US Tariffs: Insights on market impact and reactions

What is a tariff?

In economics, a tariff is a type of tax imposed by a government on goods and services imported from other countries, essentially adding an extra cost to foreign products when they enter a country. Tariffs can be seen as trade barriers that raise prices, reduce available quantities of goods and services to the country imposing the tariff, and create an economic burden on foreign exporters. Tariffs are often used by a country to protect domestic industries, raise revenue, or influence trade patterns. 

What is the Law of Comparative Advantage in economic theory?

Comparative advantage is an economic theory created by British economist David Ricardo in the 19th century. It argues that countries can benefit from trading with each other by focusing on manufacturing the goods they are best at making, whilst buying the goods they are not as efficient at producing from other countries. The law of comparative advantage benefits individuals, businesses, and nations by promoting specialisation and trade, leading to increased efficiency, lower costs, and overall economic gains. These gains result in all countries and their citizens being better off through trading the goods they have the competitive advantage in.

Ramifications

The implementation of tariffs distorts the economic theory of comparative advantage. The price of goods for trade is distorted in the hope that production and manufacturing is increased in the country imposing the tariff. The effect of producing goods that you may not be the most efficient in producing is a rise in prices (higher costs of production) increasing the chances of higher levels of inflation. The average consumer will be worse off due to being able to purchase less goods with their discretionary income than before. This then has a knock-on effect on a country’s ability to grow the economy and hence create economic growth.

Last week, US President Trump announced sweeping tariffs of 10% on imports from all countries, with additional reciprocal tariffs on specific nations. For instance, China faces a 104% tariff (the existing 20%, followed by 34% followed by a further 50%), Japan 24%, the European Union 20%, UK 10%, India 26%, Vietnam 46%, Taiwan 32% and South Africa 30%. These tariffs are set to go into effect on Wednesday, 9 April 2025.

President Trump believes these tariffs will force other countries to lower their own tariffs on US goods and services, creating a more balanced economic playing field for US exports. He argues that this will incentivise companies to manufacture goods within the US to avoid paying the tariffs. He feels that countries that have had trade deficits with the US (the US imports more from them than what they import from the US) have benefited at the expense of the US and he wants to “level the playing fields and make trade fair for both countries.”

In addition to the above-mentioned tariffs, the US had already announced tariffs of 25% on all automobiles imported into the US. This will have a major impact on certain countries and economies that have large motor vehicle manufacturing plants – like Germany, China, France and Korea. South Africa exports around 25 000 vehicles a year, with approximately 30% going to the US. This will also materially hurt the SA economy.

The tariffs are likely to slow global growth as countries adjust to the new trade barriers. Inflation could rise due to higher import costs, leading central banks to consider raising interest rates to combat inflation. However, if the tariffs lead to a significant slowdown in economic activity, central banks might keep rates low to support growth.

Economists have mixed opinions on the current global crisis around tariffs. Some argue that while tariffs may cause a one-off increase in prices, they could ultimately reduce consumer purchasing power and thus dampen demand, potentially being disinflationary in nature. However, the consensus amongst most economic commentators is that these tariffs will likely

lead to higher inflation and slower economic growth over the next 6-12 months. This has material ramifications for investment markets and companies around the world.

Market reactions

Global stock markets have reacted negatively to the tariffs. The S&P 500 had its worst week since June 2022 and has had six negative weeks over the past seven. The VIX Index, a measure of market volatility, has spiked to over 53 – levels even higher than those seen during the Covid-19 crisis in 2020 and the Global Financial Crisis in 2008. Bond markets rallied, with yields on US Treasuries and UK Gilts falling as investors sought safe-haven assets. The tariffs have also led to a sell-off in tech stocks and other sectors heavily reliant on global supply chains.

The tech-heavy Nasdaq has fallen by 21% since the start of the year and down 12% in USD over the past week. A market correction is generally defined as a decline between 10% - 20% from recent market highs. When the decline reaches 20% or more, it is typically considered a bear market. The S&P 500 is down 12% the last week and 15% YTD, closely matched by the Dow Jones Industrial Average. Over the past week we have seen global equity markets tumble – the UK, French, German and Japanese markets are all down between 7% - 10% respectively. South African equity markets, having held up reasonably on Thursday last week are also down around 10%. The Rand has weakened significantly to R19.66 to the USD (by around 7% this year). The Rand has further been weakened due to jitters around the National Budget and the continuation of the GNU.  

With the implementation of the tariffs as announced, we could see a US GDP growth rate of below 1% and core inflation of around 3.5% this year. This would represent a substantial deterioration in both GDP and inflation outcomes relative to general market expectations at the start of the year. Markets have priced in a reduction of between 1%-1.5% in US GDP growth hence causing a fall in stock prices.

