U.S. Tariff Rates Highest in 119 Years, Recession Risks Rising

Initial Takeaways:

• The tariffs announced yesterday by President Trump are significantly higher than expected and could be considered a “worst case” scenario in terms of tariff levels. These tariffs substantially increase the risk of recession, moving it from a 40% probability to over 50%, after considering the negative second-order impacts of tariff retaliations and uncertainty. This assumes tariffs stay in place for the balance of the year, which is, of course, not a certainty.
• The initial market reaction is very negative, and we expect heightened volatility as investors digest the ramifications of these announcements and monitor the responses from trading partners.
• We reduced risk in November 2024 and February 2025, at which time we assessed policy uncertainty as underappreciated by markets. Portfolios are neutral to the strategic benchmark across all asset classes and positioned with an overweight to high-quality stocks. At this time, we are not making changes to the portfolio, as tariff negotiations, Fed rate cuts, and a larger tax package could mitigate some of the downside risk. Markets could fall further in coming days or weeks, but we caution against trying to reduce risk in a highly volatile market. That said, we are closely monitoring markets and trade developments to determine if there is an opportunity to reduce risk; we do not feel the markets have fallen enough as to create reasonable margin of safety to add to risk.

Highlights:

• Long-awaited “reciprocal tariffs” were unveiled this afternoon and reflect a significant departure from existing rates. The new tariff schedule pairs a 10% minimum with higher rates on many countries that have high tariffs, as judged by the Administration, and implement other non-tariff trade barriers. Our initial calculations are that these actions would bring the “effective tariff rate” – the tax rate that the U.S. charges across all imports – to roughly 24%, the highest level since 1906 (see figure below). The 10% minimum rate is to go into effect on Saturday April 5^th, while additional reciprocal tariffs are to follow on Wednesday April 9^th.
• The rates associated with key trading partners are high, including a 20% levy on imports from the European Union, 24% on Japan, and a rate of 54% on China after incorporating both new and existing tariffs. Insofar as rates are not negotiated lower in the near-term, this has the potential for substantial economic ramifications. The EU is the U.S.’s largest trading partner, Japan provides many types of essential industrial machinery, and China is the largest source of imported consumer goods. The magnitude of these tariffs increases the likelihood of retaliatory actions by major trading partners, which could intensify the impact to the economy.
• Beyond country-level reciprocal tariffs, various trade-related changes are slated to go into effect, with industry-specific tariffs taking effect this week. Tariffs of 25% on foreign-made cars and car parts go into effect on April 3. Pharmaceutical tariffs are expected to be announced in the near future as the administration seeks to reshore production in targeted industries. Tariffs on certain items such as lumber, various metals, and semiconductors are also being carved out from reciprocal tariffs and have a separate tariff schedule under Section 232 of the Trade Expansion Act.
• The extent and structure of tariffs suggest that the administration intends to use them to serve a variety of aims such as leverage in geopolitical negotiations, reshoring manufacturing, and raising tax revenue to narrow the budget deficit and assist in tax cut negotiations. Reciprocal tariffs may be negotiated down from the standpoint of reaching more equitable trade policy, but may also be used for leverage to meet geopolitical and strategic objectives. Tariffs on automobiles and semiconductors are intended to bring production to the United States. The 10% minimum global tariff reduces the extent to which tariffs can be circumvented through triangular trade and increases the amount of tariff revenue that would otherwise be collected under a solely reciprocal system.

U.S. Effective Tariff Rate (%)

^{Data as of April 2, 2025. Sources: Yale Budget Lab, and WTIA.}

Market Impact:

• Equity markets across the world sold off as President Trump announced the global tariff rollout. Specifically, S&P 500 futures dropped over 3% while Nasdaq 100 futures slid 4.2% in the after-hours as traders braced for a volatile trading session on Thursday. Elsewhere, shares in Asia and Australia also sank shortly after the open.
• Pressure from tariffs is expected to pose a significant challenge for U.S. equity markets. From a sector standpoint, utilities and healthcare could be better positioned to weather the most recent round of tariffs. Both sectors are more defensive, tend to contain more service-oriented businesses, and are less reliant on inputs and customers from abroad. Valuations have started to reflect this information as key metrics for both sectors have moved higher in recent weeks.
• Conversely, cyclical sectors, such as materials and discretionary, could be more vulnerable as trade tensions escalate. On average, cyclicals tend to have a higher percentage of imported inputs (COGS) in addition to lower margins and weaker pricing power, all headwinds in a high-tariff environment.
• Elsewhere, haven assets such as gold and US Treasury bonds moved higher as investors continued to digest the impact of the tariffs. The 10-year UST yield fell towards 4% as weaker economic growth and heightened recession risks were baked into the market.
• In any given year, the average U.S. equity market drawdown is typically between 12-15%. Recessionary drawdowns, however, tend to be far more severe in both size and duration, depending on the severity of the recession. On average, recessionary drawdowns are 2.7x larger than a non-recessionary drawdown with the drawdown period (peak to trough) lasting four times longer. However, several of the milder historical recessions saw peak-to-trough drawdowns of 16% or less. Healthy corporate and household balance sheets and lack of an asset bubble could help in this case.

Core Narrative

Our Investment Committee has been gradually reducing risk since late last year. We reduced small-cap equity exposure in client portfolios in November 2024. In February of this year, we closed our U.S. large-cap equity overweight. Both risk reductions were based on the view that investors were no longer being compensated with adequate margin of safety for taking excess risk. Client portfolios are now allocated with a neutral allocation to our strategic benchmark across asset classes. Diversification, within the portfolio construction process, has started to pay off for investors as international stocks have benefitted from turmoil in U.S. markets, historically cheap valuations (relative to U.S. large-cap stocks), and the weakening dollar. Additionally, fixed income has also played an important role as defensive assets have risen amidst heightened uncertainty.  We will be communicating frequently and as our thinking on the economy, markets, and investment opportunities evolves. 

Disclosures

Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of Wilmington Trust or M&T Bank who may provide or seek to provide financial services to entities referred to in this report. M&T Bank and Wilmington Trust have established information barriers between their various business groups. As a result, M&T Bank and Wilmington Trust do not disclose certain client relationships with, or compensation received from, such entities in their reports.

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