What Trump’s latest tariff threats mean
CIO Daily Updates
CIO Daily Updates
From the studio
Podcast: with Dominic Schnider, Head CIO Global FX & Commodity, and Constantin Bolz, CIO FX Strategist.
Video: ۶Ƶ Chief Economist Paul Donovan on the latest tariff deadline announcements and more (12 min)
Video: The AI Show: CIO's Sundeep Gantori on tech earnings (3 min)
Podcast: Investors Club: The Fed, the US dollar, credit opportunities, and gold (16 min)
Thought of the day
US President Donald Trump stepped up his tariff threats yet again on Wednesday, doubling the tariff on Indian goods to 50% and targeting a 100% tariff on semiconductor imports. While he said the semis levies would not apply to businesses that had made investments or a commitment to build and invest in the US, no further details about the plan were provided.
The move came as the refreshed “reciprocal” tariffs on a wide range of trading partners came into effect after midnight today. Earlier this week, he said tariffs on semis and pharmaceuticals would be announced imminently, and that imported drugs could ultimately face a tariff rate of 250%.
The market reaction so far has been relatively muted. S&P 500 and Nasdaq futures are both 0.5% higher on Thursday before the US market open, extending the advance on Wednesday that pushed up the benchmark index by 0.7% and the tech-heavy Nasdaq by 1.2%.
Pending final details, we have said the sector impact of semis and pharma tariffs appears manageable at this stage. Here we offer several perspectives for investors to consider as they navigate fresh trade headlines in the coming days and weeks.
Tariff threats remain a pressure tactic rather than a sign of permanent escalation. Trump has demonstrated his escalate-to-de-escalate approach in negotiations, and we believe he has employed a similar strategy with the latest threats. The additional 25% tariff on India is set to take effect in 21 days, providing a window for further talks, with the next round of US-India negotiations scheduled for 25 August. We also think the Trump administration may be using the pharma tariff as leverage in its efforts to gain industry concessions on Most Favored Nation drug pricing. Additionally, the carveouts in these tariffs are not a coincidence—IT services in India (which has the largest revenue exposure to the US) are unscathed, generic drugs are exempt, and companies with commitments to investing in the US will not be charged with duties on semis. This shows that the Trump administration is aware of the potential economic impact of very aggressive tariffs.
Tariffs are increasingly used to address issues other than trade imbalances, with geopolitical tensions coming into play. The Trump administration cited India’s ongoing purchase of Russian energy as the reason for the additional 25% duties, warning that China could also face new tariffs if it continues buying Russian oil as the White House steps up pressure on Moscow to end the war in Ukraine. Such penalties followed the politically motivated 50% tariff on Brazil as the US runs a trade surplus with the South American country. Geopolitical developments are fluid, and whether any truce could be agreed remains to be seen, but Trump’s use of tariffs highlights the intersection of trade and geopolitical risks.
Fundamentals will remain the underlying driving force of markets. With markets becoming less sensitive to trade headlines, investors are taking more cues from economic data. While the impact of Trump’s tariffs has yet to be fully felt, recent data show that US companies are still increasing profits, consumer spending is holding up, and an imminent recession appears unlikely. With the Federal Reserve on track to resume easing in the coming months, fundamentals look set to keep markets supported.
So, our base case remains that the US effective tariff rate will settle at around 15%—enough to weigh on growth and lift inflation, but not enough to derail the US economy or the equity rally. We expect near-term volatility to continue, but think investors should stick to their longer-term financial plan. In addition, to ensure portfolio diversification across asset classes, investors can consider capital preservation strategies for more defensive stock positioning, or prepare to buy the dips to build long-term exposure.