SJP Tariff Update: Unforeseen consequences: How far reaching will US tariffs be?

Unforeseen consequences: How far reaching will US tariffs be?

Written 4 March 2025, 5 minutes

Thank you to St. James’s Place Asia and Middle East for sharing an important update regarding the ongoing situation with the US Tariffs.

At a glance:

• The recent tariff news wasn’t wholly unexpected, but the scale and initial countries targeted caught markets by surprise.

• Tariffs will see costs passed on to consumers and impact interest rate decisions.

• In times of uncertainty, it’s important not to make short-term decisions.

Global supply chains may be a casualty of the US tariff actions, extending their impact beyond the directly affected countries. Experts at SJP explore the potential long-term ramifications of the latest protectionist measures.

According to investment experts at SJP, the US's move to implement tariffs on key trading partners is likely to have many unforeseen impacts.

Canada and Mexico import 30% of US goods and are highly integrated in supply chains. For example, more than 50% of auto parts come from Canada and Mexico, and goods cross the border several times during the production process.

Hetal Mehta, head of economic research at SJP, says that while it was well known President Trump may turn to tariffs, the scale and the initial targets caught many off guard. While the US has large trade deficits with both countries (meaning the US imports more than it exports), they are also its closest neighbours. They have also all been part of “free” trade agreements with the US for decades.

Trump is reneging on deals he signed (when he was first president in 2016), Hetal explains. While the Canadian and Mexican tariffs are grabbing the biggest headlines, other countries are being targeted – such as China. Where next? Consequently, how will this affect trade relationships – and supply chains - worldwide?

While Hetal points out it is unlikely to be as disruptive to supply chains as the pandemic, it will likely change relationships between countries. But it isn’t just a matter of switching suppliers to other countries or emphasising buying domestically, Hetal notes. For one, building supply capacity from different regions and areas takes time to fill current demand. For another, there are also non-tariff barriers with other countries – such as regulation. “You can’t just jump to another supplier that easily. So, will these non-tariff barriers get watered down? Where will the trade get rerouted to?”

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

Hetal comments:

“One way or another the US consumer will pay for tariffs – they are on the hook. The impact could be

1. Higher inflation.

2. Higher interest rates to combat that inflation and

3. 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 opening salvo of Trump’s trade war for now, but it may still get caught in other ways. For one, Trump has also discussed potential tariffs on the EU, 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 should they also be 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."

A 10% tariff could reduce euro area GDP by up to 0.5%, Hetal explains, adding:

“With growth already so fragile in Europe, there is little scope for it to avoid recession if such a tariff was to be imposed. As such, we believe the ECB is likely to carry on cutting rates.”

It also raises global uncertainty. We know that in periods of uncertainty, extreme outcomes known as ‘fat tails’ become more likely. The first day markets opened after Trump’s Mexico/Canada announcement already saw increased volatility.

Joe Wiggins, investment research director at SJP, says this initial volatility spike resulted from 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. 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 around US—Canada/Mexico trade and other countries remain. What other countries will be targeted, and what retaliation will be taken? 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.

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

(Originally posted on 05/02/2025. Updated on 05/03/2025)

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