United States
We believe the administration's new tariffs on individual trade partners may allow for negotiation, but the blanket tariffs could be permanent. As we closely monitor retaliations and political rhetoric, we see fixed income as a potentially compelling shield against uncertainty.
The administration announced key new tariff initiatives as part of its “Liberation Day” announcement.
According to the Executive Order, all countries will face a 10% tariff effective April 5, and tariffs on 57 countries will kick in on April 9, calibrated to half the US bilateral trade deficit divided by US imports from that country, adding to the administration’s total tariff announcements so far (Figure 1).
Figure 1: Trump administration announces further tariffs on trade partners1
The measures were more severe than markets anticipated. Much of the market had expected the new measures to take the global effective tariff rate to 10% to 15%, but the latest estimates are 20%-25%, the highest since the early 1900s2.
The administration may see tariffs as both the means and the end
During his press conference, President Trump described tariffs as a way to force other countries to lower their trade barriers (a “means”), but also as a revenue generator (the “end”).
We can envision the 10% universal tariff being a permanent fixture, primarily aimed at raising revenue for tax cuts and thus an “end” in itself.
We can also envision any country-specific tariff rates being negotiable, (a “means” to a different end). Despite initial expectations that the policies would take effect immediately, their slight delayed implementation may imply some room for dealmaking. This could take many forms – such as lower tariffs on US imports, eliminating non-tariff barriers on US goods or commitments to purchase US goods.
Notably, Canada and Mexico were spared any further action, and in fact the temporary exemptions negotiated last month of USMCA-compliant goods were extended. To us, this suggests a potential path forward for USMCA.
We will monitor retaliations and political discord closely
Over the coming days and weeks, we will closely monitor any retaliation from US trade partners. We expect some economies will respond with counter tariffs and other measures such as export restrictions, restrictions on trade in services or access to FDI or public procurement. This will risk further escalation from the US.
Some may take a less confrontational approach, providing fiscal support for their exporter sectors. Others may be content to take no action with the aim of securing a Free Trade Agreement with the US.
We also have an eye on signs that discord within the Republican Party may limit further action. Symbolically, four Republican Senators joined Democrats to pass a resolution aiming to end the emergency declaration that allowed President Trump to unilaterally impose tariffs on Canada. The bill is very unlikely to advance further in the GOP-controlled House, but it may get President Trump’s attention.
We expect fixed income to offer a shield against uncertainty
We are re-evaluating our US and global growth and inflation projections in light of the US administration’s policies, considering the likely drag on growth and increase on pricing pressures.
In this environment, we continue to see value in fixed income assets, which could be an effective way to shield against uncertainty in the current environment.
Our strategies are generally long duration at the short- to-intermediate maturities of high-quality sovereign curves, which could be most immediately sensitive to Fed rate cuts. We have maintained moderate overweights in high quality spread products like US Agency MBS and investment grade corporates, although we reserve significant liquidity should the risk asset sell off become more pronounced, creating potential buying opportunities.
Looking ahead, in a tariff-heavy environment, we believe sector and security selection will make the difference. A global approach to fixed income may also offer significant opportunities to enhance alpha generation.
