The Tariff War (2025)

Trump confirmed the tariff war

On April 2, President Trump announced that, in response to the United States’ ongoing trade deficits, he would impose a minimum 10% tariff on all imports beginning April 5, invoking the International Emergency Economic Powers Act of 1977. He also declared that higher reciprocal tariffs would be imposed on countries with the largest trade deficits with the United States: China (54%), the EU (20%), Japan (24%), South Korea (25%), and Vietnam (46%). Canada and Mexico will also be subject to a 25% tariff, except for goods covered by the USMCA agreement.

The existing 25% tariffs on steel, aluminum, and automobiles will not be affected by the new tariffs. Although they are expected to be reduced through negotiation, the average effective level of the new tariffs is estimated to be at least 10%. If they remain near the proposed maximum level, they could lead to stagflation in the U.S. and a potential global recession.

Much ink has been spilled regarding the simplistic and unscientific calculation formula used to justify the tariff war: the deficit in the trade balance of goods—excluding services, since that is not relevant—between the exporting country and the US (see table above).

The S&P 500 has its biggest drop since 2020

The market reacted very negatively to these announcements during the trading session on April 3.

The S&P 500 fell 4.8%, recording its worst day since June 2020, and was 12.1% below its all-time high of February 19, clearly entering a market correction.

The Dow Jones Industrial Average also fell 4%, marking one of the largest declines since 2020.

The Nasdaq Composite lost 6%, with significant losses in tech giants such as Nvidia, Apple, and Amazon.

The dollar depreciated around 3%, going from 1.08 to 1.11 in just a few hours.

Meanwhile, gold reached a new all-time high of $3,167.57 per ounce, driven by demand for safe-haven assets amid economic uncertainty.

The declines spread to the rest of the world, with uneven impacts on countries or sectors depending on the potential interpretation of the impact of these policies. These declines add to a volatile period in which the MSCI World Index has fallen slightly less: 9.6% from its highs of February 18, 2025.

What are tariffs and their immediate effects?

Tariffs are taxes on imported products. They make money for the country imposing them, and this cost is borne by both foreign producers and local consumers (depending on how they react to prices).

They make global production less efficient, as they distort trade.

They generate stagflation (less growth and more inflation): they hurt the exporting country more (deflation) and make products more expensive in the country imposing the tariff (inflation).

They protect local businesses from foreign competition, but they may become less efficient. However, if the country boosts its economy with fiscal or monetary stimulus, those businesses can survive.

On the other hand, tariffs are necessary in contexts of conflict between great powers to ensure that the country maintains its own production capacity and help reduce dependence on other countries, both in products and capital, which is important in times of global tension.

What is the background of this tariff war?

Trump wants to correct at the same time:

• The imbalance in the US trade balance (imports-exports)
• An expensive dollar because it is the global reserve currency
• and, consequently, reduce the US’s high debt, which can be financed relatively easily because the dollar is the reserve currency. However, there are large holders of US debt from foreign countries, including China, and this is seen as a risk for the MAGA party.
• Another of Trump’s goals is to reindustrialize the US, that is, to force large multinationals, both domestic and foreign, to produce domestically to sell in the country.

There is currently much debate about whether it is positive or negative for the US dollar to be the world’s primary reserve currency and for the dollar to be strong. It is clearly beneficial for the dollar to be a reserve currency, as it generates greater demand for US debt and capital than would exist if the US did not have that privilege.

However, since markets determine these dynamics, this privilege tends to be overexploited, contributing to the current debt and imbalance problems. These imbalances in goods, services, and capital must be corrected in Trump’s view, which will undoubtedly require extraordinary measures to reduce debt and foreign dependence, especially in a tense geopolitical context.

An appreciation of the Chinese renminbi (RMB) could be a key component of a trade and financial agreement between the United States and China. Ideally, all of these issues should be addressed through political and economic negotiations between Trump and Xi and, if necessary, with other major powers and Europe. But Trump applies a negotiating style typical of the business world, very different from that usual in politics.

Possible side effects

European countries have already announced retaliation.

At the time of writing, China has already announced an increase in tariffs on US products to 34% starting April 10 and controls on the export of rare earths (strategic for sectors such as semiconductors and weapons).

The effects on exchange rates, central bank policies (raising or lowering interest rates), and government spending decisions will also influence the situation.

All of these responses can increase or decrease the initial effects on the global economy, especially in the form of inflation or recession.

Beyond the macroeconomic impact, tariffs will affect different sectors unevenly. Some will face direct cost increases, while others will have to readjust their supply chains, something especially complex if they depend on countries currently subject to high tariffs, such as Vietnam. Furthermore, if US trading partners respond with their own tariffs, American companies will be affected, as they obtain 25% of their income from abroad.

The most exposed sectors in the short term are the automotive and technology sectors.

Starting April 3, cars imported into the US will pay a 25% tariff. This could reduce sales by 2-3 million units per year and increase prices by 5-7%.

The new tariffs will particularly affect the technology sector, as most hardware is produced in China. Companies will have to bear the costs or raise prices, although subsectors such as networking and storage may be less affected due to their lower dependence on China and less commoditized products.

What this means for index portfolio management

It will take some time before we know the real effect of this new tariff war and what it will ultimately result in.

For example, it remains to be seen whether production will actually return to the US. It’s a process that could take several years, as companies must evaluate whether it’s worth it and then make the change in a political environment that doesn’t seem the most favorable.

It’s also worth noting that many of the announced measures are subject to negotiation. We’re sure the new administration doesn’t want to provoke a recession, although they may be willing to accept a slowdown. For now, everything indicates that tariffs will remain part of economic policy for a long time. In any case, this isn’t Trump’s first tariff war. He already clashed specifically with China during his previous term, and it was an event (like many others) that the global economy has overcome.

The inbestMe investment committee is undoubtedly monitoring events, but is not in favor of making hasty decisions. We believe that, overall, our index fund portfolios are well diversified and prepared to perform well over the medium and long term (3 years and beyond) for which they were designed. We should also remember that our Euro portfolios have an overweight in Europe, which appears to be awakening, and in other regions, overweight in global indices (the US is underweight), and are partially hedged to the Euro.

Our savings and target portfolios, by their nature, are not affected by these events. On the other hand, we are monitoring the effect on our longer-term bond portfolios to see if any adjustments are necessary. Ultimately, we will remain vigilant in case further fine-tuning is necessary.

Although we understand that these events may cause concern, we want to convey peace of mind. Our portfolios have successfully weathered much more adverse situations (Brexit, Covid-19, the war in Ukraine) that at the time seemed like the end of the world, and we are confident that they will do so this time as well.

If you were considering investing, we believe short-term fluctuations shouldn’t affect your long-term plans. While we don’t recommend trying to anticipate the market, and past results are no guarantee of future results, we have data confirming that clients who stick with their plans and continue contributing when the market is weak typically achieve better results over time. Abandoning our investment plan during volatile times and downturns is the worst decision we can make.