By: Sheila Morgan
The global economic chessboard has been dramatically reset as tariffs mount and trade alliances shift, our country faces a critical inflection point. Within just 60 days of President Trump’s return to office, a new economic architecture is taking shape, one that could fundamentally transform our global supply chains, inflation trajectories, and equity markets for decades to come. The stakes couldn’t be higher. As the tariffs demolish old trade paradigms and forge new geopolitical alliances, will America master this new market reality?
The President has consistently conveyed his clear preference for tariffs as a policy tool. But what exactly are tariffs and how do they work? Tariffs are essentially taxes imposed on imported goods when they cross international borders. Despite common misconceptions, these tariffs are not paid by the foreign country or their manufacturers. Instead, the tariff is paid by the U.S. business that imports the foreign-made goods. For example, when a 25% tariff is placed on Canadian lumber, a U.S. construction company importing $100,000 worth of lumber would pay an additional $25,000 in tariffs to the U.S. government. The immediate impact is that the cost of selling imported products increases, and these costs are typically passed along to the end consumer in the form of higher prices. American businesses face difficult choices: absorb the tariff costs (reducing their profits), raise prices (potentially losing customers), or find alternative suppliers.
A benefit of long-term tariffs is “reshoring,” the process where the supply chain for these products changes to being manufactured in the U.S. This can create domestic manufacturing jobs and reduce dependence on foreign producers. However, reshoring takes significant time and investment to implement. The downside is that these tariffs will likely trigger inflation across our economy as we see price increases in many products to cover the additional tariff costs. American consumers ultimately bear much of this burden through higher prices on everyday goods.
The central question is whether the Administration now views tariffs as an economic policy instrument, or merely as leverage in negotiations. The Administration has cited persistent bilateral trade deficits with these countries as evidence of inequitable trading practices. The tariffs that President Trump has announced so far are 20% tariff on imports from China, 25% tariffs on steel and aluminum, 25% on Mexico products, 25% on Canadian products, 10% on Canadian energy, and 25% on copper and lumber. While the U.S. operates as a relatively self-sufficient economy, imports constitute approximately 14% of the U.S. Gross Domestic Product and their impact to the supply chain of goods sold in the U.S. is widespread.
Many U.S. refineries are specifically configured to process heavy crude oil imported predominantly from Canada. Consequently, the imposition of considerable tariffs on Canadian crude oil imports would likely result in elevated gasoline prices, especially in the Northeast and Midwestern areas that border Canada. When one uses tariffs to promote a U.S. first policy of Protectionism instead of international free trade, there are consequences. China’s retort to the tariffs has been multifaceted, including 10-15% retaliatory tariffs on U.S. agricultural goods and various non-tariff measures. A 30-day halt on tariffs granted opens a window for diplomatic talks that could benefit everyone involved. There were temporary reprieves granted to Mexico and Canada, while the administration proceeded with a partial 10% tariff on Chinese imports.
Canada expeditiously imposed 25% retaliatory tariffs on approximately $100 billion of American products. Canadian officials then announced a postponement of retaliatory measures, suggesting that the Administration’s tariff threats could be more amenable to negotiation than initially perceived. These changing amounts, delays in enacting, uncertainty of whether tariffs are temporary or permanent, collectively create economic uncertainty across the world. This pervasive uncertainty forces businesses into a decision-making paralysis, making long-term planning virtually impossible.
Beyond the fiscal policy objectives of the Trump Administration of making America Great Again, tariffs will impact monetary policy by the Federal Reserve. They conclude that an increase in trade costs for imported goods will lead to persistently higher inflation. Beyond the initial impact on prices, its industry-wide impact will continue to increase inflation even after two years. With a mandate to prevent inflation, it is reasonable to conclude that interest rates will need to remain higher for longer periods. As the economy navigates this complex transition toward reshoring, monetary policy remains a crucial stabilizing factor in the investment landscape. The Federal Reserve is keeping interest rates steady but is more focused on guarding against higher short-term inflation, which should provide some clarity for fixed income investors. Treasury yields offer attractive returns for income-focused investors, while the potential for yield stabilization creates a more predictable environment for financial planning. The magnitude of these effects would depend critically on the comprehensiveness, duration, and reciprocity of tariff measures.
