By popular demand, here is a bitesize Q&A on tariffs. In short, there are no winners from a trade war, but it is not too late to avoid a global recession. For now, ‘wait and see’ may be the best strategy both for central bankers and investors.

1. Do the new ‘reciprocal tariffs’ make any sense?

No. They ignore services, assume any deficit in goods between two countries means that the surplus country must be cheating, and rely on dodgy assumptions about the pass through of tariffs and the price elasticity of demand. They are also an administrative nightmare, and have already prompted strong retaliation from China.

2. Are these new tariffs really ‘reciprocal’?

No. The US administration has made no attempt to quantify the effect of trade barriers, such as the tariffs applied by other countries. It has simply assumed that these can be proxied by the size of the bilateral deficits in goods, which is nonsense economics.

3. Won’t tariffs ‘bring jobs back home’?

Both economic theory and experience (including from Trump 1.0) show that any jobs gained in protected sectors are more than offset by losses in others, as prices rise and productivity falls. And can the US really replicate Vietnam’s low-cost manufacturing model in Ohio?

4. How useful are the extra revenues?

The new tariffs might raise as much as $700bn a year for the US Treasury, allowing other taxes to be cut and/or reducing the budget deficit. But this estimate assumes that they are permanent and do little harm to trade or the wider economy, which is unrealistic.

5. Isn’t the fall in bond yields a good thing?

A lower cost of borrowing is helpful, but the context matters too. Bond yields have fallen because of recession fears and safe-haven flows from riskier assets including equities. This is not a great way to save on interest payments.

6. Will the trade war cause a global recession?

Too soon to say. But the best hope is that the new US tariffs will quickly be scaled back, either because they are obviously harming the US economy, and/or because they are negotiated away (Trump ‘loves a deal’).

7. What does this mean for inflation?

The new tariffs will raise prices in the US, but the impact elsewhere is less certain. In the short term, the diversion of imports from Asian producers might actually lower prices in some European markets, notably the UK. Global oil prices have also fallen sharply. But the unwinding of globalisation could push inflation up.

8. Emergency rate cuts?

I doubt it. Central banks will want to wait for more evidence on the impacts both on demand and supply. At most, those who would probably have cut anyway at their next meeting – incl. the BoE and ECB, but not the Fed – might now be more likely to do so.

9. How hard will the EU be hit?

The default ‘reciprocal tariff’ on the EU will be 20%, but some goods will initially be exempted (such as pharmaceuticals) while others will face a higher rate (e.g. 25% on cars). In practice, the effective rates for most countries will be between 10% and 20%.

10. How will the UK fare?

The UK will face the lowest default tariff of 10%, though will still be subject to the higher sector-specific tariffs e.g. on cars. Overall, the UK has been let off more lightly than the EU, and has a better chance of negotiating a bespoke deal.

11. Should the UK retaliate with tariffs of our own?

No. This would simply raise costs for UK businesses and consumers, with no guarantee that it would result in any more concessions from Trump. If anything, the UK should be lowering tariffs, including those on the US, not raising them.

12. What should investors do?

Sit tight. There is simply too much uncertainty to make sensible long-term decisions now. In the meantime, a diversified portfolio, including safe haven assets such as bonds, should minimise the losses.

(This is not offered or intended as financial advice.)

13. What do you really think of President Trump?

I’ll duck that one, thanks!

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