If you’ve been following the news, no doubt you’ll have heard about the current market volatility that’s a reaction to Trump administration’s introduction of sweeping US tariffs, followed by a pause on them. (*Note: this information was correct at time of publication on 10 April 2025, but changes are always expected.)
While it’s never fun to watch the value of your investments go down, it is important to remember that historically, markets have gone through boom and bust cycles and have always recovered – even over the course of significant events as world wars, pandemics and the Great Depression.
Here’s a very simple guide to what’s happening now and what it means for you.
What was Liberation Day?
On 2 April, 2025, President Trump announced significant tariffs aimed at restructuring U.S. trade policies to favour its own domestic interests.
His justification was that it would boost US domestic manufacturing and address longstanding trade imbalances between its many international trade partners.
What was announced?
There were two parts to the announcement.
First, a universal 10 percent tariff will apply to virtually all U.S. imports starting 5 April, 2025.
Second, beginning 9 April, 2025, the US will impose country-specific “reciprocal” tariffs—targeted at 57 named countries, with rates reaching as high as 50 percent.
These countries were targeted with additional tariffs based on the balance of trade between them, perceived tariff imbalances, and other perceived barriers to U.S. exports.
What are tariffs and how do they work?
A tariff is essentially a tax on imported goods. The point of a tariff is to make imported goods more expensive, so people are more likely to buy locally made products instead – encouraging local production and protecting domestic industries from overseas competition.
In this case the tariff amount will be added to products that come from other countries when they enter the US.
Here’s an example:
A US company imports a product, such as a New Zealand lamb, into the US.
When the shipment arrives at US customs, the government adds a tariff to it, such as 10%.
The importer has to pay this tariff to receive the meat. This effectively makes the total cost of the meat more expensive for the company importing it.
The importing company is likely to increase the price of the meat in shops, so they can still make a profit.
While the importer pays the tariff, it is likely that the cost of the tariff is mainly borne by consumers.
What is a trade deficit?
A trade deficit happens when a country buys more from other countries than it sells to them. It's part of what's called the balance of trade.
For example, one of Trump’s main talking points is the trade U.S. deficit with China, because they import a lot more from China than it exports there.
A trade deficit is a not necessarily bad, but it was a key area of focus for the new Liberation Day policies.
Some might see a trade deficit as a bad economic indicator for a country because:
- It can mean fewer jobs in local manufacturing
- It might suggest a country is too dependent on foreign goods
- It adds to debt if the country is borrowing to fund it
However it also can be seen as positive because:
- It lets people buy cheaper or better products – consumers have access to a competitive market
- It can reflect a strong economy where people can afford more
- It may mean investment is flowing into the country
What does this all mean for me?
Unfortunately for markets more uncertainty is likely to ensue as newly tariffed countries contemplate retaliation. It also increases the risk of recession in the US as consumers put away their wallets due to the wealth effect of a falling stock market and as they await a settling of the dust in the wake of this escalation in the trade war.
Despite this uncertainty we all know that markets can change direction quickly and we recommend our clients to stay the course. It’s in times like these that we like to remind ourselves of one of Warren Buffett’s more famous quotes:
"In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497."
We advise staying the course – and one of the great things about KiwiSaver is that it’s a long-term investment, so you can ride out these times of uncertainty.
If you would like to chat to one of our friendly advisers nationwide, we’re always here to help.