Reciprocal tariffs: What to expect from 2 April?

Investor sentiment remains skittish ahead of the expected announcement of further US tariffs on Wednesday, 2 April.

On Monday, the S&P 500 recovered from early pressure to close 0.6% higher, while the Nasdaq reduced its declines to just -0.1% on the day. That marked a reprieve from the heavier losses seen in Europe and Asia on Monday, including single-day declines of more than 4% for both Japanese and Taiwanese benchmark indices.

Most Asian equity indices traded higher on Tuesday, including a 1.6% gain for South Korea's KOSPI index. Yields on 10-year US Treasuries are currently hovering near 4.19%, down from around 4.37% last Thursday, while gold has hit a fourth straight all-time high at USD 3,144 an ounce. At the time of writing, gold is trading at USD 3,122 an ounce.

Sentiment continues to pivot on headlines and speculation around the upcoming Trump administration's tariffs. Over the weekend, the Wall Street Journal (WSJ) reported “Trump has pushed his team to be more aggressive,” but that policy had not yet been agreed or set. The report suggested a 20% tariff on virtually all US trading partners was under consideration. Late Monday, Trump told reporters he had made up his mind on a tariff approach, but did not reveal details.

What do we expect?

The US administration is poised to announce a new round of “reciprocal” tariffs after imposing a range of tariffs on China, Mexico, and Canada; a separate set of tariffs on steel, aluminum, and derivative products; and newly announced levies on autos and auto parts.

• Who and what? The new reciprocal tariffs will likely target a range of countries (potentially focusing on Europe and Asia ex-China) and products (potentially pharmaceuticals, semiconductors, lumber, copper) to address other countries’ persistent trade surpluses with the US and grievances related to high tariff and non-tariff barriers.
• How high? The tariffs imposed during Trump 1.0 were relatively small (the US effective tariff rate rose from 1.5% in 2016 to 3.0% in 2020), primarily focused on China, and followed a highly stimulative reduction in personal and corporate taxes. The 2025 tariffs are much larger: The effective tariff rate has increased from 2.5% to approximately 9%, the highest since World War II.
  Wednesday’s reciprocal tariffs could push the effective tariff rate another 4 percentage points higher. Anything further than that could move tariffs beyond a revenue-raising “sweet spot,” in our view. Globally, the risk of high tariffs disrupting trade and economic activity would potentially offset any US federal revenue gains that the Trump administration seeks to use to further domestic policies.
• How long? We do not know how long the previously enacted tariffs and any future tariffs will remain in force. However, we believe that the news flow could become more supportive as we approach the second half of the year. Once tariffs are announced on 2 April, negotiations to soften them can begin.
• What reactions can we expect? The reciprocal and product-specific tariffs will likely prompt varied responses across different countries, ranging from immediate retaliation to diplomatic negotiations.

North America, particularly Canada and Mexico, may adopt a more diplomatic approach. Recent positive interactions between President Trump and Canadian Prime Minister Carney suggest potential for tariff de-escalation, and the US-Mexico relationship has been pragmatic. Potential off-ramps include enhanced border security measures and stricter rules-of-origin content requirements in the upcoming US-Mexico-Canada trade agreement review.

In contrast, the European Union faces a more challenging scenario. The US administration has numerous grievances with Europe, including corporate tax havens, digital services taxes, carbon border-adjustment taxes, and prohibitions on certain agricultural imports. Given past experiences under Trump 1.0, we think reciprocal tariffs on the EU are likely to be broader and longer lasting. Although the EU trade commissioner has indicated an openness to lower car import tariffs, the complexity of issues suggests prolonged negotiations.

China, already heavily targeted by 2025 tariffs, may seek diplomatic solutions. A planned June summit between US and Chinese leaders could provide opportunities to revisit the dormant 2020 Phase 1 agreement, potentially exchanging geopolitical concessions for tariff reductions.

Read more in our latest Global Risk Radar, “Preview of 2 April tariffs.”

How to invest?

Take advantage of US volatility. Markets are likely to be volatile in the near term as investors navigate US policy and economic uncertainty. But we expect the news flow to become more positive toward the second half of the year. We think investors can use market swings to build long-term exposure. Investors should therefore consider taking advantage of market dips to buy into broad US equities and companies exposed to AI.

Our analysis suggests that entering the US market after a 10% peak-to-trough decline has tended to yield higher returns compared to waiting for 15% or 20% drops, and we believe that investors should accelerate phasing in strategies at S&P 500 levels below 5,500. (For more, see "Signal over noise #5: Equity market valuations – is it time to buy the dip?")

Navigate political risks. Tariff-related uncertainty and trade policy shifts reinforce the need for portfolio diversification and risk management. In equities, capital preservation strategies can help manage downside risks. Investors should also ensure portfolios are well diversified with defensive assets like gold and alternatives like hedge funds.

Seek durable income. With bond yields remaining high despite equity market volatility, we believe investors should seek durable portfolio income and optimize cash returns. High grade and investment grade bonds offer attractive risk-reward, in our view, and can help diversify portfolios against equity market volatility. We also like diversified fixed income strategies, including senior loans, private credit, and equity income strategies.