The end of the 90 day US tariff reprieve is over for now

The U.S. administration has decided to delay its self-imposed deadline for implementing reciprocal tariffs until August 1. Reciprocal tariffs, originally announced on April 2, also known as “Liberation Day,” saw U.S. import tariff rates rise significantly for over 50 trade partners before being temporarily lowered to 10% until July 9 to allow for negotiations.

Since then, only a few tentative trade frameworks have been agreed upon, with agreements limited to the U.K. and Vietnam, as well as a truce with China. In an effort to accelerate talks, the administration has begun sending letters to various countries, informing them of their tariff rates if a deal cannot be secured.

The move signaled the administration's willingness to move forward with significant country-specific punitive tariffs consistent with the initial announcement before the tariff delay. However, as these reciprocal tariffs exclude products subject to sectoral tariffs, they were not as meaningful as initially anticipated. As a result, while Japan and South Korea were hit explicitly with a 25% tariff, only 20% of their trade is exposed to these additional duties.

President Trump also recently announced an additional 50% sectoral tariff on copper. Though the U.S. is highly reliant on imports and the move would likely be counter to rejuvenating domestic manufacturing, the experience with Steel and Aluminum tariffs, where exclusions were not only revoked and derivative products included, but also increased to 50% from 25%, is a possible signal of the administration’s determination on sectoral tariffs.

Despite all the tariff upheaval of the past few months, equity markets have hit new all-time highs and credit spreads are close to historic tights. This likely reflects the widespread view that the administration has been willing to soften its stance multiple times to prevent a lasting market sell-off. Moreover, with Trump’s tariffs having a limited macro impact so far, markets may also be looking through trade policy and instead focusing on factors that can change economic fundamentals, such as corporate earnings.

Despite President Trump’s comments that there will be no further extension after August 1, that is likely not the end of the story. Trade deals typically take between 18 months to three years to finalize, making deadline extensions and renewed tensions still possible. Ongoing legal challenges also have the potential to limit the staying power of broad-based tariffs.

 Finally, the administration’s liberal use of tariffs as a negotiating tool to extract non-economic concessions means that tariff noise will likely remain a permanent feature of the economic backdrop.

Even through all the tariff noise, negotiations, legal challenges, and trade spats, we can be certain of three factors:

1. Tariffs are here to stay. The administration views tariffs as a key source of tax revenue to fund its fiscal expansion plans—tariffs are unlikely to disappear entirely.
2. Peak tariffs are behind us, particularly for China. A return to a 145% tariff on China’s imports would result in a trade embargo between the two nations, sharply raising U.S. recession odds again, making it politically unfeasible.
3. An increased focus on sectoral tariffs. As the administration prioritises reshaping global manufacturing toward the U.S. domestic industrial base, it will likely increasingly pivot to sectoral tariffs. While sectoral tariffs generally take longer to implement, they carry less legal ambiguity than other trade mechanisms, suggesting they have longer staying power.

With these three factors in mind, our baseline expectations include:

1. Global reciprocal tariffs maintained at 10% on average
2. Country-specific universal tariffs on the following countries maintained near current levels: EU 10%, China 30%, Mexico 25%, and Canada 25%
3. Current exemptions (i.e., United States-Mexico-Canada Agreement (USCMA) and energy) maintained
4. Sectoral tariffs broadened to include 25% duties on semiconductors and pharmaceuticals, while 50% duties on steel and aluminum are expanded to copper. The 25% duty on autos is maintained.

These baseline expectations imply that the average effective U.S. tariff rate will ultimately settle at around 17%, the highest level since the 1930s Smoot-Hawley tariffs, up from the current 14% and meaningfully higher than the 2% at the start of 2025.

Investment outlook

While the extension of negotiations through August 1 may suggest that more trade deals will materialize, investors should expect trade barriers to remain higher for the foreseeable future, suggesting there is likely to be some economic scarring. In the near term, risk-on sentiment may need to contend with an economic outlook of slowing growth, elevated inflation, and ongoing policy uncertainty. 

Indeed, even in an optimistic upside scenario where trade hostilities dissipate, the average effective tariff rate is still expected to triple compared to its level at the start of the year. Beyond the short term, it is worth remembering that market disruptions from policy uncertainty are typically short-lived if companies continue to deliver earnings. In turn, investors should expect continued gains in the S&P 500 if corporate earnings continue to grow.

With trade policy volatility likely to persist, it could create headwinds for the U.S. dollar, keeping it vulnerable to further downward adjustment. Yet it’s important to point out that a sharp downward spiral is unlikely. The dollar’s safe haven status remains secure for now, as over half of global trade is invoiced in dollars, and the depth and liquidity of U.S. capital markets remain unmatched.

For investors, diversification across geographies and sectors will be critical. A weakening dollar could further reinforce the case for continued international exposure, particularly as more active policymaking in other global economies invigorates growth momentum. As with any shock, trade policy volatility should create winners and losers amid increased sector bifurcation, with active management playing a key role in identifying opportunities.

Overall, despite the narrow range of outcomes with respect to trade policy, investors should not be complacent about risks stemming from abroad and the restructuring of global trade, both in the near term and the longer term.

Principal Asset Management