A point that seems overlooked is the impact of tariffs on those who live and work in countries targeted by this change in tariffs. There is a change in the perspective of Canadians, who have been traditionally friendly to Americans. Beyond booing U.S. hockey teams, Canadian airlines are canceling flights to the U.S. Canadians spend over $4 billion in vacation travel to the U.S., and that will impact the leisure industry. Hostility from people in formerly friendly countries could mean we are not as welcome to visit, and this change may affect us in future years.
All this heightened policy uncertainty has resulted in elevated equity stock market volatility. Major equity indices demonstrated significant volatility in response to the tariff announcements. The industrials sector experienced a 3.1% decline, while consumer discretionary stocks fell by 2.8%, with automotive manufacturers being especially impacted. The information technology sector similarly recorded a 2.7% decline. Defensive sectors demonstrated relative resilience, with utilities and consumer staples outperforming the broader market, declining by only 0.8% and 1.2% respectively. The CBOE Volatility Index (VIX) surged by over 40% from pre-announcement levels, reflecting substantially elevated market uncertainty and risk premiums. Defensive U.S. stocks, such as those in utilities, health care, or consumer staples, may outperform cyclical sectors like industrials or consumer discretionary, which may be more vulnerable to increased import costs and reduced international trade. For example, consumer discretionary companies with a greater reliance on revenues generated from lower-income consumers will likely experience the most pressure, as higher prices weigh more heavily on the purchasing power of those with less to spend.
The implementation of such tariffs is having varied impacts across equity market sectors, creating both challenges and opportunities for us. Companies with extensive global supply chains face the most significant risk exposure, particularly those reliant on imports from China, Mexico, and Canada for production inputs or finished goods. This paradigm shift creates powerful incentives for reshoring and domestic investment that could strengthen America’s economic foundation over time. Consider, for instance, the automotive manufacturing sector, where a single component may traverse the U.S.-Mexico border multiple times during the assembly process. If each border crossing were to trigger a 25% tariff, the economic viability of existing supply chain configurations would be fundamentally compromised, necessitating structural adjustments with associated transitional costs.
However, one critical aspect that must be considered is the time required to build the necessary infrastructure for reshoring industries. The push to bring manufacturing back to the United States is a monumental task that involves significant investment in new facilities, transportation networks, and supply chain logistics. Domestic U.S. companies have already spent more than half a trillion dollars since 2021 to onshore facilities back to the U.S., but the process is far from instantaneous. Building infrastructure for onshoring can take several years, depending on the complexity and scale of the projects. This includes constructing manufacturing plants, upgrading ports, and developing efficient transportation networks. While the long-term benefits of onshoring are substantial, including reduced supply chain vulnerabilities and increased domestic production capabilities, the initial phase requires patience and strategic planning.
As President Trump begins his four-year tenure of reshaping America’s economy again, we stand at a pivotal crossroads that will define our nation’s prosperity for decades to come. The tariff-driven transformation we’re witnessing isn’t merely a policy shift—it represents a fundamental realignment of global trade relationships and domestic manufacturing priorities. In this new market reality, short-term volatility is inevitable as businesses adjust supply chains, consumers absorb price increases, and international relationships recalibrate.
A balanced portfolio management approach acknowledges this transitionary period while embracing potential market opportunities. Our approach continues to be focused on evaluating companies with strong fundamentals, including pricing power, robust balance sheets, and sustainable earnings growth that have demonstrated remarkable resilience during periods of market turbulence. Investors who maintain perspective and market patience as the markets sort out the corrective impact of the tariffs, the current volatility presents rare opportunities to acquire quality stocks at attractive valuations. The road ahead may be challenging as the markets sort out the corrective impact of these tariffs to our economy, but for those with vision and patience, the new market reality offers the potential for substantial long-term rewards.
If you have any questions about portfolio advice and management, give us a call or email us at info@portfolioadvisor.com.
