The tariff wars explained. What do they mean for your portfolio?

A little tariff clarification.

The phrase being thrown around by the market at the moment is that ‘nobody wins a tariff war’, and this is true. Both sides lose in the short term, but there are ups and downs associated with tariffs and ultimately, we get a slight rebalancing of global trade. Trump wants more internalisation with regard to industry, and that is ultimately what will happen but here is why, how, and what are the consequences.

Why

Despite what you might hear, it’s not madness. While it’s very easy to say that Trump is mercurial and that what he’s doing makes no sense, there is actually a reason behind his plan (you might not agree with it, but many Americans do). He also might not realise it, but he’s essentially calling a Brexit for the US on the rest of the world. A USexit. Close the boarders and change all trade deals by increasing tariffs. Increase strength by decreasing reliance on other countries and increasing self-sufficiency.

The US has a huge trade deficit and it’s getting worse. In 2024 the goods trade deficit for the US was $1.2 trillion. This means the rest of the world is generating a lot of revenue by selling to America. It’s the largest economy in the world with the 3rd largest population in the world so this isn’t too surprising to us in the UK but China’s exports to the US make up about 3%-4% of China’s GDP (compared to 0.5% for the US).

China buys a lot of goods from the rest of the world and is crucial to global trade. However, it’s relationship with the US is fairly one-sided (in terms of trade). This isn’t necessarily an issue, unless you see things through the eyes of zealous patriot like Trump. The chart below is what the President doesn’t like the look of.

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.

US consumers have benefited from this globalisation, but it now depends more on imports than ever before, and the President does not see this as a positive.

While China does have the largest trade gap of $-295.4 billion, the EU isn’t far behind with a gap of $-235.6 billion, which is why Europe is now in Trump’s crosshairs and why it is unlikely he will let this go. Mexico is $-171.8 billion, Vietnam $-123.5 billion and Canada was $63.34 billion.

The UK’s trade deficit with the US is fairly balanced.

How

On 1 February, US President Donald Trump signed executive orders imposing substantial new tariffs on imports from Mexico, Canada, and China. Two days later, the tariffs against Mexico and Canada were suspended for one month, but the additional levies on Chinese imports took effect on 4 February, prompting retaliatory measures by China.

The UK and the EU were not included in President Trump’s initial salvo, but he has indicated that tariffs on EU products in particular may be forthcoming given the EU’s large trade surplus with the US. The uncertainty alone is likely to weigh on an already struggling European economy.

Tariffs aim to control the number of imports, protect domestic industries and generate income for governments. There are many countries around the world who impose tariffs as a protectionist measure, especially for agricultural products to help protect the domestic industries. However, tariffs can have subsequent impacts on the economy, markets and international relations. Trump has claimed these tariffs are being implemented due to the trade surpluses, as the countries sell more to the US than what they import from the US.

Once the tariffs are imposed these create trade barriers and make it more expensive to import into the US, which means that these products could be diverted from the US to other markets around the world.

The main impact will be more noticeable if the two largest economies in the world now escalate. So far, the tariffs on Chinese imports are so far more moderate than many of the proposals floated by President Trump. Similarly, the response from China has been restrained so far, including tariffs on some US energy and industrial exports, export bans on critical minerals and measures targeting specific US companies. (For example, Goldman Sachs estimates China’s actions equate to an additional 12% tariffs on $14bn of US goods, compared with the 10% additional tariffs on $525bn on Chinese shipments to the US).

Escalation risk: the executive orders include a clause allowing the President to increase tariffs if the targeted countries retaliate. Analysts at Barclays Capital note that the intensification of trade competition between the US and China in recent years, against a backdrop of rising geopolitical tensions, suggests there is a small prospect of a “Phase Two” US-China deal. And even if an agreement were reached, it is likely that existing tariffs would remain in place.

Consequences

Impact on the global economy is unknown as the exact tariffs are unknown. Canada, Mexico and the EU are large agricultural exporters and if trade barriers into the US are increased it will likely mean that these products are diverted elsewhere in the world where it is less expensive to trade. There is a chance that more products could be diverted to the UK in this scenario. Whether this is good or bad is down to personal opinion.

Tariffs also lead to inflation, as they make importing goods more expensive. This will have an impact on prices, especially on those cheaper products that may have been imported, or on countries who are dependent on imports to meet the needs and wants of the population.

Other impacts would include slower growth in the global economy although maybe only initially, as a rebalancing occurs. Monday 3 February saw stock markets down significantly with the announcement of the tariffs as the market hates uncertainty. They have since bounced back and have actually so far, had little impact.

