details on the energy market, read Heliocentrism, the latest annual energy paper from Michael Cembalest, our Chairman of Market and Investment Strategy.
• China accounts for $52 billion of phone imports (43% of U.S. total phone imports).

With history as a guide, we can analyze the 2018–2019 trade war, what was implemented, and what it meant for the companies across sectors that were heavy importers. The United States enacted several tariffs primarily targeting China, but also affecting other countries.

• Steel and aluminum tariffs: In March 2018, the United States imposed a 25% tariff on steel imports and a 10% tariff on aluminum imports from most countries, citing national security concerns.
• Section 301 tariffs on China: These tariffs were implemented in several rounds, targeting a wide range of Chinese goods:
  • First round (July 2018): A 25% tariff on $34 billion worth of Chinese goods, including machinery and electronics.
  •  Second round (August 2018): A 25% tariff on an additional $16 billion worth of Chinese goods.
  • Third round (September 2018): A 10% tariff on $200 billion worth of Chinese goods, which was later increased to 25% in May 2019. This round targeted consumer goods, electronics and furniture.
  • Fourth round (December 2019): A 15% tariff on $120 billion worth of Chinese goods, which was later reduced to 7.5% as part of the Phase One trade deal.
• Tariffs on European Union goods: In October 2019, the United States imposed tariffs on $7.5 billion worth of European goods, including aircraft, wine and cheese, following a World Trade Organization ruling on illegal EU subsidies to Airbus.
• Tariffs on Canadian and Mexican goods: Although initially imposed, the steel and aluminum tariffs on Canada and Mexico were lifted in May 2019 as part of negotiations for the United States-Mexico-Canada Agreement (USMCA).

Amid all of the tariffs outlined above, five of the top 10 importing industries experienced a decline in import costs as a percentage of total costs. For those industries that did experience a price increase, none saw a climb greater than 2%. Although the tariffs were manageable for companies in the last round—and most companies could fairly easily pass the increased costs on to consumers—this time around, the effective tariff rate has increased significantly, and we expect the impact to be more onerous.

What does it all mean? The situation remains extremely fluid, with tariffs being announced and delayed all within the same week. We continue to evaluate our base case, but risks look large. Our base case accounts for durably higher tariff rates on Chinese imports and other products that are deemed to be important to national security, but the risk is clearly for higher tariff rates on a wider range of countries and goods.

Our strongest view in this scenario is that uncertainty will persist and headlines will continue to move the market. We think adding resilience is the most important thing to do for portfolios in this environment. We advise investors to diversify across geographies, themes and sectors. Consider uncorrelated assets such as gold and hedge funds, which have rallied this year and have shown little sensitivity to trade-related announcements.

Questions on how to add resilience to your portfolio? Reach out to your J.P. Morgan team.