by Kenneth J. Entenmann, CFA®
2/12/2028
For better or worse, the first three weeks of Trump 2.0 have been fast and furious! A bit of an understatement! Overall, the financial markets have shown some volatility but have remained stable in the New Year. So far, the S&P 500 is up 4.06% this month and 3.1% year-to-date. That is a great start to the year, despite all the vitriol coming out of our nation’s capital, particularly as it relates to the potential impact of tariffs.
It is easy to fear tariffs. Economists of all stripes will tell you that tariffs are bad; they are inflationary and invite retaliation and distort world trade. They are correct! But they most often fail to include the second part of the full tariff comment…Tariffs are bad in a free and fair global market. Unfortunately, there is little evidence that there are many “free and fair” markets. Indeed, when tracking trade reciprocity, every major industrial country in the world except the U.K. and Australia is offside, meaning tariffs on U.S. goods are significantly higher than U.S. tariffs on our imports. Even our friends, the EU, Canada, and Mexico, are way offside and have significant protectionist tariffs. In some cases, entire industries are precluded from participating in a trade partner’s economy. The U.S. auto industry is priced out of Europe by tariffs that are ten times higher than U.S. tariffs on E.U. cars. Same for U.S. agriculture. U.S. banks are prohibited from doing business in Canada. Hardly “free and fair.” And then, there is China. China was permitted to join the World Trade Organization in December of 2001. The hope was China would evolve into a great global trade partner. It has certainly helped the Chinese economy become the second largest in the world. Sadly, they have been cheating global trade rules ever since. The debate over TikTok operating in the U.S. is interesting as U.S. software companies are prohibited from doing business in China. Yes, tariffs are bad, but global trade is hardly a “free and fair” market.
Yesterday, President Trump announced 25% tariffs on steel and aluminum, including on Canada and Mexico. This set everyone’s hair on fire! Mexico and Canada are our friends and our largest trading partners. How could we possibly pick this fight? True, we import large quantities of steel and aluminum from Canada and Mexico and this action has the potential to raise prices in the U.S. However, many of those commodities are made in China and shipped to the two countries to avoid direct China tariffs and exploit the friendly USMCA (U.S., Mexico and Canada Free Trade Agreement) tariff policies. Global trade gamesmanship at its worst, especially from our “friends” North and South of the border! Not exactly “free and fair!”
With all of the doomsday tariff talk, it is interesting that the markets have held up so well. This indicates that the markets don’t believe in the worst-case scenarios. Perhaps some perspective on tariffs is warranted. The U.S. GDP closed in 2024 at nearly $28 trillion. Total goods imports were roughly $3.2 trillion. Let’s assume that after all the dust settles there will be a permanent 10% tariff on all goods from all countries. That would be $320 billion. As a percent of the total GDP, that is about 1%! Yes, on the margin, tariffs have the potential to reduce GDP growth and increase inflation. GDP could be reduced by .5-1% and inflation may rise by .5%. That is why economists do not like tariffs! But that is likely the worst case, which is far from catastrophic for a $28 trillion economy. But economists also love “free and fair” markets. And maybe, just maybe, the tariffs could begin to alter the trading behavior of our global trade partners. After all, having access to the world’s richest and largest economy is valuable. In fact, our trading partners need us more than we need them. U.S. global exports are just 11% of U.S. GDP, while exports represent nearly 27% of Mexican GDP and 20% of Canadian GDP.
For long-term investors worried about the impact of tariffs, take a deep breath! No one has any idea where the trade ward will end, including President Trump. Even if the negative aspects of tariffs prove true, they can be counter-balanced by more favorable tax policy, reduced government spending, onshoring of manufacturing, an improved regulatory environment and even “freer and fairer” global trade. That is a lot of moving parts! It is far too early to jump to dramatic conclusions. For the moment, the markets seem to be taking the Trade Wars in stride. The equity markets are off to a great start, and the bond markets have yet to price in any trade-induced inflation spike. As always, patience is a virtue of the long-term investor.