Reciprocal tariffs were rolled out on schedule by President Donald Trump on April 2, but the breadth and magnitude were well above consensus. A 10 per cent baseline tariff was introduced on imports coming into the U.S. from 185 countries effective April 5, with much higher rates imposed on over 60 of these trading partners effective April 9, including another 34 per cent on China and 20 per cent on the European Union. Canada and Mexico were excluded from the list but remain subject to 25 per cent “fentanyl” tariffs on trade that is not compliant with the existing United States-Mexico-Canada trade agreement.

According to Bloomberg, the 22 per cent weighted average reciprocal tariff rate is double the size anticipated by economists, and almost ten times higher than the average 2.4 per cent that prevailed in 2024. As discussed in a previous newsletter, U.S. reciprocal tariff rates were expected to be based on both tariff and non-tariff barriers imposed by other countries. However, many economists have observed that the methodology employed by the Trump administration in arriving at their reciprocal tariff rates is inconsistent with conventional definitions of reciprocal.

While markets had attempted to price in reciprocal tariffs leading up to April 2, the higher-than-expected rates surprised everyone. Furthermore, China’s immediate retaliation further aggravated the outlook and resulted in a two-day decline of 10.5 per cent for the S&P 500, 8.4 per cent for the S&P/TSX Composite, and 9.3 per cent for the MSCI World index over Thursday and Friday last week.

To highlight the fluidity of the situation, Vietnam, Israel, and Taiwan have already come forth with proposals to drop their tariff rates to zero on U.S. goods., and the U.S. administration has indicated that another 50 countries have already reached out to negotiate. While this should be received positively by global investors, the U.S. administration’s emphasis on non-tariff barriers could complicate and prolong negotiations.

Higher inflation and slower growth likely in the near-term

Trump’s use of tariffs to achieve the broad goals of eliminating its trade deficit and reindustrializing the U.S. is likely to result in a dramatic re-wiring of global trade. Like the supply chain disruptions during the pandemic, this process cannot be accomplished quickly and should result in inflationary pressures and weaker economic growth in the interim.

While negotiations may result in a reduction of tariff rates in the weeks ahead, we think global markets are adjusting to the reality that some level of tariffs will remain indefinitely as the U.S. reshores critical industries.

As an effort to cushion the impact of tariffs, U.S. Congress is making progress on the next leg of Trump’s policy agenda: tax cuts. On April 5, the U.S. Senate passed a budget framework that would extend previous personal tax cuts and introduce new ones. The U.S. House is working toward a similar bill. Beyond taxes, the new administration is expected to turn its attention soon to growth-friendly deregulation.

As investors contend with the uncertainty of markets, the U.S. Federal Reserve (the Fed) is facing its own uncertainty on the path of interest rates. With a dual mandate of maximizing employment and maintaining price stability, the Fed has opted to remain on pause. Even though Chair Jerome Powell remarked that tariff-induced inflation could be more persistent, the interest rate futures market is pricing in four quarter-point rate cuts this year starting as early as June. Developments of the past week have increased the likelihood of three additional quarter-point rate cuts by the Bank of Canada this year, from two previously. While rate cuts cannot fully offset the disruptive impact of tariffs, they should support capital market liquidity and reduce borrowing costs across the economy.

Canada escapes reciprocal tariffs for now

Trump’s unveiling of reciprocal tariffs on April 2 included him waving a copy of the latest 397-page report by the U.S. Trade Representative (USTR) on Foreign Trade Barriers that was released March 31. Reciprocal tariffs were supposedly based on the findings of this annual report. As expected, the largest grievances are with China. With regards to Canada, our review indicated almost identical grievances as the 2024 report. As most trade between Canada and the U.S. has been tariff-free, most of the issues relate to non-tariff barriers such as: agricultural supply management, restrictions on wine/beer/spirit sales, language rules of Quebec’s Bill 96, protection of intellectual property rights, and taxation of digital services. Interestingly, Canada’s Harmonized Sales Tax was not listed as a grievance as it was for several other countries.

Contrary to Trump’s rhetoric of a US$200 billion annual trade deficit with Canada, the USTR’s 2025 barriers report listed the deficit at only US$32.5 billion for 2023. If one were to adjust for elevated pandemic-induced oil prices, the deficit would shrink to approximately US$10 billion. While it undoubtedly faces challenges in redefining its trade relationship with the U.S., we think that Canada may eventually fare better than many other U.S. trading partners.

Making course corrections rather than wholesale portfolio changes

Trump’s shock and awe tariff strategy has disrupted the economic outlook for every region, including the U.S. While trade negotiations could eventually result in market stabilization, elevated market volatility is likely to plateau. Crises, whether external or self-inflicted, are accompanied with high levels of uncertainty and anxiety. As past instances have demonstrated, wholesale portfolio changes in the midst of a storm have generally underperformed a steady approach of staying invested and making course corrections where necessary.

In the days leading up to April 2, we were rebalancing overweight equity position and applying proceeds to raise fixed income exposure. We further trimmed equity exposure immediately following the announcement of reciprocal tariffs, shifting our balanced portfolios to a modest underweight equity allocation. While risk management remains a priority, we are also cognizant that many strong corporate franchises have become more attractively priced and warrant consideration.

This may be one of the most uncertain times we have seen as portfolio managers over the last decade. Like you, we are not immune to the daily market volatility and the near-constant barrage of negative headlines. In times like this, it can be helpful to remain focused on portfolio management fundamentals and to look to history as our guide. A few things we are keeping in mind this week:

• A well-diversified portfolio comprising multiple asset classes has historically performed well over the course of the entire market cycle. While equities have dominated portfolio returns over the past two years, a significant portion of our portfolios is invested in assets not linked to equity markets, such as bonds and mortgages. These non-equity holdings will serve as a strong ballast for the portfolio in the days ahead.
• We have seen more than a dozen significant corrections in equity markets over the past century. Through wars, pandemics, and financial crises, the history of equity markets is riddled with periods of extreme volatility. For the long-term investor, these previous periods have been opportunities to buy assets at depressed prices. Indeed, the average 12-month return following a bear market has been over 30 per cent.
• While it is tempting to “opt out” of the volatility by selling assets in times like this, history has shown that this is exactly the wrong thing to do. Surprisingly, 50 per cent of the best market days in history occur during bear markets and often follow the point of maximum uncertainty. Investors who missed these days would have underperformed in the long term by significant margins. While extremely challenging, staying invested during these periods—and finding opportunities to add high-quality assets—is the right thing to do.

As always, we encourage you to contact us if you have any questions regarding your portfolio and our market outlook as we all navigate this turbulent period.