Despite a busy news cycle, we hope this message finds you well.
To clearly address the elephant in the room, with new tariffs and trade news making headlines, we want to provide you with a precise, confident perspective on what these events mean for you and the U.S. economy.
In support of that, I am going to break down what is transpiring in the markets in a way that is easy to understand because, while there are a lot of moving parts, there are ample reasons for optimism ahead.
What Exactly Are Tariffs?
One way to explain tariffs is to describe them as taxes placed on goods imported from other countries. To note, most of our trading partners apply tariffs to goods manufactured in the U.S. So, the thinking is, that by applying tariffs that make products that are manufactured abroad more expensive to buy, you can help protect American industries and jobs, and this will give domestic manufacturers a level playing field to sell more goods internationally.
However, there is a potential flipside to all of this, and that is that tariffs can also raise prices for all consumers and even lead to retaliation from other nations.
As of the writing of this update, the totality of the international response to the sweeping U.S. tariffs is unfolding and will not be entirely known for many weeks.
But do tariffs even work?
A real-world example of the effective utilization of tariffs comes from China, which has used these barriers to effectively shield its solar panel industry. By taxing imported solar components through the proverbial roof, China has nurtured its domestic producers, helping them become global leaders in solar technology by cornering over 80% of market production.
Now, in the 24-hour news cycle that we all live in, and in an effort to increase clicks and viewership, virtually every potential outcome of the recent application of tariffs has already been written about as foregone conclusions, which, depending on the source, either undermines or instills investor confidence (often intentionally).
But I am going to stick to history and foundational economics to explain what is likely to happen – and why – despite the headlines, and the initial reaction of the markets, I am cautiously optimistic.
A Quick Look at the U.S. Trade Deficit
The U.S. has run a trade deficit since the 1970s, meaning we import more goods than we export. According to data from the Bureau of Economic Analysis, the total U.S. goods trade deficit has steadily and significantly ballooned over the decades.
Sources: Capital Group, Bureau of Economic Analysis. Figures reflect 12-month totals through September of each year. As of September 30, 2024.
Looking back, starting at around $100 billion in the mid-1970s (about $310 per person in the US), the trade deficit has climbed to nearly $1.2 trillion per year in 2024 (about $3,700 per person in the US). (This yearly deficit has not only grown, but that growth has also greatly accelerated, especially since the 1990s.)
What this means is that more money is flowing out of the U.S. to foreign nations than comes back in through our exports, and this reduces the U.S. Gross Domestic Product (GDP).
But is this a problem?
Not necessarily. A trade deficit can be balanced by other economic strengths, like investment inflows, tourism, or a strong service sector. The fact is, that the U.S. economy remains resilient despite the accelerating trend toward ever-higher deficits.
So, from which countries are we seeing the biggest deficits? In 2024, our biggest trade deficits were with:
- China: $285 billion
- European Union: $224 billion
- Mexico: $174 billion
- Vietnam: $137 billion
- Canada: $73 billion
The Pros and Cons of Tariffs
Tariffs can come with benefits and challenges. Some potential positives are that they can:
- Protect American Jobs: They support domestic industries, boosting local production.
- Increase Revenue for the Government: Tariffs generate funds that can support budget priorities.
- Encourage Innovation: By leveling the playing field, they can spur U.S. companies to spend more and innovate.
- Help Ensure our National Security: In case of global conflict, selective tariffs help ensure that domestic industries such as manufacturing and defense are not only competitive, but, more importantly, also not reliant on foreign markets and supply chains. (Remember during COVID when there were shortages? Those were largely due to the interruption of foreign supply chains that we have grown dependent upon.)
And the cons of tariffs potentially include:
- Higher Prices: Tariffs can cause inflation by raising the cost of imports.
- Trade Tensions: Retaliatory tariffs from other countries can escalate into trade wars.
- Supply Chain Risks: Tariffs can disrupt supply chains and slow down innovation in foreign markets, indirectly affecting U.S. consumers.
Recent Events: Reciprocal Tariffs and Trade Imbalances
However, it is important to mention that these new tariffs are not 100% tit-for-tat responses to our partners’ existing tariffs. These tariffs are also considered a tool to address broader issues like trade imbalances, currency manipulations and foreign manufacturing sector subsidies.
Simply, another major reason the U.S. has stated it is addressing its $285 billion (about $880 per person) trade deficit with China through tariffs right now is to influence policy. Plus, this also aligns with the broader, long-term strategy of shifting supply chains and reducing reliance on foreign goods.
