Inside Trump Tariffs and Their Impact on Sector ETFs

President Donald Trump introduced and enacted a two-step tariff strategy on Wednesday, marking the implementation of his "Liberation Day" plans. A baseline tariff of 10% will be imposed on imports from various countries starting April 5.

Additional duties will be levied on select nations deemed the worst offenders, taking effect on April 9. Trump stated that these extra rates were determined based on both tariff and non-tariff barriers, which have long been criticized.

Evercore ISI estimated that the new weighted-average U.S. tariff rate could rise to 29%—the highest in over a century—once all duties are fully implemented, as quoted on Yahoo Finance. The executive order signed by Trump includes provisions allowing further tariff increases if countries retaliate.

However, Treasury Secretary Scott Bessent, speaking on Bloomberg after the announcement, urged nations not to panic, reassuring that tariffs would not rise further if they refrained from countermeasures.However, several nations, including China, Japan, and South Korea, have already vowed to retaliate.

Focus on Non-Tariff Barriers

Beyond tariffs, Trump's administration also targeted non-tariff barriers such as currency manipulation, value-added taxes, export subsidies, and agricultural restrictions.

While some countries may find it easy to adjust their policies, others face significant challenges. For instance, the European Union's value-added tax system could be difficult to modify, whereas India has already committed to repealing its digital service tax as part of ongoing negotiations.

ETF Areas to Win/Lose

Against this backdrop, we highlight a few sectors and their related stocks and exchange-traded funds (ETFs) that could be under the spotlight amid the escalating trade tensions.

Technology

Bloomberg News reported in early February that regulators in China were considering introducing a formal investigation into Apple’s AAPL App Store fees and policies. Additionally, China initiated an antitrust investigation into Alphabet GOOGL.

China is a key production engine for tech gear, including for American companies like Apple that have their products assembled in the country. In 2023, China made up for 78% of U.S. smartphone imports and 79% of laptop and tablet imports, the Consumer Technology Association trade group reported, as quoted on apnews.com.

So, tech ETFs like Technology Select Sector SPDR ETF XLK and Communication Services Select Sector SPDR ETF XLC may face troubles.

Consumer

As tariff tensions are heating up, consumer stocks could be under pressure.  A sweeping new U.S. tariff on products made in China is expected to raise the prices American consumers pay for a wide array of products, from the ultra-cheap apparel sold on online shopping platforms to toys and electronic devices such as computers and cellphones.

Chinese exports of low-value packages jumped to $66 billion in 2023, up from $5.3 billion in 2018, according to report released last week by the Congressional Research Service, quoted on apnews.com. In the United States, Temu and Shein accounted for about 17% of the discount market for fast fashion, toys and other consumer goods.

The new tariffs will also hit third-party sellers on Amazon that import products from China, according to Squali, as quoted on apnews.com. There are high chances, retailers will try to pass on some burden of higher costs to consumers, thereby raising prices.

This is likely to bump up inflation levels in the U.S. economy. Higher inflation in turn will give a boost to bond yields. This, in turn, might push up consumers’ borrowing costs and hurt ETFs like iShares U.S. Consumer Services ETF IYC and SPDR S&P Retail ETF XRT.

Rare Earth Elements

China’s Commerce Ministry and Customs Administration revealed that the country is imposing export controls on rare earth elements like tungsten, tellurium, molybdenum and indium, which are crucial for the clean energy transition, with China controlling much of the global supply.

VanEck Rare Earth/Strategic Metals ETF REMX puts 26.87% of weight in China and 26.74% weight in the United States. The latest trade war puts focus on the REMX ETF.

Auto

President Trump announced a 25% tariff on auto imports to the United States. U.S. auto companies earn about sizable revenues from China. According to the U.S. International Trade Commission, the U.S. imports between $15.4 billion and $17.5 billion worth of transportation goods from China annually, as quoted on CNBC.

Moreover, the United States and Mexico share trade ties in the automotive industry. Hence, sectors with the largest Mexico exposure, autos and auto parts, are particularly vulnerable (read: Here's Where Tesla Stands Amid Auto Tariffs: ETFs in Focus).

Per an analyst at JPMorgan, as quoted on Forbes, sourcing about 40% of its vehicles from Canada and Mexico, General Motors (GM) could face a $14-billion hit to its earnings due to the new tariffs, making it the most vulnerable Thus, the ongoing clash will weigh on First Trust NASDAQ Global Auto Index Fund CARZ.

Steel

The new steel and aluminum duties may benefit the domestic steel and aluminum industries, boosting VanEck Steel ETF SLX. But then, they could weigh on broader economic sectors. Ryan Young, a senior economist at the Competitive Enterprise Institute, noted that Trump's previous metal tariffs created approximately 1,000 jobs in the steel and aluminum sectors but resulted in the loss of 75,000 jobs in steel- and aluminum-dependent industries, such as automotive manufacturing, construction, and beverages, as quoted on Yahoo Finance.

Invesco Building & Construction ETF PKB may lose over the long term due to higher steel prices as steel is a raw material in the construction industry (read: ETFs to Win/Lose as Trump Imposes 25% Tariffs on Steel and Aluminum).

Beverage

Beverages and spirits such as tequila, mezcal and beer accounted for a significant portion of U.S. imports, totaling almost $12 billion in trade. Corona beer maker Constellation Brands (STZ) could be at risks. The STZ stock has about 3.67% exposure to Invesco Food & Beverage ETF (PBJ). Moreover, the food and beverage bottling industry may see high-cost pressure due to steel tariffs.

Aerospace

U.S. aerospace industry thrives on steel and aluminum imports to construct aircraft. About 80% of an aircraft is made of aluminum. Companies like Boeing Company (BA), Lockheed Martin LMT and Northrop Grumman NOC may come under pressure. Aerospace and defense ETFs like iShares U.S. Aerospace & Defense ETF ITA may also feel the pinch.

Soybean

The two largest exporters of soybeans, Brazil and the United States, are likely to make up about 85% of the total global import demand. And soybeans are key U.S. exports to China. Needless to say, Teucrium Soybean Fund SOYB may face the brunt of a retaliatory tariff.

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This article originally published on Zacks Investment Research (zacks.com).

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