European Central Bank board member Isabel Schnabel stated that trade fragmentation negatively impacts economic growth and inflation. ECB President Christine Lagarde remarked that the effect of tariffs would vary depending on their duration and the products affected.
Tariffs are customs duties imposed on imports to protect local industries by providing a competitive price advantage. Unlike taxes, which are paid at the point of sale, tariffs are prepaid at the port of entry by importers.
Economist Views On Tariffs
Economists have differing views on tariffs; some see them as essential for protecting domestic industries, while others warn they can raise prices and instigate trade wars. Donald Trump plans to utilise tariffs to support the US economy and intends to focus on Mexico, China, and Canada, which represented 42% of total US imports in 2024.
These initial comments from Schnabel and Lagarde shed light on the broader ramifications of trade restrictions, particularly tariffs, at a time when global supply chains are already under strain. When countries apply tariffs, no matter the justification, there tends to be a knock-on effect – not just on prices, but also on activity and sentiment across production networks.
Schnabel’s indication that trade fragmentation diminishes growth and heightens inflation can be taken as a reminder that these disruptions don’t remain confined to national borders. They ripple outward, tightening margins for companies that rely on imported components or finished goods. Inflationary pressures, no longer just a function of domestic demand, begin feeding through costlier imports. That creates headwinds not just for central banks trying to hit inflation targets, but also for those of us watching rate expectations and volatility premiums.
Lagarde adds nuance by pointing to the differentiated impact depending on the nature of the tariffs. That matters. Blanket levies applied suddenly across essential commodities don’t behave the same as sector-specific duties rolled out over time. This is key for pricing optionality and managing term structure effectively. For example, if tariffs are temporary and narrowly aimed, their impact on volatility may be more muted and short-lived—particularly across front-end expiries.
Impact On Market Dynamics
From a broader market structure view, increased tariffs, especially between the US and its major trading partners, can reprice correlation assumptions. With Trump emphasising protectionist tools again, and openly targeting nations that collectively supply almost half of US imports, we can’t treat this as a background noise. Past experience shows that volatility across currency and rates markets tends to pick up when policy decisions become unpredictable, particularly when tied to geopolitical motives.
What that means in practice is a heightened need to recalibrate positioning, particularly in areas sensitive to cross-border trade friction. Volatility curves have already started showing minor distortions which, if they widen, may offer strategic spread opportunities, especially around G10 FX pairs and rates overlays.
We must also take into account that tariffs often prompt retaliatory moves. Should that materialise again, implieds can run ahead of realised, especially in short-duration instruments. This highlights the importance of distinguishing between temporary repricing owing to policy noise and more entrenched shifts towards stagflationary scenarios.
The focus now shifts to forward-looking strategies. If tariffs are priced in as inflationary—with growth expectations softening—the front end of curves may steepen, particularly in jurisdictions slower to acknowledge imported inflation. This benefits those selectively positioned in curve steepeners and conditional inflation caps.
Monitoring the regulatory tone also becomes more relevant. Should monetary policy overcompensate for transitory shocks, we are likely to see medium horizons becoming dislocated. That opens opportunities around gamma-neutral structures, hedging policy missteps rather than just asset volatility.
In coming weeks, it will be essential to stay alert not just to policy announcements but also to actual tariff deployment. Market sensitivity isn’t driven by headline risks alone—but by granular shifts in duration, coverage, and response. Trading approaches must incorporate these factors actively, tweaking exposure almost in real time rather than leaning on outdated assumptions.
