Emerging as a trade weapon targeting a broad range of countries across the globe, US tariffs will seriously impact economies and construction of investment portfolios.
The re-emergence of US tariffs as a policy tool marks a decisive shift in global trade. Once dismissed as temporary measures, tariffs are now embedded in a broader economic agenda that blends protectionism, industrial policy and geopolitical influence. For investors, this evolution carries far-reaching implications, influencing inflation, growth and asset allocation strategies.
At the start of the year, markets assumed tariff increases would remain limited, more negotiation tactic than economic reality. However, latest decisions from the US administration, targeting Canada, Mexico, China and potentially Europe, have shattered that expectation. Tariffs are not simply a short-term political instrument but a structural mechanism reshaping global trade, reinforcing domestic industries and recalibrating economic alliances.
The economic impact of tariffs is inherently stagflationary. By raising import costs, they fuel inflation while restricting trade, weighing on global growth. For the US, this creates a difficult balancing act for the Federal Reserve, which must manage inflationary pressures without stalling economic momentum.
In the eurozone, the stakes are equally high. Europe maintains a significant trade surplus with the US, largely driven by exports of machinery, pharmaceuticals and automobiles. A broad 10 per cent tariff hike on European imports could lead to a contraction in eurozone GDP, with estimates suggesting a decline of up to one percentage point.
Layers of complexity
The European Central Bank, already navigating slowing growth, may be forced to accelerate rate cuts to counteract the fallout. A widening divergence between ECB and Federal Reserve policy could have far-reaching consequences for currency markets and investment flows, adding another layer of complexity for global investors. This policy shift means asset allocation decisions must account for a more fragmented and protectionist global economy.
Equity markets are likely to see increased divergence between sectors and regions. Companies with strong domestic supply chains and pricing power will be better positioned than those reliant on global trade. US industrials and infrastructure-linked businesses could benefit from reshoring efforts and government incentives. In contrast, European manufacturers, particularly in the auto and industrial sectors, may face margin compression and declining export demand.
For fixed income investors, the inflationary effects of tariffs require careful positioning. Rising import costs push inflation expectations higher, making duration risk a growing concern. Inflation-linked bonds, such as TIPS in the US and European ILBs, may serve as effective hedges. At the same time, corporate credit markets, particularly for firms with high exposure to global trade, could face headwinds as rising costs squeeze profit margins.
In currency markets, the US dollar typically strengthens in times of trade uncertainty, benefiting from its safe-haven status. However, prolonged protectionist policies may eventually weaken the dollar’s dominance as trade partners explore alternative settlement currencies.
While the dollar remains the world’s primary reserve currency, sustained tariff disputes could accelerate regional trade agreements that bypass reliance on the US financial system. This shift is already visible in the increasing use of the yuan in Asian trade settlements and the growing strategic importance of the euro in global finance.
Recalibrating investments
For wealth managers, navigating this environment requires a strategic approach that accounts for both risks and opportunities. Traditional global investment strategies, built on seamless trade flows and open markets, may need to be recalibrated. Increased focus on sector selection, currency exposure and regional diversification will be essential.
Beyond public markets, alternative investments offer a means to hedge against trade uncertainty. Commodities, particularly metals and energy, may benefit from supply chain disruptions, while infrastructure and private equity strategies focused on domestic manufacturing could attract increased capital flows. Gold and other real assets will remain important hedges against geopolitical risk and currency volatility, particularly as trade tensions continue to reshape economic relationships.
The integration of tariffs into US economic policy represents a long-term shift rather than a temporary adjustment. The global economic landscape, once defined by increasing trade liberalisation, is now entering an era of selective protectionism, where national interests drive policy decisions more aggressively than in past decades. Investors who recognise this shift and adapt their strategies accordingly will be better positioned to manage risk and capture new areas of growth.
As markets absorb the realities of this new trade environment, the need for a flexible and forward-looking investment approach has never been greater. While policymakers may continue to adjust their stances, the fundamental trend toward trade fragmentation is already underway.
The key for investors will be ensuring that portfolios remain resilient in the face of volatility, while identifying opportunities in sectors and regions that stand to benefit from these profound structural changes.
Patrice Gautry, chief economist, UBP
