Tariffs and Trade Tensions

Potential Impact Analysis

Trade tensions are heating up, with a significant increase in tariffs shaking up global markets. As the United States introduces reciprocal tariffs, both developed and emerging markets will feel pressure as financial markets and the global economy are affected. This report provides a detailed analysis of the potential effects of tariffs and trade tensions across various regions and offers strategic insights for investors

• The Winners and Losers of Tariffs

• Impact on Emerging Markets

• Resilience of Developed Markets

• Economic Recoupling: A Global Perspective

• Navigating Today’s Trade Landscape

• What to Watch for in the Months Ahead

Overview

On April 2, 2025, the United States enacted reciprocal tariffs on imports from over 180 countries and territories. These tariffs represent a retaliatory trade measure in response to foreign tariffs and non-tariff trade barriers. Intended to fortify domestic producers by inflating the cost of foreign goods, these measures signify a substantial escalation in global trade tensions, with profound ramifications for both advanced and emerging markets. This report delves into the multifaceted repercussions of these tariffs, scrutinizing their potential to reshape economic competitiveness, influence consumer behavior, and alter growth trajectories across regions. We assess the vulnerabilities of export-reliant emerging economies, the relative resilience of developed markets, and the winners and losers in this shifting global landscape, while providing strategic insights for investors navigating the complexities of an increasingly protectionist international economy.

The Winners and Losers of Tariffs

Tariffs create clear winners and losers. For foreign exporters, higher tariffs reduce the competitiveness of their products, making it harder to compete on price. Conversely, domestic producers often benefit, as tariffs raise the cost of imported goods and give local alternatives a relative pricing advantage. However, not all domestic businesses win. Retailers and manufacturers that rely on imported inputs may face higher costs, which can weigh on margins.

For consumers, tariffs typically mean higher prices and reduced purchasing power. There are some offsets: rising wages, government support measures, and even strategic price absorption by companies—both domestic and foreign—aiming to preserve market share. Currency movements can also help cushion the impact. Still, these mitigating factors rarely offset the full cost of broad-based tariff increases.

In summary, trade policies and tariffs are complex, with wide-ranging effects. But at their core, tariffs often function as a tax on consumers, while tending to support domestic producers and disadvantage foreign exporters.

“Tariffs may boost domestic producers, but consumers and import-reliant businesses often pay the price.”

Impact on Emerging Markets

Emerging markets—including China, India, and many countries across Southeast Asia—are particularly vulnerable to the negative effects of reciprocal tariffs. As shown in Figure 1, many emerging markets were imposing significantly higher tariffs on U.S. imports than the U.S. was charging in return. Second, these economies tend to be more goods- and export-oriented than service-driven, making them more sensitive to shifts in global trade and growth. And with less financial flexibility, many emerging markets lack the capacity to borrow or spend their way out of a slowdown.

There are some offsets; emerging market equities continue to trade at a discount relative to developed markets. Additionally, most emerging economies are less reliant on U.S. imports compared to regions like Canada or Europe. China’s bold fiscal package, announced in early March, also offers a potential tailwind and further stimulus could be on the table. Still, we believe emerging markets remain more exposed to trade-related risks than their developed counterparts.

Resilience of Developed Markets

Developed markets such as Canada and Europe appear relatively well positioned in the current environment. These regions maintain more balanced trade relationships with the United States, giving them greater leverage 

to retaliate or renegotiate terms. Central banks in both regions remain supportive, with interest rate cuts expected to help cushion the economic impact. In addition, fiscal stimulus measures are likely to be deployed in the near term.

Overall, Canadian and European equities may prove more resilient than expected and could outperform other equity indices, particularly those in emerging markets. The Canadian dollar has held steady despite trade-related volatility—likely due in part to the USMCA trade agreement, which offers some protection for Canadian exports. Support may also be coming from portfolio flows, as Canadian stocks and bonds have recently outperformed their U.S. counterparts (Figure 2).

“As global growth slows  and trade restrictions rise, the gap between the U.S. and other economies may begin to close.”

Economic Recoupling: A Global Perspective

As noted in the March report, the U.S. economy was beginning to show signs of slowing, while growth momentum was picking up in Europe and China. A combination of factors including higher interest rates in response to persistent inflation, reduced government spending, and tighter immigration policies likely contributed to the U.S. slowdown. At the same time, a surge in U.S. imports ahead of the implementation of tariffs likely provided a temporary boost to economic activity in Europe and China.

Looking ahead, a recoupling in growth momentum between the U.S. and the rest of the world appears increasingly likely. Higher tariffs may lead to a pullback in U.S. imports, which could slow economic growth outside the U.S. (Figure 3).

Navigating Today’s Trade Landscape

Global trade dynamics are evolving, with notable implications for market performance worldwide. U.S. equities are showing signs of strain, weighed down by elevated valuations and growing trade uncertainty. While markets in Canada and Europe are also exposed to the risks of higher tariffs, support from central bank rate cuts, fiscal stimulus, and more attractive valuations may offer a buffer against near-term volatility.

In this environment, diversification remains a core risk management strategy. Allocating across regions and asset classes—from equities to fixed income—can help mitigate downside risk and position portfolios to benefit from pockets of relative strength (Figure 4).

Conclusion

The escalation of trade tensions, exemplified by the United States’ broad reciprocal tariffs in April 2025, represents a critical juncture in global economic relations. These measures, designed to address trade imbalances, highlight the vulnerabilities of export-dependent emerging markets while testing the resilience of developed economies. The tariffs reflect the complex interplay between domestic priorities and international interdependence. 

This evolving landscape underscores the intricate nature of contemporary trade dynamics—a challenge that will continue to shape the direction of markets and economies in the months and years to come.