Tariffs: Update on Current Policies and Portfolio Positioning - Trust Point

Tariffs: Update on Current Policies and Portfolio Positioning

Cargo ship sailing with imports and exports

FACTS

This past Saturday, President Trump imposed 25% additional tariffs on all imports from Mexico and Canada and 10% additional tariffs on all imports from China. Energy resources from Canada will see a reduced tariff rate of 10%. On Monday, only two days after announcing these tariffs, Trump said he was delaying them by 1 month for Mexico and Canada after reaching an agreement with both countries on border security. Discussions between the U.S. and China are expected to begin soon.

These proposed tariffs are much larger than what transpired during Trump’s first term. We believe that the primary rationale for the new tariffs is to get leverage in stopping illegal immigration and the importation of fentanyl and other dangerous narcotics. A secondary objective may be to recalibrate trading relationships and bring in additional government revenues to help offset the cost of a potential extension of the 2017 Tax Cuts and Jobs Act. Determining if tariffs are a negotiation tool or an end in themselves remains an important question in the mind of investors.

Note that the total value of goods imported into the U.S. is approximately $3.3 trillion, while total personal income is about $25 trillion. A 25% increase in tariffs on all imports would be roughly equivalent to a 3% tax increase on all income. Tariffs often do increase the cost of imported goods, therefore acting as a hidden tax on consumers.

VIEWS

This trade policy action reflects two major shifts from previous administrations:

  • A preference for bilateral trade agreements over large multilateral ones.
  • A willingness to use economic tools for non-economic goals, such as addressing illegal immigration and drug trafficking.

If implemented, the new tariffs could:

  • Increase economic uncertainty and lead to declining confidence
  • Increase inflation and inflation expectations
  • Increase market volatility
  • Put pressure on the Fed to keep interest rates higher for longer
  • Drive currency volatility in affected countries.
  • Potentially lower earnings and earnings multiples for impacted sectors

It is important to note that tariff impacts tend to be temporary, not structural; just as tariffs can be imposed quickly, they can also be reversed just as fast. Long-term investors should focus on fundamental drivers—valuations, earnings growth, and diversification—rather than reacting to short-term policy shifts.

As noted in our Q4 publication Market Point released in early January, this policy shift was expected as we recognized that the President alone has a lot of authority to make changes on tariffs. Current actions have been factored into our portfolio positioning. In our opinion, the latest developments do not introduce unexpected risks to our long-term strategy nor required substantive shifts to portfolios.

Related Posts

I’m Interested in Your Services Question about my 401(k)