Understanding tariffs in five charts

To help make sense of it all, we developed this guide to tariffs and their potential implications for the economy, markets and investors.

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1. What are tariffs and how are they used?

Tariffs are essentially taxes on goods imported from other countries. They are used to help protect domestic producers from foreign competition, among other purposes. We employ a four-box framework to understand the motivations for tariffs and what they could mean for the investment environment. Four main factors – decoupling, rebalancing, negotiating and funding – will influence how the story plays out.

2. Why is the US trade deficit so high?

Trade deficit is a key indicator when thinking about tariffs. Economists note the high trade deficit may be a sign of US economic strength – indicating consumers are buying – but the figure is nonetheless why tariffs are central to Trump’s economic agenda.

3. Do tariffs cause inflation?

The short answer is yes, but how it plays out is much more complex. In the event of a one-time tariff, prices would likely increase modestly but then even out over time. A more worrisome development is a trade war scenario, where tariffs ratchet higher year to year. That, in turn, could lead to higher long-term inflation with a knock-on effect of rising interest rates.

4. What is trade reciprocity and how will it unfold?

At face value, the concept of trade reciprocity is simple: We charge you the same tariffs that you charge us. The Trump administration aims to rebalance tariffs between the US and other countries to make them reciprocal. Such a move bucks 75 years of multilateral US trade policy and sidesteps rules of the World Trade Organisation, the successor to the General Agreement on Tariffs and Trade (GATT) of 1947.

5. What impact did tariffs have during the first Trump administration?

Investors may be experiencing a strong sense of déjà vu as tariffs make headlines. The first Trump administration pursued a similar goal of reducing the trade deficit by imposing tariffs on China. That move sparked a trade war that whipsawed markets and dominated the news, much like now.

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