Most large investment house are now placing a probability of a US recession at around 60%-65%.  

Markets had expected the Federal Reserve to ease rates two more times this year as growth (prior to the tariff news) was already slowing. Jerome Powell, the Fed Chairman stated that the Fed will be balancing the tariffs’ impact on inflation and inflation expectations with any growth deterioration. Inflation expectations appear to be well-anchored, which creates scope for the Fed to respond to the growth challenges if needed. Powell stated that it was still too soon to know exactly how things would play out, and the Fed would be monitoring things closely. He stated that it was likely that inflation would tick up and growth slow in the short-term. Similar responses are likely from other central banks like the European Central Bank and Bank of England who will balance the inflation impacts with consequent growth impacts.

Impact on Europe and Asia

European and Asian countries are expected to retaliate with their own tariffs. China has already announced additional tariffs of 34% on US goods. This could lead to a trade war, disrupting global supply chains and increasing costs for businesses and consumers. Trump has responded by adding a further 50% tariff to Chinese goods – thus making tariffs on Chinese goods now a whopping 104%. European countries may also impose countermeasures to protect their economies. Positively for European and Asian countries, the large tariffs imposed by the US will force countries to re-align and look for other markets to export their produce to. The outcome of this will be new and increased trade relations between Europe and Asia, providing an impetus for improved economic growth within these regions.

Impact on South Africa

The recent US tariffs imposed by President Trump can result in significant negative impacts on South Africa's economy. The tariffs, levied at 30% (on top of the 25% automobile tariff) will likely affect various industries, including vehicles, precious metals, machinery, and citrus fruits. The car export industry and the citrus industry are currently both significant contributors to South Africa's economy.

In 2024, the US accounted for 6.5% of South African vehicle exports, making it the third-largest destination for locally produced vehicles, with an annual export value in the region of R35 billion.

The citrus industry is another vital sector for South Africa. In 2021, duty-free exports of citrus to the United States under the African Growth Opportunity Act reached a historic high of 100,234 metric tons. South Africa's citrus exports rank as the world's second largest by trade value, worth $2.43 billion as of 2023. The US is considered a premium market for South African citrus, and the new tariffs will likely reduce demand and profitability for South African citrus exporters.

What does the future hold?

In the near term, it is likely that we see negotiations and some watering down of the announced tariffs as many countries around the word negotiate bi-lateral trade agreements with the US.  According to the White House more than 70 countries have approached them to negotiate trade deals over the past week. However, Trump has stated very clearly that the direction of these policies is unlikely to change. Interestingly, what has landed up as being the favourable treatment of Canada, Mexico and Latin America could suggest a deliberate policy of favouring the US’ “sphere of influence” in a world that is becoming more split.

Longer term, a world with more US trade barriers will also be a world where the US is likely to see reduced levels of capital inflows and hence a higher cost of capital. Implications of this would then be higher US rates (a steepening of the yield curve), a weaker US dollar, and an increase in the required risk premium in credit markets. Trump’s other key areas of policy, namely tax cuts, deregulation and pro-growth policies may partially offset this. To what extent it is difficult to tell at this moment.

Investors and business owners prefer certainty – currently with the Trump administration and its policies – there is materially spiked levels of uncertainty, which no doubt will continue in the weeks and months ahead. Increased levels of uncertainty make it more difficult to make informed capital allocation decisions – both as investors allocating capital into equity and fixed income markets, as well as business owners allocating capital for growth in their businesses in terms of plant and machinery.

As a result, markets outside the US will likely be viewed more favourably by investors and companies. Both European equity and fixed income markets as well as certain emerging markets have a good probability of outperforming the US over the medium-term.

History teaches us that it is often in times of great market uncertainty, when markets sell off (and often over-react in the short-term due to investor fear) that much opportunity presents itself for allocating capital. Buying in at cheaper valuations increases one’s ability for generating above average future returns. As investment professionals, and with a long-term investment horizon in mind, we will be looking for these moments to take advantage of to our best abilities.

For investors worried about the impact of the tariffs, it's essential to remain calm and avoid making hasty decisions. Diversification is key to managing risk and ideally one should spread investments across different asset classes and regions. A focus on high-quality companies with strong fundamentals that can withstand economic volatility would also be favourable.

 Lastly, stay informed and consult with a financial advisor to make well-informed investment decisions. Investors should try their best to not react emotionally in times of heightened anxiety and market uncertainty – stay focused on your long-term investment horizons.