Now, naturally, a wealthy country such as the United States wants as few barriers to trade as possible. So, the stated goal here is to bring our trading partners to the negotiating table to hammer out more equitable deals that lead to an increase in American exports.
However, until (or unless) favorable negotiations transpire, tariffs and trade wars can lead to short-term inflation, as higher import costs trickle down to consumers.
Tariffs in Action: Past and Present
To be sure, tariffs have shaped markets before. As recently as from January 2018 to October 2019, tariff headlines (e.g., tariffs placed on China, Canada, Mexico, and the EU) coincided with a rise in the S&P 500 from 2,700 to around 3,000, while inflation increased slightly from 1% to 3%.
This suggests tariffs can influence markets, and that the U.S. economy has recently weathered such shifts before. (Though those tariffs were selective, rather than the broader tariffs of a minimum of 10% across the board that we have seen over the last few days.)
Now, as mentioned above, the administration is saying that tariffs are not a percentage-to-percentage, or tit-for-tat response. That the reason for the, in many instances, larger than 10% tariffs is because there are numerous other barriers in place to free trade than “merely” flat tariff percentages.
While distinct from tariffs, these policy-related “impediments” (or “non-tariff barriers”) to free market commerce which many countries employ include things like quotas, the out-and-out banning of certain imports, governments that subsidize entire industries (which lowers costs and, by extension, prices), and even Customs Departments’ red tape, just to name a few.
Make No Mistake, While There Will be Bumps, we are Confident about the Future
Despite challenges such as inflation and market volatility (tracked by the CBOE Volatility Index, which spiked in last week’s trading), we are bullish on the long-term future, and here are some reasons why.
First, many countries have already announced they are prepared to negotiate new trade deals. The sooner these tariffs are removed, the better growth expectations we will have.
Second, while tariffs have shown mixed results in the past, if we are to lower our trade deficit, lower interest rates to bolster manufacturing, save money on the interest associated with servicing our massive debt, and bring back vital U.S. industries that help our economy, obstacles to free trade absolutely need to be removed, renegotiated, or overcome.
Third, we are seeing heightened volatility (as indicated by the VIX), which normally indicates short-term woes but quicker recoveries. As seen recently, in 2022 we experienced extreme volatility, coupled with high inflation and rising interest rates – rarely do we see rising interest rates while the stock markets are negative. However, once stabilized, we experienced incredible growth in both 2023 and 2024.
Now, with trending volatility back in 2025, we do expect similar outcomes given favorable trading outcomes.
Leveraging Uncertainty to Provide Stability – NewEdge Wealth
After all the discussion and debate about the viability of the implementation of tariffs, there are a lot of conversations about the possibility of a recession, so here are a few things that need to be considered:
Of our over $36 trillion in total debt, due to myriad factors, the U.S. has a tsunami-like $28 trillion (about $86,000 per person) in debt to refinance over the next four years. Unlike a decade or two ago, interest rates are high. So, in the event that say, due to the above underlying causes, we find ourselves moving into a short-term recession, it would likely bring lower interest rates which would save the U.S. billions of dollars in interest and speed up the recovery.
Another reason, recessions generally mean lower growth – although not positive by any means. Lower growth tends to decrease inflation, allowing prices to stabilize. With price stabilization, businesses have an easier time making key growth decisions, allowing for a ripe recovery.
Lastly, a short-term recession could be a positive is that lower interest rates have historically helped to ramp up lending for businesses and production, meaning a faster rebound for the economy and the financial markets.
There is obviously a lot to consider, and only time will tell if the tariff approach is an effective one. But we are optimistic that most countries will quickly negotiate improved agreements. That’s because our economy is significantly larger than, Mexico’s, Canada’s, or even all of Europe’s, and while not easy to predict all future outcomes, as the world’s largest importer, these entities rely on U.S. consumers for their economic health.
We certainly know that no one (except the media) likes volatility. But as the U.S. economy is the largest in the world, highly pro-business, and adaptable, we believe that over the long run, we will thrive. In the short run, we are prepared for the volatility to come and have built appropriate measures in our client’s financial portfolios to account for these seasons.
Lastly, as a client of ProsperPlan Wealth, perhaps the single two most important considerations are that markets have always moved higher over time, and that you have an individualized financial plan which was constructed with challenges such as the above in mind.
Please know that we are here to guide you through these events with confidence.
From the bottom of our hearts, we want to thank you for your loyalty. As always, if you have questions or want to dive deeper, please reach out—we would love to hear from you.
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