Market Update

Market Update

07.04.2025

Weekly Brief Special Edition

The US president’s reciprocal tariffs were headier than analysts’ worst-case scenarios. No wonder: they were calculated in a way that no one expected. The immediate result: global stock markets headed south, and major institutions upped their recession odds. Is the impact of these levies as serious as the headlines suggest? Let’s take a look at why and discuss what this means for investors.

What’s the policy?

The US president’s primary goal is to balance out “trade deficits” – that’s the difference between the amount another country imports from the US and exports to America. By encouraging more companies to move supply chains onto stateside soil, as well as limiting the appeal of foreign goods, the president hopes to bring more jobs and money to American manufacturing firms. Plus, with the predicted hundreds of billions of dollars expected to be made from tariffs, he could cut taxes for Americans.
Every single import into the US was hit with a 10% tariff starting from April 5th, for starters. Then from the 9th, bespoke rates will increase levies for over 60 trade partners.

How were these tariffs calculated?

Economists and armchair number-crunchers alike took to social media forums to speculate on the method. After all, the figures didn’t seem to align with the president’s previous pledge to match a country’s tax on the US and (to the best of his ability) non-tariff barriers like regulations, quotas, or domestic subsidies. The United States Trade Representative Office revealed it used a “crude” formula that divides a country’s trade surplus with the US by its total exports, based on data from the US Census Bureau for 2024. That number was then halved – and hey presto, you get the “discounted” rate. Note, too, that the system didn’t account for services, an industry dominated by the US in many parts of the world. Most analysts were surprised, expecting the leaders of the world’s biggest economy to use a more refined approach for this potentially economy-crushing initiative.

Take China as an example. The country had a trade surplus of $295 billion with the US last year and total exports worth $438 billion. Divide the first by the second, and you get 68%. Halved, that means a tariff rate of 34%. Add the 20% tariff China already pays, and the total levies land at 54% – one of the highest fees.

Vietnam – a key base for many global manufacturers – received a punishing 46% tariff. Taiwan got 32%, Europe 20%, and Japan 24%. Tariffs affected countries where the US runs a trade surplus too: they’ll pay the base 10%, a decision that seems to undermine the principle of fairness touted by the government. Not even tiny islands and remote locations escaped the board, with an uninhabited island near Antarctica and a military base on the Indian Ocean slapped on their wrists, too – and yes, Gibraltar is included on the list.

There were, however, a couple of exceptions. Canadian and Mexican imports that meet USMCA standards are indefinitely exempt from new tariffs, although their previous 25% rate will stay. The president declined to upgrade existing tariffs on steel (25%), aluminium (25%), and vehicles (25%).

What’s the economic impact?

Remember that it is the US importer that is paying these tariffs. Companies facing this will have to choose between increasing prices and probably selling fewer or keeping them steady and squeezing their profit margins. In the long term, they could move production facilities to the US, sure. But that’s an expensive and drawn-out process. It can take eight years to build a chipmaking plant, for example. Plus, trade rules and relationships could change at any time, making it riskier to commit to long-term plans.

Now, some believe this is a negotiation tactic, with the president eager to push trading partners into making certain policy concessions. There seems to be some truth in this, with the US saying it’s open to discussions and Brazil, India, Thailand, and Europe all indicating a desire to negotiate.

However, despite all this talk of negotiation, Europe’s Foreign Council on Trade will meet today (on the 7^th April), when it’s likely to carve out its own response to US tariffs. Others are expected to follow, in a string of tit-for-tat moves that could easily lead to a trade war.

Consumer sentiment is at a twelve-year low, reflecting mounting concern among everyday Americans about the impact of the new government’s policies. The experts don’t seem much cheerier. Economists have slashed forecasts for plenty of economies, with Fitch expecting many countries to end up in a recession if new tariffs last. Many analysts believe that these levies will increase inflation and decrease growth.

What’s the impact on financial markets?

Investors fled from Global stocks after the announcement, with stateside stock markets suffering bigger tumbles than other international ones. The US dollar fell sharply against other major currencies, too. The carnage has been widespread, and the repercussions felt globally.

The Vietnamese stock index fell by 7%. Plenty of brands with supply chains linked to the country saw their share prices affected, as well. Lululemon – which sources around 40% of its products from Vietnam – fell 13%. Nike saw a 12% fall, as nearly half of its supply comes from Vietnam and China. Adidas declined by 12%, too.

Global financials weren’t exempt. US banks like JPMorgan slid by almost 10%, as did Japanese and European ones. Tech stocks joined them: Apple, for example, wobbled 9%, as its main manufacturing hubs are in China, Taiwan, India, and Vietnam.

What can you do?

As always, it’s difficult to predict what will happen next. The US government believe that the effects of tariffs will be short-lived pain worth persisting through to forge a new global trade system. But it’s a risky move, with a recession now more likely, according to the experts.

There is a lot of nervousness out there – but there is also hope. Bad news will be punished but investors will also be looking for even the smallest positive signals of negotiations.

It will be difficult to identify specific investment implications, but we can be sure that financial markets will likely respond quickly to developments as they unfold. Long-term investors should be cautious against reacting with short-term changes to well-considered investment plans.

The best line of defence against volatility is to keep perspective, focus on the long term and maintain a well-diversified portfolio that reflects your goals and attitude to risk.

Latest from Schroders’ Group CIO, Johanna Kyrklund

For clients invested in our Global Discretionary Portfolio Management service, here is the latest from Schroders’ Group CIO, Johanna Kyrklund.

"Certainly, Trump’s opening salvo points to higher tariffs than we were expecting, and our economic growth forecasts are being adjusted downwards.

This leads us to reduce our equity exposure, and we see value in government bonds as a hedge against the risk of recession for the first time in this cycle. We continue to like gold as it benefits from both weaker growth and the more structural risk posed by rising debt levels.

Going forward the reaction of the rest of the world will be critical. The countries on the list will have to make their decision either to retaliate and escalate the war – or to contemplate reducing their trade imbalance with the US. How long this will take will also matter for the market.

But let’s also try and tease out some positives. Trump’s framework, laid out on a physical chart, is clear. One might dispute the approach – of using each country’s trade deficit with the US – but by applying the principle of imposing 50% of the calculated rate they have laid out a clear starting point for negotiation. This might feel like a game of snakes and ladders, but at least we are beginning to understand the rules. That gives markets a basis for pricing these risks."

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