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Market Perspectives: Learning to live with tariffs threats

Anthony Willis

Senior Economist, Multi-Asset Solutions team

Key Takeaways

Despite a U-turn on Greenland-associated levies the world continues to operate in a much higher tariff regime that at any time over the past 70 years.
The US administration has used the International Emergency Economic Powers Act to impose tariffs. If the Supreme Court finds them illegal what would be the ramifications?
Recent events have further eroded trust between the US and Europe, but NATO remains intact. Has the US reassessed the importance of NATO?
Gold has hit new highs – a move that reflects general uncertainty in markets. Nevertheless, the economic backdrop remains supportive and expectations are anchored around an upbeat earnings season.

Transcript

We focus on the fallout from last week’s Greenland tariff announcements and subsequent policy shifts. Irrespective of U-turns, we are now operating in a world of higher US tariffs. When we look back from the 1950s to 2018 when US president, Donald Trump, was first talking about instigating trade-related measures, the average effective US tariff rate stood around 4%. Indeed, we entered 2025 with an effective tariff rate of 2.5%; but ended the year at 14.4%. Despite noise about “TACO” (Trump Always Chickens Out) and the suggestion that these policies aren’t followed through on, the world is now operating in a much higher tariff regime than at any time over the past 70 years.

We expect tariffs to persist for an extended period. But, of course, we need to remember that around two-thirds of these levies are imposed under the International Emergency Economic Powers Act (IEEPA). This act is normally reserved for events of national security, but under the Trump administration the lines between economic and national security policy are increasingly blurred. If the IEEPA tariffs are removed, the US effective tariff rate drops to around 8%. The knock-on consequences will be significant. For instance, US government revenues would drop from about $2.3 trillion to $1.2 trillion – a significant move given the impact on the deficit and bond markets. For households the negative impact of just over $1,200 would fall to around $600 and the tariff drag on GDP of about 0.4% would turn into a positive boost of 0.1%. Additionally, tariff payments could need to be refunded – a situation that would be both complicated and a slight economic stimulus at the margin. Of course, it is not as simple as that – even if the Supreme Court ultimately rules tariffs to be illegal under IEEPA, the Trump administration still has other options to impose these measures on their trading partners.

So, what did we learn last week with the US climbdown over Greenland tariff threats? There are three ways to respond or push back against tariffs. Firstly, you can accept them – a stance that appeases the administration. We saw this last year as the EU accepted a 15% tariff rate on the basis that there was continued US support for Ukraine. The second response is pushing back – a strategy adopted by China, which was the only major economic power to impose their own retaliatory tariffs. Those moves ultimately resulted in agreement but only after a short but significant trade war. Lastly, we can see significant pushback from financial markets, which we saw a little bit of last week.

Politically, the outcome of these events is a further loss of trust between the US and Europe. On the upside, however, NATO remains intact and perhaps from the US side there has been a realisation that the stability of NATO is more important for national security than acquiring Greenland.

Unsurprisingly, the mood in financial markets is somewhat unsettled, and we are seeing that reflected in gold trading at or around record highs. Tariff threats have not gone away and over the weekend Trump threatened a 100% tariff on Canada – time will tell whether that rhetoric has momentum.

Despite unsettling geopolitics, the economic backdrop remains strong with a cyclical upturn boosted by fiscal stimulus and supportive monetary policy. As we head into reporting season, earnings growth is still expected to be positive.

26 January 2026

2026年 January 26日

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Market Perspectives: Learning to live with tariffs threats

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Market Perspectives: Learning to live with tariffs threats

Weekly Perspectives: How serious is the US threat to Europe over Greenland?

Weekly Perspectives: What could unsettle financial markets?

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