Tariffs have once again taken center stage in U.S. economic policy—and in investor conversations. In the early days of President Trump’s second term, sweeping new tariff proposals have rattled markets and rekindled uncertainty around global trade dynamics. For many investors, the return of these aggressive trade tactics has raised new questions: What are the administration’s true goals? How might tariffs impact inflation, economic growth, and portfolio performance?
To help clients and readers better understand what’s happening—and what may lie ahead—we sat down with our Chief Investment Officer, Brian Dorn. In the Q&A that follows, Brian breaks down the role tariffs have historically played in U.S. policy, outlines the economic theory behind them, and explores what their resurgence could mean for financial markets in the months to come.
Q&A with Brian Dorn, Leelyn Smith’s CIO.
Q: What are tariffs?
A: In simple terms, a tariff is a tax levied on imported goods. The importer of those goods — usually a public or private company — pays the tariff to the enforcing government, which in the U.S. is Customs and Border Protection. When it comes to who ultimately pays for the tariff, it depends. A company could absorb the cost of the tariffs, which could lower their profitability, or pass on the additional costs to consumers by raising prices.
Q: How often are tariffs used as a policy tool?
A: While President William McKinley, who implemented tariffs in the 1890s, is the most well-known proponent of these levies, they have been a part of U.S. trade policy for years. More recently, President Trump implemented tariffs on China in his first term, with the highest levies on goods including semiconductors and electric vehicles. President Biden continued those tariffs during his presidential term.
Q: What is the goal of President Trump’s tariffs?
A: The assumed high-level intent of these tariffs is to devalue the U.S. dollar (USD), decrease or remove existing tariffs against the U.S., allow freer access to markets, and encourage manufacturing in the U.S. The idea is to level the playing field for global trade. Tariffs make imported goods more expensive, which should improve the competitiveness of U.S. goods as substitutes. A weaker dollar makes U.S. exports more competitive in foreign markets, which should also boost U.S. company revenues.
To gain some perspective on tariffs as a tool in global trade policy, some historical context may be helpful.
The U.S. came out of World War II as a global superpower that has since provided a global defense shield to liberal democracies, mostly in Europe and Japan. For decades, the U.S. opened its markets to the world at advantageous terms while other nations, allies and enemies alike, haven’t necessarily returned the favor.
From President Trump’s point of view, the U.S. has been taken advantage of for decades through several trade pacts. Even today, the U.S. has the lowest tariffs on imports (3%) of any nation, according to the World Trade Organization. By comparison, Europe has 5% tariffs, China 10%, and developing nations have much larger levies on the U.S. For example, the U.S. in the past has not placed tariffs on German-made automobiles, while Germany has levied 10% tariffs on imported U.S. vehicles.
The result of this trade policy has been a wide and rising trade deficit with other nations. Raising U.S. tariffs to similar levels as our trading partners is meant to slow or even reverse this deficit and bring more manufacturing jobs back to the U.S. from nations with much cheaper labor and production costs like China and other Asian nations.
Q: Why is there such a focus on U.S. tariffs on countries like Mexico, Canada, and China today?
A: While the initial explanation of planned tariffs on Mexico and Canada was to curtail illegal immigration and drug trafficking, the assumed overall goal is to balance trade across the three countries. Tariffs on China are meant to penalize the world’s second largest economy for not adhering to trade norms and are part of a larger effort to blunt its rise as a global military power.
It remains unclear whether the latest tariffs are a negotiating tactic or long-term policy shift. Rather than a short-term tactic, they may be part of a dedicated effort by the Trump administration to better balance global trade to benefit the U.S by devaluing the dollar and reshoring manufacturing.
Q: What impact could tariffs have on the economy?
A: Tariffs could have both short and longer-term impacts on the U.S. economy. In the immediate future, tariffs could increase inflation as companies pass on the higher prices of goods to the consumers and businesses they serve. The Federal Reserve is taking a wait and see approach on the inflationary effects of tariffs, but the Fed is still projected to cut interest rates in 2025, which could help offset any headwinds to economic growth from tariff actions.
Over the long term, should tariffs lead to a devaluation of the dollar, this would offset inflation by lowering the price of U.S. exports. While the timing of these developments is hard to predict, we expect the first half of the year to be uncertain, resulting in some market volatility. However, the sequence of policy actions should become more favorable later in the year if the administration shifts its focus to extending and enhancing individual and corporate tax cuts and pushing for greater deregulation of industries like banking and energy. This increases the likelihood of an economic rebound.
Q: What are the investment implications of rising tariffs and a global trade war?
A: Tariffs were an impetus, but not the sole reason, for recent market volatility. We believe the recent selloff is healthy for the market, as U.S. stocks have been trading at historically high valuations for the last two years.
At Leelyn Smith, we currently favor U.S. stocks due to their superior fundamentals and supportive economic backdrop, but the flurry of trade actions and threats by the U.S. to pull back from its security role could push regions like Europe to meaningfully increase spending in areas like defense and innovation. This could lead to some interesting investment opportunities in Europe and elsewhere, and we will continue to monitor the situation and consider whether to add international exposure to client portfolios.
Regardless of the risks presented by tariffs, we maintain confidence in high-quality businesses with strong competitive moats. Their fundamental strengths should allow them to weather the current volatility.
Q: How do tariffs affect the near-term economic outlook?
Many market watchers like us had anticipated Trump’s tariff policy to create financial uncertainty from the moment he won his second term. The good news is that the U.S. economy is currently sturdy enough to handle these disruptive changes. The Fed has brought inflation mostly under control, the labor market remains solid, and GDP growth is favorable. Whether the economy gets through this period without a recession, however, ultimately depends on the resilience of the U.S. consumer, and tariffs will test this resilience.
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