Global Trade, Global Tariffs - 1st Quarter 2025

The Trump administration began implementing its long-promised tariffs against our trading partners in February, starting with Mexico, Canada, and China. A tariff is a tax on imported goods, paid by, in this case US companies, and often passed on to consumers via higher prices. As policy details emerged, so did risks to global markets and economic growth. For the first time since the early 2000s, foreign equities outperformed US equities, and did so by a wide margin. The All-Country World Index (ex-US) was +6.5% in the first quarter, while the S&P 500 was -5.4%. Investment grade US fixed income, as measured by the US Aggregate Bond Index, rallied +2.8% as investors fled to safety on increased fears of an economic slowdown. Trump’s ‘Liberation Day’ announcement on April 2nd provided additional clarity to the administration’s tariff plan, including customized rates on a country-by-country basis. Rather than calming markets by removing uncertainty, it surprised markets with its punishing scope and magnitude. US stocks fell over 10% in the following two trading days (not reflected in this 1Q report), one of which was the largest single day decline since the Pandemic market crash in 2020.

The motivations behind these tariffs are storied and complex, ranging from US debt management to trade deficit defiance. The immediate outcome, should they remain in place without offsetting circumstances or policies, is relatively straightforward according to most economists. We should expect to pay more for imported goods and a rise in inflation. Consequently, we should expect weaker economic growth, assuming businesses and individuals alike pull back on both investment and consumption. If demand softens, business hiring will slow and/or layoffs increase. Retaliatory tariffs, already announced by China, Canada, and the EU, will further reduce demand for US goods.

The uncertainty surrounding these tariffs, and other policies, also creates an environment in which investment becomes difficult. Should a business owner move their manufacturing to a lower tariff country or back to the US? Will these policies remain in place long enough to warrant such a move, that may cost billions of dollars and take 3-5 years to complete? If in the meantime there is a global recession, does it make more sense to move manufacturing or does it make more sense to take a defensive posture to weather the downturn? It is for these questions, and their foggy answers, that we are skeptical a manufacturing renaissance in the US is about to commence. There is a case for onshoring strategically important production and high-value manufacturing, semiconductors for example, which would call for a targeted approach to government incentives. It is unclear to us how and why the US would seek to produce lower-valued widgets and consumer goods. There is a lack of low-cost labor and other inputs needed to effectively compete at scale.

We believe negotiations will continue, resulting in the reduction for many of the proposed tariffs. There is enormous pressure from all sides, including businesses, consumers, and politicians, to accomplish this. If agreements with our trading partners are not reached, we may be facing not only short-term economic disruption, but a repositioning of global alliances that could affect the US’s long-term economic and political standing. Apart from war, this is a worst-case scenario and would likely result in reduced trade and a decline in wealth, which would negatively impact most, if not all economies.

As we consider all that has happened, and all that may transpire in the months ahead, we take solace in our long-term thinking and diversified approach. Exposure to alternatives, fixed income, and cash, have proven once again to be worthwhile investments, often when one least expects it. With volatility comes opportunity. We believe the prudent tactic is to rebalance portfolios, even when the future looks murky. This encourages buying low and selling high, without making drastic moves that could lead to poor investment returns over multi-year periods. We know too that each client has specific goals and timelines, and this is where our highly customized service shines.

Thank you for your support, and please reach out to continue the conversation.

EPIQ Partners