The implementation of broad tariffs under the International Emergency Economic Powers Act (IEEPA) marks a significant shift in US trade policy. While tariffs targeting Mexican and Canadian goods have been postponed until 1 March, China-focused measures have taken immediate effect, prompting swift retaliatory action from Beijing.
Market impact and initial reactions
Global equities have experienced broad-based declines, with currency markets showing particular sensitivity. The US dollar has strengthened significantly against major trading partners’ currencies, including the Chinese yuan, Canadian dollar and Mexican peso. The Economic Policy Uncertainty Index has surged to levels not seen since March 2020, reflecting widespread concern about policy implications.
Goldman Sachs analysts estimate that these tariffs could reduce the S&P 500’s fair value by approximately 5%, citing potential margin compression from rising input costs or slower sales if costs are passed to consumers. Ernst & Young’s economic modelling suggests US economic growth could face a 1.5 percentage point reduction this year, with potential recessionary implications for Canada and Mexico.
Policy framework and implementation
Deploying the IEEPA mechanism carries significant historical precedent, most notably through Nixon’s utilisation of its predecessor for a six-month universal tariff in 1971. However, the current implementation differs materially in its open-ended nature, with termination requiring joint congressional action.
The removal of de minimis exemptions on goods valued under $800 represents a targeted effort to address concerns about fentanyl trafficking. The varying rate structure – 10% for the Canadian energy sector versus a general rate of 25% – demonstrates a nuanced approach to trade pressure points.
Economic implications
The implementation of these tariffs effectively creates a $300m sales tax on the US economy. Paul Ashworth of Capital Economics suggests that this represents the first strike in what could become a destructive global trade war, potentially driving US inflation higher and faster than initially anticipated.
Several mitigating factors warrant consideration:
- Dollar strength potentially offsetting some economic impact.
- Market adaptations through alternative supply chains.
- Potential Federal Reserve rate cuts if economic cooling occurs.
- Possible acceleration of United States-Mexico-Canada Agreement renegotiation ahead of 2026.
| Exhibit 1 – Average tariff rate on US goods imports for consumption |
 |
| Source: Pinnacle Associates |
Global market implications
For UK and European investors, Morningstar’s chief European strategist Michael Field warns that Europe should prepare for impact, given the imposition of tariffs on immediate neighbours. The potential for digital service taxes, particularly targeting France, holds special relevance for the UK’s substantial digital services sector.
Analysis suggests corporate earnings could face pressure of approximately 2.8%, including the impact of retaliatory measures. This effect could be more pronounced for UK 100 companies given the index’s high proportion of dollar earners, although the currency impact may provide some offset.
Sector-specific analysis
Our analysis, supported by recent policy expert consultations, suggests varying degrees of impact across sectors:
- Manufacturing and automotive sectors face particular pressure, with European auto makers showing immediate sensitivity to tariff news. UK-based manufacturers with complex supply chains require careful evaluation.
- The technology sector shows resilience, particularly among mega-cap firms with strong balance sheets and central roles in AI development. However, smaller tech firms face increased pressure from supply chain disruptions.
- Domestically focused services businesses demonstrate particular resilience, with financial services, real estate, utilities and healthcare services offering defensive characteristics in the current environment.
Edison analyst Fiona Orford-Williams examined the impact of a return of tariffs in her December 2024 note on 4Imprint. Fiona concluded that the return of Trump-era tariffs, particularly on goods from China, is anticipated to cause disruptions, though the full impact may not be immediately apparent due to existing buffer stocks in supply chains. Tariffs are imposed on the landed cost, potentially reducing the overall impact on consumer prices, which could be further mitigated through substitutions. A large-scale return to domestic manufacturing of low-cost items is unlikely. Superdry’s CEO, Julian Dunkerton, has stopped shipping Chinese-made goods to the US, citing the tariffs are making shipments unprofitable and adding unnecessary complexity to the supply chain.
Investment strategy implications
Near-term positioning warrants careful consideration of several factors:
- The S&P 500 is expected to find support in the 5,000–5,500 range, suggesting potential entry points for long-term investors. The UK 100’s defensive characteristics may prove valuable if global trade tensions escalate further.
- Medium-term considerations should include preparation for potential global recession risks if tariffs persist, although current economic foundations appear more robust than during previous trade disruptions.
Conclusion
While we anticipate near-term market pressure, underlying economic resilience, potential deregulation benefits and the continuing AI revolution support a cautiously optimistic six- to 12-month view. The situation warrants careful monitoring of implementation timelines, retaliatory measures and central bank responses to inflationary pressures.
For UK investors, emphasis should remain on companies with strong domestic market positions and sectors benefiting from dollar strength. Understanding the IEEPA framework and monitoring resolution requirements provide an essential context for navigating this period of trade policy adjustment.
This analysis is based on market conditions as of 10 February 2025 and is subject to change as the situation evolves.
