What Trump's trade war means for YOU: As tariffs throw markets into turmoil, what investors should do
The ink was barely dry on Rachel Reeves’s Spring Statement before her plans to balance the nation’s books were effectively blown out of the water.
US President Donald Trump last night announced he was slapping a ‘permanent’ 25pc tariff on foreign-made cars, fuelling fears that an all-out global trade war will wipe out what little headroom the Chancellor had to avoid more tax rises or spending cuts.
But what does it mean for you as a taxpayer, a consumer and an investor?
Nothing good, unfortunately.
Only hours earlier the Office for Budget Responsibility, the official forecaster, had warned that the impact of tit-for-tat tariffs would eliminate the ’tiny’ £10billion headroom she had given herself.
‘This represents the crystallisation of one of the risks that we highlighted around our central forecast,’ said OBR head Richard Hughes.
In a worst-case scenario where the US imposed an extra 20 pc levy on goods imported from across the world and the UK retaliated, ‘we would lose about 1pc of our GDP,’ or national income, Hughes added.
That would be a huge ‘shock’, Hughes said, as the OBR expects the economy to grow by 1.9pc next year – itself an optimistic forecast.
Donald Trump last night announced a ‘permanent’ 25pc tariff on foreign-made cars
Reeves admitted the latest Trump tariffs, which follow levies foisted on steel and aluminium imports, were the ‘beginning of a risk slide’ which could be bad news for the economy, hitting growth and jobs and increasing the risk that taxes will have to go up again.
‘Trade wars are no good for anyone,’ the Chancellor said, warning they would push up prices and ‘make it harder for British companies to export’.
But she ruled out immediate retaliation, with the UK locked in ‘intense negotiations’ with their US over a ’better trading relationship,’ she added.
Experts say a free trade deal is unlikely.
‘I’m pretty sceptical,’ said Chris Southworth, secretary general of the International Chamber of Commerce in the UK.
‘We’ve tried twice to get trade deals with the US, and we’ve wasted ten years in the process and still don’t have one.
‘And (for) good reasons,’ he added, ‘because of food standards in the UK, hormone beef, chlorinated chicken, US companies having access to NHS services,’
So how should British investors play this highly volatile and unpredictable situation? What are the sectors and assets to avoid, and who or what might emerge as winners?
Rachel Reeves leaves 11 Downing Street to deliver her Spring Statement to Parliament
In its simplest form, a tariff is a tax imposed by one country on goods imported from another.
Crucially, the duty is not paid by the foreign company exporting but by the receiving business, which pays the levy to its government, providing it with useful tax revenues.
These could be worth up to $250billion a year, or 0.8 per cent of US GDP, according to consultants at Capital Economics.
Most economists hate tariffs, mainly because they cause inflation when companies pass on their increased import costs to consumers, sending prices higher.
But Mr Trump loves them – he has described tariff as ‘the most beautiful word in the dictionary’.
He concedes Americans will bear some ‘short term’ pain from his sweeping tariffs. ‘But long term the United States has been ripped off by virtually every country in the world,’ he added.
Mr Trump says the tariffs imposed by former US President William McKinley in 1890 made America prosperous, ushering in a ‘golden age’ when the US overtook Britain as the world’s biggest economy. He wants to repeat that formula to ‘make America great again’.
But experts say he risks a re-run of the Smoot-Hawley Tariff Act of 1930 – a disastrous measure introduced just after the Wall Street stock market crash. It raised tariffs on a broad swathe of goods imported into the US, leading to a collapse in global trade and exacerbating the effects of the Great Depression.
‘The lessons from history are clear: protectionist policies rarely deliver the intended benefits,’ says Nigel Green, chief executive of wealth manager deVere Group.
Rising costs, inflationary pressures and disrupted global supply chains – which are far more inter-connected today than they were a century ago – will impact businesses and consumers alike, he added.
‘The Smoot-Hawley tariffs worsened the Great Depression by stifling global trade, and today’s tariffs risk triggering the same destructive cycle,’ Mr Green adds.
Perhaps the best historical guide to how Mr Trump’s trade policy will impact investors is from his first term in the White House.