Both the Canadian dollar and Mexican peso plunged, and the US dollar strengthened as with higher inflation will come higher interest rates and, subsequently, higher cost of borrowing. The higher prices could also hinder demand and have a knock-on effect on businesses and consumer spending (which will in turn lower inflation – you have to love how the economy manages itself).

Despite being well trailed, the scale and speed of the recently proposed tariffs took many observers and financial market participants by surprise. The announcement was notable for being the first time emergency powers have been used by a US president to impose tariffs - and with almost immediate effect - in contrast to more conventional processes involving US trade authorities.

Hints from President Trump that Europe might be next in line for tariffs could weigh on already weak growth prospects. The EU in particular appears likely to be a target for President Trump, given its relative importance as a US trading partner (accounting for around 15% of US imports vs around 2% for the UK), and the fact that the EU enjoys a large surplus in goods trade with the US. Analysts estimate that measures to target the EU’s automotive sector and “critical imports” could shave around 0.5% points off EU growth, while a 10% tariff rate on all US imports from the EU could knock around 1% point off EU growth (assuming retaliation).

What does it all mean for us?

Don’t panic, as we’ve mentioned, the UK might fare better than most and this is why the FTSE (for the first time in a very long time) is outperforming its peers – it’s currently seen as a relatively safe haven. This is due to the fact that UK-US goods trade is broadly balanced (statistical quirks mean both countries report a small surplus), the UK is not expected to be a target of US tariff escalation.

However, assuming the US did seek to raise tariffs against the UK, some sectors would likely be more exposed than others. For example, analysis from Oxford Economics shows that exports of pharmaceuticals, mechanical power generators and automotive products display both above-average reliance on the US export market and are also large (accounting for more than 5% of UK goods exports).

The duration and perceived permanence of tariffs will influence reactions in financial markets and the corporate sector, and hence the overall economic impact. If tariffs turn out to be limited in scope or temporary in nature, the impact would be less severe. Analysts’ current forecasts assume a fairly modest impact on US growth and inflation although both will be impacted negatively.

A rule of thumb is that every 1% point increase in the average tariff rate would raise US core inflation by around 0.1% points. As things stand, the tariffs are unlikely to do more than prevent US inflation from falling back significantly in the coming months, with a slight, negative impact on GDP growth. If the tariffs against Canada and Mexico do come in, inflation could rise nearer to 3% by end-2025, with the hit to US GDP growth more significant, at around 0.4% points.

Due to the impact in inflation US financial markets have priced in a more cautious path for interest rate cuts in the near-term. In the medium-term, however, higher tariffs could drag on growth and prove deflationary, meaning the long-term outlook for inflation is more uncertain.

The impact on the dollar depends on three factors. Raising the cost of imported goods relative to domestically-produced goods, tariffs have a direct effect by reducing the demand for imports and foreign currency. The prospect of retaliatory tariffs work in the opposite direction, however, so the net impact via this channel is uncertain. Second, amid wider market volatility, the US dollar is likely to benefit from its “safe haven” status. Third, interest rate differentials between the US and other key markets are likely to favour dollar-based assets.

For the UK we should only see a limited macro hit. Outside of directly affected sectors, the macroeconomic implications will be limited by the fact that 70% of total exports to the US are services exports, which should be largely unaffected by tariffs. Oxford Economics previously estimated a scenario in which the US imposes a global 10% tariff, finding that even these extreme measures would shave just 0.2% points off UK growth at its peak.

We hope this clears up some of the noise out there with regards to ‘Trump’s Tariffs’. As always, we are often shown a one-sided story. It’s not good news, but we should be able to weather the storm. However, there is still the unknown. Trump is prone to saying things without thinking them through, and there is always the chance of escalation at any moment. Tread with caution.

TPP portfolios are certainly doing this. After a great start to 2025 with most trading strategies up between 5%-10% already, profits have been taken and traders are wary of what might come next. This is where our portfolios differ from the crowd’s. We don’t have to just leave your money in the market and do nothing about it. We actively trade it and have no issues with moving to cash in the short term if the global economy comes under fire. Protecting capital is key.

All the assumptions above are based on what we do know, not what we don’t.

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Disclaimer: The views expressed in this article are the author’s own and should not be considered in rendering any legal, business or financial advice.

Past performance may not be indicative of future results. Therefore, you should not assume that the future performance of any specific investment or investment strategy will be profitable or equal to the corresponding past performance.

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