Trump's Tariffs and the Economic Consequences
Last week’s tariff announcement by U.S President Trump surpassed even the most pessimistic expectations. Tariffs now stand at a baseline 10% for all imports, excluding oil, gas, and refined products, with steep increases to 20% on EU imports and 34% on Chinese goods. Notably, Vietnam, a key hub for Nike's shoe production, faces a 46% tariff.
According to JP Morgan, the overall weighted average U.S tariff of 23% marks the highest in over a century, a stark contrast from the 10% average pre-announcement and the mere 2.5% in 2024.
Trump has made these decisions due to his view of U.S "jobs and factories roaring back". Today, the U.S economy is 70% service based – just like Australia.
However, critics (and anyone who studied Economics 101 at university) argue that Trump’s ideal of a self-reliant America with tariffs is flawed economic thinking and will breed complacency among U.S companies, reduce competitiveness, and inevitably lead to higher consumer prices, ultimately undermining economic growth.
President Trump's optimistic view that "the markets are going to boom" contradicts the consensus among most forecasters, who foresee a detrimental impact, which has already occurred (see below). The United States, historically a major beneficiary of globalisation, now risks undoing over a century of trade liberalisation efforts under the guise of revitalising domestic manufacturing and agriculture—an endeavour likely doomed to fail in today's service-based economy.
Take the iconic Apple iPhone, designed in California but manufactured in China through a complex global supply chain involving multiple nations and a factory employing 200,000 (relatively lower paid) Chinese workers. How would Apple replicate such a process in the US amidst (current) historically low unemployment rates? And how long would it take them to have this factory up and running at full capacity?
With rising inflation expectations and declining interest rates, some economists fear the resurgence of stagflation in the U.S —a major challenge for central banks when both inflation and unemployment rise (reminiscent of the 1970s oil crisis). When unemployment rises, a central bank normally wants to cut interest rates to ignite economic growth – but when inflation is rising, you want to do the opposite.
JP Morgan predicts that the tariffs could impose the largest tax increase on US households and businesses since 1968.
Let’s use Ford as an example. If Ford currently sells a car for the same price as an import, and that import is now 10% more expensive, Ford can raise its price by 5% and still be cheaper. Who loses? The consumer. Over time the country’s standard of living will likely diminish. You don’t grow an economy with higher taxes.
These tariffs also have implications for global trade dynamics.
Capital can be diverted relatively quickly, and nations maintaining open economies may flourish while the US risks isolation, potentially losing out on global prosperity. Attempts to coerce workers into manufacturing jobs behind tariff walls could drive up costs without achieving sustainable economic gains.
The uncertainty surrounding Trump's policies and the strategic intent behind these tariffs will leave corporate boards hesitant to relocate resources back to the US. The cost and timeline to shift supply chains between countries is immense. Who knows – these tariffs could all be gone by the end of 2025?
What should you do?
Since the market peak in mid-February 2025 to the market close last week, the US S&P 500 index is down -17%, paralleled by a -10% decline in the Australian stock market. Those holding bonds have conversely seen an increase in value as a safe haven. It is worth noting over the past 2 years the S&P500 index remains up +23% and the Australian stockmarket up +6.6%.
To put recent volatility into perspective, over the past 31 years, the Australian stockmarket has experienced a calendar year decline of -10% of more on 23 occasions, or 74% of the time. So current volatility is within normal bounds.
Source: FactSet, MSCI, J.P. Morgan Asset Management. Data as of 31 March 2025.
The chance that Central banks will lower interest rates (including in Australia) has now increased and the possibility of a US recession by the end of 2025 is now estimated at 48% as inflation rises from 2.5% to possibly over 4%.
It will take time for global investment markets to digest the full ramifications of these tariffs.
For clients of Lorica Partners, we expect and plan for periodic volatility like this in your investment strategies. Your course of action will likely fit into one of three buckets:
Stay the course – be disciplined and when you require funds from your portfolio, draw down from your fixed interest portfolio (which has increased in value in recent months).
Rebalance – use this opportunity to sell down from your fixed interest portfolio (which has done well) and add to equities bringing your portfolio back into balance with your target asset allocation.
Be opportunistic – move assets from cash and bonds into the stockmarket if you can leave funds invested for some years.
Your financial adviser team is considering strategies for all of you and is available to talk if you are feeling anxious about how this may impact you.
Please contact your adviser team if you have any questions.
Author: Rick Walker