Unforeseen consequences: How far reaching will US tariffs be?

At a glance:

• The recent tariff news wasn’t wholly unexpected, but the scale and breadth of the moves caught markets by surprise.
• Tariffs will see costs passed on to consumers, and will impact interest rates decisions.
• In times of uncertainty, it’s important not to make short-term decisions.

The moves by the US to implement tariffs on trading partners is likely to have many unforeseen impacts, according to investment experts at SJP.

According to the US Census Bureau, in 2024 the US imported $4,110bn of goods and services. Now, the vast majority of these imports will face an additional tariff of at least 10%.¹

Some countries received substantially greater tariffs, though. For example, EU imports will face 20% tariffs, while those from Japan will face 24%. Chinese imports, meanwhile, will receive an additional 34% tariff on top of the 20% they already face.

Hetal Mehta, head of economic research at SJP, says that while it was well known President Trump was looking to implement reciprocal tariffs on key trading partners, there had been uncertainty as to what this would look like in practice. While the US has large trade deficits with many of the affected countries (meaning the US imports more than it exports to them), several were also close geopolitical allies, with tightly intertwined economies and supply lines.

A key unknown is what comes next? Several of those targeted, such as the EU and China, have promised responses. We do not know what form these will take.

While Hetal points out these tariffs are unlikely to be as disruptive to supply chains as the pandemic, they will likely change relationships between countries. But it isn’t just a matter of switching suppliers or emphasising buying domestically, Hetal notes. For one, it takes time to build supply capacity from other regions and areas to fill current demand. For another, there are also non-tariff barriers with other countries – such as regulation.

Hetal says: “You can’t just jump to another supplier that easily. So, will these non-tariff barriers get watered down? Where will the trade get re-rerouted to?”

She adds that already the US consumer buys more than the US can supply, which is why it imports more goods than it exports.

“One way or another the US consumer will pay for tariffs – they are on the hook. The impact could be, firstly, higher inflation; secondly, higher interest rates to combat that inflation; and, thirdly, higher taxes for households. The latter is because the intention is to funnel the profits of the imposed tariffs to lower US corporate taxes. If the US were to reverse this action in the future, they may find it difficult and have to turn to consumers to pay that bill.”

UK impact?

The UK may have escaped the worst of the opening salvo of Trump’s trade war for now, but it still received a 10% tariff.

Additionally, Trump has implemented 20% tariffs on goods from the EU, which is the UK’s most significant trade partner. As such, tariffs imposed on EU goods may have a knock-on impact for the UK, Hetal points out.

Hetal says: “It will inevitably raise questions on how central banks – especially the European Central Bank (ECB) but also the Bank of England (BoE) – should respond now they are subject to such protectionist measures. Any further weakness in the euro area economy will likely spillover to the UK. This could result in an increased willingness to cut interest rates in the UK.”

The 20% tariff could reduce euro area GDP by up to 1%, Hetal explains, adding: “With growth already so fragile in Europe, there is little scope for it to avoid recession. As such, we believe the ECB is likely to carry on cutting rates.”

There is also the fact it raises global uncertainty. We know that in periods of uncertainty, extreme outcomes become more likely. The first trading day after the announcement saw increased volatility. Ironically it was the US markets that bore the worst of the initial brunt of the volatility.

Joe Wiggins, investment research director at SJP, says this initial volatility spike was a result of investors attempting to understand the potential responses and economic consequences.

“Periods of heightened uncertainty and market noise are incredibly challenging for long-term investors often not because of the issue that is the focus of attention but rather our behavioural response to it. When under stress, investors tend to make decisions that relieve short-term anxiety often at the expense of their long-run objectives.

“Attempting to make prudent investment decisions related to the recent announcement of US tariffs is fraught with difficulty. Untangling the economic and market consequences of an incredibly complex, and still nascent, situation is extremely unlikely to be a productive activity.”

What’s next?

This is one to watch from a political and economic standpoint. Questions remain around how other countries will react, and whether the Trump administration will take any more action. While Hetal doesn’t expect the current tariffs to have any direct impact on UK inflation, other knock-on impacts are hard to foresee given how unpredictable Trump’s policies have been so far.

With respect to markets, according to SJP’s investment experts, volatility will likely persist throughout 2025 as such policy uncertainties play out. However, analysis from the investment team suggests strong underlying business fundamentals, technological innovation, and structural growth trends continue to provide compelling investment opportunities.

With so much global uncertainty, it is important to avoid making rash, short-term decisions. While the current volatility is unsettling, history has shown that making impulsive behavioural missteps during such times can be most damaging. Instead, remaining disciplined and staying true to long-term strategies is likely to lead to the best outcomes.

Source: ¹ US Census Bureau: US International Trade in goods and services, December 2024.

(Originally posted on 05/02/2025. Updated on 07/04/2025)