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Thought of the day

US President Donald Trump announced a wave of new tariffs as the 1 August deadline arrived, including a 35% duty on many goods from Canada, 50% for Brazil, 25% for India, 20% for Taiwan, and 39% for Switzerland. 69 trading partners were listed in the executive order Trump signed late on Thursday, facing tariffs ranging from 10% to 41%. Goods from all other countries not included would be subject to a 10% tariff. Mexico, meanwhile, received a 90-day extension for further negotiation.

The new rates will take effect after midnight on 7 August to allow time for US Customs and Border Protection to prepare. Separately, judges from a federal appeals court showed skepticism over the president’s authority to impose sweeping tariffs under the International Emergency Economic Powers Act (IEEPA) during a hearing on Thursday. The court is not expected to make a ruling until a later date.

Although the 1 August deadline was well telegraphed, the initial market reaction to the tariff announcement was negative. At the time of writing, S&P 500 futures are trading 1% lower. While the Swiss stock market is closed for the 1 August National Day, European markets opened lower. Asian markets came under pressure with declines in the Indian and Taiwanese benchmarks in particular.

But our base case remains that the US effective tariff rate should settle at around 15% by the end of the year, and the economic impact is likely to prove manageable.

The global minimum rate appears better than previously feared, with recent deals underscoring reduced trade risks. The global minimum tariff rate, at 10%, has turned out to be lower than markets anticipated, as Trump previously floated the notion of a 15-20% rate for countries that do not negotiate separate deals with the US. The flurry of deals that were reached over the past 10 days, especially those with major trading partners like the European Union, Japan, and South Korea, have also solidified market confidence that the worst of the trade conflict has passed and that the Trump administration would want to avoid tariffs that could cause serious damage to the US economy.

The headline “reciprocal” rates may exaggerate their actual impact, and there is more room for negotiation. While Trump levied a 35% tariff on Canada, the majority of Canadian exports to the US will be exempted due to the US-Mexico-Canada Agreement (USMCA). Similarly, a long list of Brazilian products is exempt from the 50% tariff, while exports to the US only account for less than 2% of the South American country’s GDP. We believe there is room for further talks that could bring the “reciprocal” tariffs lower for some markets. The US negotiation team is scheduled to visit India later this month, while Taiwan said a trade deal with the US is close. Given Trump’s escalate-to-de-escalate negotiating approach, we expect more trade agreements to emerge in the coming weeks and months. The 90-day extension for Mexico and a possible similar arrangement with mainland China support this view. Additionally, a US official told reporters that more deals are in the works.

The shift in copper tariffs points to challenges in bringing manufacturing back to the US. Trump pushed ahead with the 50% tariff on copper imports, but this week exempted refined copper from the levies. This, in our view, highlights the administration’s acknowledgment that it would take time to bring some sectors back to the US. We have said that sectoral tariffs could prove to be more durable as they’re levied on more solid legal grounds, but the latest development and the provision of a grace period for pharmaceutical imports suggest that these taxes may not be as punitive as Trump had previously threatened.

Still, these tariffs would be a headwind for global trade and growth, and they have started to contribute to a rise in inflation. With markets already pricing in much of the good news on the trade front, we expect stock volatility to pick up in the near term. Investors should consider ways to navigate market swings ahead, including structured strategies and buying on dips depending on their equity allocation relative to long-term benchmarks.