‘Trump’s launch of tariffs in 2018 did raise revenues for America, but US corporate profits took a hit that year and the S&P 500 index fell by a fifth, so markets have understandably taken fright this time around,’ says Russ Mould, director at investment platform AJ Bell.
The good news is that inflation didn’t spike in the aftermath, which may ‘assuage current financial market fears that higher tariffs will mean higher prices and higher prices will mean higher interest rates,’ Mr Mould adds.
The reason prices didn’t jump was ‘because consumers and companies refused to pay them and sought out cheaper options – which is precisely the Trump plan this time around’, Mr Mould explains. ‘American importers and foreign sellers into the US elected to take the hit on margin and did not pass on the cost impact of the tariffs.’
In other words, companies absorbed the higher costs from tariffs at the expense of their profits and sparing consumers price rises.
So will it be different this time round?
‘It is hard to see how an escalation of trade tensions can do any good, to anyone, at least over the longer run,’ says Inga Fechner, senior economist at investment bank ING. ‘Economically speaking, escalating trade tensions are a lose-lose situation for all countries involved.’
The impact of a global trade war could be devastating if targeted economies retaliate, prices rise, trade fades and growth stalls or falls. In such a scenario, interest rates could either rise, to curb higher inflation, or fall, to boost sagging growth.
The consensus among experts is that tariffs will mean the cost of borrowing stays higher for longer to tame resurgent inflation, but the truth is nobody really knows.
Tariffs may also lead to a falling oil price – as demand from industry and consumers for dearer products sags – though a barrel of crude was trading higher on Monday amid fears that North American supplies may be disrupted, leading to shortages.
Either way a dramatic drop in the oil price may not be enough to save the day.
‘Unless oil prices drop by 80 per cent to $15 a barrel, it is unlikely lower energy costs will offset the effects of tariffs and existing inflation,’ says Adam Kobeissi, founder of an influential investor newsletter.
Investors are playing the ‘Trump tariff trade’ by switching out of risky assets and into traditional safe havens such as gold, which has recently hit record highs above $3,000 a troy ounce – a trend experts say is likely to continue while uncertainty persists.
Among the hardest hit sectors are microchip and technology stocks such as Nvidia, whose shares are down 18pc this year, and UK-based Arm, which is off 10pc, as financial markets brace for retaliation from China and curbs on semiconductor sales.
Other trade-sensitive companies have also been hit. Shares in German carmakers Volkswagen and BMW dived 6pc and 7p respectively overnight on news of the auto tariffs while consumer goods companies such as drinks giant Diageo have also fallen sharply amid fears of higher costs for their products.
Cryptocurrencies, which soared when Mr Trump won the US election, have been remain volatile.
At $87,500, Bitcoin is almost a third higher since Mr. Trump returned to the White House , though Ethereum – another major digital token – is down almost a quarter in that time.
It is not all doom and gloom.
‘One big hope is that the tariffs do not last, while another is that the US Federal Reserve helps out with some interest rate cuts, something for which Trump is already calling,’ says AJ Bell’s Mr Mould.
And traders think the chances of a rate cut in May to lift the stalling UK economy have improved as a result of the turmoil, which would mean cheaper mortgages for homeowners and lower borrowing costs for business.
Whenever stock markets wobble - as they have been doing this year - it is tempting to panic and sell, but holding your nerve usually pays dividends, experts say.
‘History also shows that volatility breeds opportunity,’ says deVere’s Mr Green.
‘Those who hesitate risk being caught on the wrong side of market movements. But for those who learn from past disruptions and take decisive action, this period of volatility could present some of the best opportunities in years.’
Among the sectors Mr Green likes are European banks, because their shares are trading at relatively low prices and interest rates in the eurozone are lower than elsewhere. ‘Defence stocks, such as BAE Systems, are also attractive because they will give a stable return,’ he adds.
Investors should not rush to sell while the picture is cloudy and can keep an eye out for potential bargains. One strategy is to invest regular monthly amounts into shares or funds rather than large lump sums. That way you reduce the risk of bad timing and, when markets fall, you can buy more shares for your money so, as and when prices rise again, you benefit.
