On the 2nd of April 2025 Donald Trump announced reciprocal tariffs on the whole world starting at a 10% baseline tariff and going up into the mid-thirties for countries like Vietnam and Thailand. For China, the effective tariff is 145%. This means that if American companies import something from China, they will pay 145% import tax. The rationale behind this move by Trump is to, firstly, level the playing field when it comes to international trade; other countries charge import tariffs on American goods, so America will charge import tariffs on the goods that they export to America. Secondly, Trump wants to bring manufacturing back to the US.
The introduction of these tariffs has sent markets tumbling as greed turned into fear. Let us consider some of what is happening:
- Many believe that resetting the US trade policy is a good thing. The USA is the second most free economy in the world, so bringing its economy more in line with the rest of the world is not that far-fetched.
- Many believe that the way Donald Trump is doing it, is not the way it should have been done.
- There is more than meets the eye when it comes to China. It is not only about the tariffs. China retaliated to the tariffs imposed by America by imposing higher tariffs on the US; and when Trump decided to put a 90-day pause on the reciprocal tariffs, he excluded China from this reprieve.
- The USA is in a strong position with full employment and massive investment flowing into the country.
- The shorter-term negative impact of the tariffs is the uncertainty it creates. That is why we see stock and bond prices deteriorating.
- The longer-term negative impact of the tariffs is the reputational damage it is causing America.
- The potential damage it might cause is some “accident” happening that is not clear at the moment.
- Many believe that this is all a bargaining tool that Trump is using to get the world to lower their import tariffs. If this is the case, he is playing a dangerous game with not only his own money, but with a well-established, decades-old international trading system that enhances productivity and supply chains.
- The Trump administration is made up of people who are highly educated and who understand finance. They come from the investment industry and one would assume that they know the risks of bumping that first domino.
Although we have seen some scary headlines in the media over the past week or two, we once again have to look at the actual facts:
- The JSE All Share index is up 2.3% for the year to date and up 14% over a 12-month period. Not bad.
- The S&P500 is down 10% year to date and up 1% over a 12-month period, not a disaster.
- The German DAX is up 3% year to date and up 14% over a 12-month period, not bad.
- In Hong Kong the market is up 3% year to date and 20% over a 12-month period, rather good.
We have to remember that the average annual drawdown in the S&P500 over the last 75 years has been 14% and the average annual return over a ten-year period is 10%. Once again we are in a situation where the markets are giving up some of their extraordinary performance over the last few years, creating some opportunities and reminding us that it is not a straight line up. The worst case scenario will be if Trump persists with these punitive tariff measures and the US economy goes into a recession. This will harm the normal man in the street more than the wealthy, going against everything Trump is trying to establish.
We believe that sanity will prevail and that Trump will negotiate lower tariffs with all the countries except perhaps China. We believe that the USA will not go into a deep recession and that the medium- to longer-term outlook for shares and bonds are still positive; although things will be different and we might see a very volatile market until some more clarity has been established.