Investment Outlook: Equities swipe left on Trump’s tariff threats

Just like using dating app, Tinder, financial markets have swiped left to reject President Trump’s tariff threats as a major market risk so far, even though trade policy uncertainty has risen to levels last seen during Trump’s first term (see chart below). Non-US equities have rallied this year as investors look through his theatrics and focus on the fundamentals of a constructive outlook for company earnings. Risks associated with interest rates and inflation over the last few years have eased too.

The Trump trade playbook seems to be tariff threats first, then selected tariffs, discussions and deals. For instance, on 1 February, the president announced an executive order (EO) to place a 25% blanket trade tariff increase on all goods imported from Mexico and Canada (excluding Canadian energy, which was charged at a lower 10% rate).¹

Trump subsequently suspended these tariffs for a month after the Mexican and Canadian governments tightened controls by sending more troops and law enforcement to the border. However, on 3 March, the tariffs were imposed after Trump judged that neither country had done enough to meet his demands to reduce immigration and the flow of drugs across the respective borders. 

It seems that Trump is also planning to use “reciprocal tariffs” on other trading partners. This involves imposing similar tariffs on each other’s goods. For instance, the White House has highlighted that the EU charges a 10% tariff on imported US cars, compared to 2.5% for European manufactured cars imported by the US.²

Reciprocal tariffs give Trump the ability to maintain leverage during trade talks. It will probably take a while to implement them across 600,000 product lines and 132 countries where US exporters face higher tariffs.³ 

Trump did not spare China from his trade protectionism agenda. On 1 February, an additional 10% tariff increase on all US imports from China was applied.⁴ Trump’s EO explained that higher tariffs are connected to an emergency involving “illegal aliens and drugs, including deadly fentanyl.”

On 3 March the US added further pressure by applying another 10% levy on Chinese imports. In response, China has said it will place tariffs of up to 15% on a range of American agricultural and food products. With tensions growing, both sides will want to avoid a full-blown trade war, which could give them wiggle room to work out an agreement. 

A possible China-US agreement could be in the offing. In mid-January, the Wall Street Journal reported that Trump wants to visit China.  This could be an opportunity for him and President Xi Jinping of China to find common ground to reach an agreement. For example, this could include advantageous terms to entice Chinese firms (like electric vehicle producer BYD) to invest in US manufacturing and hire blue collar workers for Trump to curry favour with his support base.  

Despite the superpower rivalry between the US and China, the relationship between Trump and Xi seems to be favourable. In February, during a Super Bowl interview on Fox News, President Trump said that he “loves talking” to President Xi.  

For his part, President Xi is likely to be amenable to an agreement with the US to help restore confidence at home. China’s consumer confidence has tanked to its lowest level in its 35-year history after the stringent zero-Covid rules and a major contraction in the domestic housing market. Meanwhile China’s population is shrinking, putting downward pressure on its economic expansion. With the demographic tailwind gone, President Xi would like some access to US technological knowhow to boost the country’s labour productivity and grow its economy. A Washington-Beijing trade and investment deal could provide such a catalyst. Geopolitically though, the US will be wary to give away too much of its technological crown jewels. 

Europe is also in the crosshairs of Trump’s tariff agenda. As a starting point for negotiations, the US president knows three things. First, the EU’s economy is more sensitive to trade than the US. EU exports to the rest of the world account for 19% of GDP (36% in the case of Germany), compared to 10% for the US.⁵ Second, the EU runs a large $236 billion trade surplus with the US.⁶And third, the US is coming from a position of strength as the fastest growing G7 economy since the pandemic.  

Reaching a comprehensive EU-US trade deal in the near-term is unlikely. The EU’s stringent regulations and policies tend to clash with US policies, while political dynamics are a hindrance: the EU prefers multilateral agreements, compared to the US’s focus on bilateral deals. Nevertheless, there is still room for transatlantic tensions to ease, which could be advantageous for both sides. For instance, given that EU electricity prices are currently at a 160% premium to those in the US, the EU could benefit from importing more US liquefied natural gas.⁷

Indeed, late last year, Trump said the EU could avoid tariffs if it imports more US energy.  

Furthermore, Trump has called for EU nations in NATO to spend more on defence to avoid tariffs. Even if Trump can negotiate a truce with Russian President Vladimir Putin over the war in Ukraine, there is a desire for EU governments to beef-up defence expenditure, and that would likely involve spending on US military hardware. 

Considering the recent equity market rally outside the US, fund managers appear to be accustomed to Trump’s bluster and are not yet terrified of tariffs. 

Regionally, there has been a divergence in equity market performance so far this year. Equities in trade-sensitive markets, like the EU and China, have both outperformed the US. An anticipated warming in Sino-US relations has driven a valuation-led expansion in Chinese (and emerging market) equities on the expectation of a shift in American portfolio capital back into China. European stocks have also gained on the expectation that tariffs won’t be as bad as feared and a truce can be agreed between Russia and Ukraine.  

US stocks have lagged peers somewhat in 2025, as higher valuations may have hindered performance. Nevertheless, there is also the possibility of more inward investment into the States should deals be reached with major trading partners, which can, in turn, boost US stocks – See our Investment Outlook - Reading the rhetoric ahead of the US election.

In terms of risks, investors are waiting for the findings from the Trump administration’s trade review on 1 April to see if there will be further follow through on tariff threats. If the US does impose materially higher import tariffs from this date, markets will no longer be able to swipe left on this risk and equities could well correct. 

1, 2, 3. Whitehouse.gov, Fact Sheet: President Donald J Trump imposes tariffs on imports from Canada, Mexico and China, 1 February 2025 \
4,5,6. JP Morgan North America: Tariff, Interrupted, Global Data Watch, 7 February 2025 
7. BCA, Europe is Next, 7 February 2025