Posted on Dec 9, 2024 by Keith Gangl, CFA®
In November, Donald Trump was selected to be the next US President. During the campaign, and after the election, President-elect Trump has discussed using tariffs as part of his foreign trade strategy. While the goods, regions, and magnitude of tariffs aren’t fully known at this time, a brief explanation and potential outcomes from the use of tariffs should be taken into consideration.
According to the Oxford dictionary, the definition of a tariff is a tax that is paid on goods coming into or going out of a country.1 President Trump used tariffs during his first term and may expand the use to more countries and products in the future.
Consumers and investors are trying to determine the potential impact of future tariffs, which is difficult because the actual tariffs to be implemented are still unknown. Different variations have been mentioned by President-elect Trump, including imposing an import tax of 60% on all goods imported from China; more recently he mentioned 25% tariffs on Canada and Mexico and an additional 10% on China.2 Trump believes tariffs are a powerful negotiating tool if used properly.
There are pros and cons to using tariffs and it is difficult to calculate the exact ramifications on the economy. Some of the potential pros and cons of using tariffs include:
· Pros
o Protection of American manufacturers
o Greater incentive for domestic production
o National security
o Potential for higher federal revenue
· Cons
o The potential for higher prices, especially on imported goods
o Retaliations from tariff nations that cause/escalate a trade war
o Reduced market competition for goods
o Potential to increase/accelerate inflation
Until President-elect Trump takes office in January and the tariffs implemented are known, investors will try to determine what is rhetoric versus reality. A potentially useful exercise is to examine the impact of tariffs during his first presidency.
Trump’s original tariffs were introduced in 2018 and most directly affected China. The reliance on China for imported goods has dramatically decreased over the last several years, as seen in the chart below. In 2018, the US imported over 20% of its goods from China; that was reduced to 13% in 2023.3 During that time, both Mexico and Canada have become trade partners at a similar level to China, effectively providing greater balance of trade partners.
The influence of COVID policies, especially zero tolerance policies in China, likely also had an influence on declining percentages of goods serviced from China in accordance with tariffs. The disruption in goods production from China forced American companies to examine their sourcing policies, with more adopting a multi-region production approach (including nearshoring some production back to the US).
We believe that tariffs are President-elect Trump’s preferred tool when negotiating with foreign countries. It is not straightforward to say tariffs are good or bad; they need to be evaluated regarding the overall trade deals that can be made by using tariffs or the threat of using them. Another thing to consider when evaluating the effectiveness of Trump’s tariffs is that many of those tariffs from his first term are still in place. The Biden administration kept $300 billion worth of President Trump’s China tariffs and even increased some of tariffs on semiconductors and solar cells.4
Currently, it is too early to dispel or applaud the use of tariffs. Like so many other economic tools, their use is merely part of an overall strategy of trade negotiation and should not be looked at in isolation. As more concrete actions are undertaken, Gradient Investments will communicate any change to forecasted economic growth or potential winners and losers from trade-related actions.
2. CNN: Trump ups the ante on tariffs
3. Yahoo Finance: How Trump’s tariffs on China Changed U.S. trade