Market volatility created by US trade policy is unlikely to go away, so investors need to take a global view of markets, keeping an eye on emerging stories including India.
The global economy may be headed for an ‘air pocket’ — a period when the drag from tariffs sets in before any potential policy offsets, such as tax cuts or deregulation, have time to take effect.
The coming months will test the resilience of post-pandemic expansion. For investors, many of whom are facing tariffs and economic mercantilism for the first time, this presents both a challenge and an opportunity. Those able to identify new growth drivers in this fast-evolving environment will be well-positioned to benefit.
Tariff disruptions are already happening. Even though we don’t know where policy will ultimately land, the uncertainty alone is affecting supply chains and pricing. Meanwhile, any fiscal offsets, such as tax cuts, likely won’t be enacted until late summer or early autumn. As for the positive impacts of US deregulation, the timeline is even more uncertain, and any economic boost would take time to filter through.
In other words, we may still be entering the air pocket, but disruptions have already begun, although policy support hasn’t arrived yet.
In the first quarter of 2025, US private domestic demand held up reasonably well, with consumption (1.2 per cent) and investment (1.3 per cent) combining to bring growth to 2.5 per cent. That represents only a modest deceleration from the pace of the prior three quarters. What made it different was the drag from inventories, which essentially offset the entirety of private domestic demand growth. The key question is, what caused the run-up in inventories?
Inventory buildup
Many have claimed that businesses were front-loading goods ahead of expected tariffs, but there is little evidence of broad-based stockpiling. Two factors are driving the inventory buildup.
First, there was a significant surge in gold imports. Whether this was government-directed or linked to financial hedging, it wasn’t related to productive economic activity. Second, manufacturers appear to be anticipating Section 232 reviews — determining the impact of imports on national security — which are likely to affect semiconductors, autos, drugs and potentially steel, and responded by building inventory. Forty per cent of the inventory buildup came from pharmaceutical stockpiling alone.
We are entering a period where GDP growth may slow, and inflation volatility may rise. We expect to start seeing the impact of tariffs between late May and early July, given shipping timelines of 45 to 60 days from port to consumer, and the fact that some ships bound for the US were delayed or stalled in early April. This will likely create price volatility, even if no new tariffs are implemented. There is also uncertainty about the de minimis exception, which could further disrupt small package flows and raise prices.
The deterioration in the growth/inflation trade-off is already underway. US GDP growth is likely to slow materially by the end of the year, even as inflation becomes more volatile, and potentially moves higher. The result is a worsening trade-off between growth and inflation and more challenges for the Fed.
Shifting geopolitics of trade
The US effectively blinked in its recent deal with China. It conceded to nearly all of China’s preconditions just to begin discussions, and those discussions will now take place on China’s terms. So the headline might say “interim deal”, but what it really signals is a broader shift: the US is backing away from its more aggressive posture, likely because it recognises it won’t win meaningful concessions.
Markets rallied because of the direction of travel. The perception now is that the administration will walk back tariff threats if it believes there’s no payoff. That shift in tone is what buoyed markets.
Compare that to the US-UK arrangement, which is hardly a trade agreement. It’s not comprehensive or legally binding and it lacks enforcement mechanisms. It’s basically a series of carveouts from the existing framework, and even those will take at least a year to finalise. If this is what it takes to revise a pre-existing structure with a close ally, imagine the difficulty of negotiating simultaneous bilateral deals with dozens of countries.
The UK-India agreement is a better indicator of where global trade might be heading. It’s a full-scale agreement that took three years to negotiate and includes both goods and services. While current trade flows between the two are modest, the deal’s real significance is that India — one of the world’s most protected economies — is prepared to dismantle its trade barriers. India is also accelerating talks with the European Union, suggesting a broader shift. If this trajectory continues, India could become far more open to global trade by the end of the decade.
The proposed 10 per cent base tariff regime crystallises a new era in US trade: protectionism as the rule, not the exception. No special treatment is on offer, not for emerging markets, nor for long-standing allies. Countries without leverage, like Madagascar or Costa Rica, are left exposed. If you’re not producing what the US wants, or can’t retaliate, there’s no protection.
Any relative ‘shield’ might come from downward pressure on the US dollar, which could ease external debt burdens or make emerging market exports more competitive. More broadly, the response to tariffs will depend on who can generate enough domestic demand to cushion the blow. Stronger consumption growth in China or increased investment in the EU are more relevant macro offsets than headline deals.
Changes in US trade policy are likely to create additional market volatility in the near-term and to provide a catalyst for longer-term, more structural solutions to relying on US demand for growth.
We expect large domestic economies such as the EU and China to support domestic growth — through infrastructure and investment in Europe and more consumer spending in China. Companies are likely to accelerate emerging AI solutions to improve operating efficiency amid policy-induced volatility. All told, response to change tends to produce exciting growth opportunities and investors should focus on companies which can identify and profit from the changing landscape.
Navigating an air pocket my lead to a bumpy ride, but an experienced pilot understands this turbulence is not necessarily the precursor of portfolios getting wiped out or crashing to earth.
To read the full opinion as it was published by Professional Wealth Management, click here.