Trump shakes up global trade with historic tariffs, increasing the risk of a US recession.

 

President Donald Trump announced higher trade tariffs than markets expected. The new import taxes will raise the effective US tariff rate to levels not seen in decades, increasing the risk of a US recessionRisk assets, including stocks, are likely to suffer further declines, while some bonds, the Swiss franc, the Japanese yen, and gold should perform better.

 

Trump's April 2 announcement will increase the effective U.S. tariff rate from 2% in 2024 to approximately 20%, according to Lombard Odier's preliminary estimate. This will negatively affect growth both in the US and globally and inflation will increase due to the impact on trade in goods. Lombard Odier expects the U.S. economy to suffer significant damage, with a higher likelihood of recession. These negative effects could eventually be partially mitigated by the planned tax cuts, which the tariffs are intended to fund, and by additional measures such as deregulation, which could be announced in the coming weeks.

 

The tariff announcement provided some details, but not the certainty that markets were hoping for. Declared a “national emergency,” the duration of the tariffs will depend solely on President Trump’s assessment that “the U.S. trade deficit and underlying unequal treatment have been satisfied, resolved, or mitigated,” according to the White House statement.

 

The US will impose at least a 10% tariff on all its trading partners. From April 5, it will apply additional "reciprocal" tariffs to those countries it considers to have high non-tariff barriers or manipulate their currency.

 

In this context, "tariffs levied on the U.S." are calculated as the proportion of the U.S. bilateral trade deficit in goods to total bilateral imports of goods. Reciprocal U.S. tariffs are equivalent to half of these estimated values.

 

China in the crosshairs

 

China is the primary target of these measures. Tariffs on Chinese goods will increase to 54%, including the 20% imposed in February plus the 34% "reciprocal" tariffs announced on April 2. It remains unclear whether these tariffs will be added to those established under Section 301 during the first Trump administration. If combined, tariffs on Chinese goods would exceed 60%, the level promised by the Trump administration during the presidential campaign.

 

Canada and Mexico, for now, have been exempt from additional restrictions, as all goods that comply with the North American trade agreement (USMCA) will avoid tariffs. However, goods that do not comply with the USMCA will face a 25% tariff (with the exception of energy and potassium, which will be subject to a 10% tariff).

 

Switzerland and the negotiations

 

Switzerland's open economy, which will face a 31% tariff, will be affected by these measures. It is not yet known how pharmaceutical exports, which account for 30% of Switzerland's shipments to the US, will be treated. Pharmaceuticals were explicitly excluded from the reciprocal tariffs, along with copper, semiconductors, and lumber, as well as steel, aluminum, and auto parts, which are already subject to previous tariffs.

 

China and the European Union have threatened retaliation. U.S. Treasury Secretary, Scott BessentHe urged governments to "wait and see" rather than retaliate. President Trump did not mention the possibility of negotiation in his remarks. We believe that negotiations in the coming months could reduce effective tariff rates to approximately 15%, which would bring US inflation down to 3.5%.

 

It is also noted that this announcement should mark a peak in tariff-related uncertainty, and that unexpected exemptions, as recently occurred with Mexico and Canada, could occur, lowering effective tariff rates.

 

Inflation Risk and the Federal Reserve

 

The immediate threat to the U.S. economy is inflation, raising concerns about growth and a possible recession. With the rising economic risk, the Federal Reserve will need to manage both the labor market and inflation. In the event of a recession, the federal funds rate could be cut to 2%.

 

Lombard odier continues to monitor real wage trends, business confidence surveys, the U.S. dollar, and business inventories-to-orders ratios, as U.S. importers have brought forward orders to anticipate tariffs.

 

Implications for investment

 

The macroeconomic environment suggests a period of risk aversion in financial markets. The duration of this period will depend on how long the new tariffs remain in place and whether their impact can be offset by more positive news about deregulation and tax cuts in the US.

 

Given the increased risk of recession in both the US and globally, and rising inflation, Lombard Odier anticipates volatility in equity markets. Defensive sectors, such as utilities, should outperform.

 

In the fixed-income market, Lombard Odier expects 10-year US Treasury bonds to fall to the 3.5%-4% range over the next three months as the Federal Reserve reduce its monetary policy rate. With investors avoiding risk, the Treasury bond inflation-protected securities (TIPS) perform well.

 

In the currency markets, Lombard Odier forecasts a stable or stronger dollar against the euro and the pound. Safe haven currencies, such as the Swiss franc and the Japanese yen, are expected to strengthen further. Asian currencies, especially the Chinese yuan, are likely to weaken further.

 

Gold remains a useful asset for portfolio diversification. However, there could be short-term consolidation if U.S. gold imports decline due to a tariff exemption.