In a move that marks a radical shift in North American trade policy, Donald Trump announced on April 2 — coinciding with what he calls “Liberation Day” — a new global tariff offensive. These measures, justified on grounds of national and economic security, significantly raise the United States' trade barriers, generating a strong impact both economically and geopolitically.

Details of the New Tariffs

The new measures will be rolled out in two phases:

• April 5: A universal 10% tariff on all imports will come into force.
• April 9: Reciprocal country-specific tariffs will be activated, with much higher rates for certain trading partners.

The tariffs imposed are much stricter than the markets had anticipated:

• General tariff: 10% on all countries.
• Example of reciprocal tariffs by country:
  • European Union: +20%
  • China: +34%, in addition to the 20% already imposed earlier this year.
  • Mexico and Canada: exempt for now.
  • Sectors like automotive, already taxed at 25%, will not receive additional tariffs.

This move represents a strong tightening of U.S. protectionism and raises alarms about a potential escalation of trade conflicts.

However, the executive order allows Trump to reduce or limit tariffs if affected countries take “significant steps” to align with U.S. economic and security interests.

On the other hand, he has warned that any retaliation by affected countries could lead to even higher tariffs.

Financial Market Reaction: Shock and Volatility

The uncertainty leading up to the announcement had already created volatility, but the final severity of the tariffs exceeded expectations:

• The S&P 500 recorded its worst daily drop in more than five years, reflecting concerns about a contraction in global trade and an economic slowdown.
• Yields on U.S. Treasury bonds plummeted, a typical move in response to a flight to safer assets.
• The euro appreciated above 1.10 against the dollar, signaling a clear shift in market sentiment towards the dollar, which has weakened notably.

Strategic Objectives of the Tariffs

The White House justifies the initiative by citing the decline in national competitiveness. According to official figures, the U.S. has lost 5 million industrial jobs since 1997. Additionally, its share of global manufacturing output has dropped from 28% in 2001 to 17.4% in 2023. With this policy, the administration aims to restore trade reciprocity. It also seeks to revive domestic production in key sectors such as automotive, microelectronics, defense, and pharmaceuticals.

The U.S. government is pursuing several objectives with these measures:

• Reduce the trade deficit.
• Stop “unfair” trade practices by allies and rivals.
• Encourage reindustrialization by making imports more expensive.
• Raise funds: With a tax base increase derived from the rise in imports since the 1960s, it is estimated that up to $700 billion could be raised annually. This amount would represent 21% of current goods imports.

However, there is no clear correlation between high tariffs and prosperity among developed economies.

Economic Risks

The big question is how these new tariffs will affect global growth and trade flows. While the final effects will depend on multiple factors, the downside risks have clearly intensified.

Key factors to consider:

• Duration of the tariffs and potential extensions.
• Possible responses from trading partners (retaliation).
• Use of tariff revenues by the U.S. government.
• Evolution of business and consumer confidence, which already shows signs of deterioration.

If businesses believe the tariffs may be temporary, they might delay investments and hiring, resulting in a larger short-term impact.

Indicators of uncertainty and various sentiment indices in the U.S. are already showing clear signs of worsening, both in terms of business confidence and investment intentions.

Possible Impacts

The Peterson Institute for International Economics has modeled the potential effects of a 25% tariff on the EU:

• Germany: a decline of up to 0.4 percentage points in GDP relative to the baseline scenario.
• France and Italy: a more moderate impact.
• U.S.: would also take a significant hit, especially if the scope expands to all countries and sectors, as in the current plan.
• Inflation: the projected impact ranges around an additional 0.5 percentage points, enough to complicate central banks' tasks but likely insufficient to alter monetary policy on its own.

Implications for the ECB

The recent slowdown in service prices in the euro area has reinforced the perception that inflation is moving toward the European Central Bank's target.

The ECB is less concerned about the persistence of service prices, increasing the likelihood of a new 25-basis-point interest rate cut in the April meeting. Attention is shifting from actual inflation to growth prospects, which are becoming more fragile in light of the new global uncertainty.

Germany’s and the EU’s spending plans introduce some upside risks in the medium term, but the short-term bias remains clearly downward.

Implications for the Federal Reserve

As for the Federal Reserve (Fed), the effects of the tariffs create a duality of effects that complicate decision-making:

• The inflationary impact of the tariffs could lead the Fed to keep rates steady in the short term.
• A deterioration in confidence and growth could force the Fed to cut rates if the downturn solidifies.
• The market is already pricing in a 25-basis-point rate cut in June and anticipates up to 100 basis points in total cuts by the end of the year. This reflects growing investor concern about a potential contraction in demand and a slowdown in activity.

Asset View

Equities

This scenario has contributed to increased volatility in equity markets. Uncertainty in the market is likely to remain high in the coming weeks. However, the news flow could become more favorable as the second half of the year approaches. Now that tariffs have been announced, negotiations to ease them could begin. The revenues from the tariffs could be used to offset the cost of extending tax cuts. On the other hand, the Fed could also respond to a growth slowdown with interest rate cuts.

In the coming weeks, market corrections could create opportunities for underexposed investors to increase their exposure to long-term positive drivers, with Europe likely benefiting from greater fiscal spending and China from more recent pro-business guidance.

Fixed Income

We believe high-quality fixed income represents an attractive diversification element for portfolios. Bond yields have remained relatively high in recent weeks, despite the recent volatility and concerns about growth. We believe this creates an opportunity for investors to seek sustainable income by optimizing treasury yields.

High-quality, investment-grade bonds offer an attractive risk-reward ratio, in our view, as well as diversified fixed income strategies and dividend income strategies.

Finally, gold, now at $3,000 per ounce, could continue to act as a safe haven asset in the face of geopolitical and inflation risks.

In summary, Trump’s new tariff package accentuates the downside risks both for the U.S. economy and the global economy.

In the short term:

• Volatility will remain high, and investors will look for signals of a shift or response from central banks.
• The ECB is preparing for further stimulus, while the Fed may be forced to act if growth falters.
• The dollar weakens, the euro gains ground, and global trade uncertainty increases.

This scenario sets the stage for a delicate moment for the global economy, where monetary policy decisions and trade negotiations will be key to avoiding a deeper cooling of the economic cycle.