Trade wars and market jitters

Please note: All data referenced in this article is sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

President Donald Trump is back. Since coming to power in January, he’d signed over 100 executive orders by the end of March¹. He beat Franklin D Roosevelt’s former record of 99 orders in his first 100 days in office. 

Away from his domestic agenda, he’s been reshaping geopolitical relationships. But, probably the biggest deal for financial markets so far has been his protectionist agenda on trade. So, what might this mean for global growth prospects and, in turn, financial markets?

At the time of writing, the US leader had imposed tariffs on $3.3 trillion of trade. As he feels out his bargaining power, a trade war seems inevitable. One that might have profound consequences for global trade flows, and so growth prospects.  

Global trade

Global trade hit a record $33 trillion in 2024. Despite growing by 3.7% during the year, it slowed in the final quarter, according to United Nations’ data². Most of it is in the form of goods, with services flows smaller, but growing at a rate that is three-times quicker than for goods. 

Despite record trade levels last year, the outlook is highly uncertain. President Trump is frustrated that the US has a $1.2 trillion trade deficit in goods. 

Tariffs: a brief history 

Tariffs were rife in the late 19th century and the onset of the first world war. As a consequence of the economic harm of trade wars ahead of 1939, the forerunner of the World Trade Organisation (WTO) was established.  

A subsequent world of flourishing trade and a period often referred to as globalisation, under a free-trade mantra in the West, followed. Only under exceptions could tariffs still be raised beyond agreed ceilings and the WTO acted as a governing body for trade disputes.

If Trump sticks to his guns, the post-second world war consensus might be ripped apart. Indeed, based on the tariffs just announced, which was the so-called ‘Liberation Day’, the country’s additional tariff rates, of around 23%³ on all trade partners, would represent the biggest increase that the global economy has seen since 1930.  

Beware of the unexpected

In preparing for trade battles, three concepts might be applied in estimating the potential impact of tariff threats⁴, and for what the optimal response of the other side could be⁵. 

• Elasticity of import demand
• Comparative advantage of the counterparty
• Global dominance of the counterparty as an exporter. 

In viewing how the above points might apply in practice, the 2018 US trade disputes between the EU and with China showed that the former handled it better, causing the least self-damaging responses, while the latter, due to a lack of domestic breadth in American imports, damaged its economy by retaliating⁶.  

Investor caution

Applying the outlined principles for trade conflicts to the current skirmish, it appears highly unlikely that the US can take broad and indiscriminate action without hitting its own growth prospects. 

Investors have already seen the potential ramifications for equity markets: in the face of the trade policy uncertainty, US equities underperformed other equity markets in the first quarter of 2025 by more than seen in any other quarter since the 1980s. 

With so much uncertainty, taking directional views on the markets is more difficult. As such, maintaining a well-diversified portfolio is one time-tested approach that can help manage risk.

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