We wanted to share an update on what’s happening right now in the markets.
Yesterday, at the market’s close, President Trump announced his broad-sweeping tariff plans. The market’s initial reaction is negative, contributing to today’s market drop. The first thought we want to share is that it is not atypical nor unexpected for the markets to react negatively to “change,” especially when the change is of this magnitude.
President Trump’s end goal is to rewrite the book on how the USA collects taxes and to promote domestic investment from both U.S. corporations and abroad. The current focus on the newly announced tariffs is that they may cause both price increases and supply shortages. The announcement of both domestic and foreign investments has been largely ignored.
Before jumping into the tariff discussion, we also want to remind clients that one of the biggest risks to investors is making impulsive decisions based on fear or short-term market movements. Studies have consistently shown that attempting to time the market—jumping in and out based on news or emotions—leads to lower returns than simply staying invested through market cycles. Investors who sell during market dips often miss out on the strongest days of recovery, which can have a significant impact on long-term portfolio performance.
Rather than reacting to every headline, investors should focus on maintaining a well-diversified portfolio that can weather short-term fluctuations. Diversification helps manage risk, ensuring that no single event, such as a tariff announcement, can derail long-term financial goals. Furthermore, a disciplined investment strategy that prioritizes fundamentals over fear will serve investors well in the months and years ahead.
Because we have been fielding so many questions about tariffs, we wanted to take a moment to share some information with all of you:
1 . Tariffs can be extremely effective in promoting domestic investment and production by increasing the competitiveness of local industries relative to foreign competitors. By raising the cost of imported goods, tariffs encourage consumers to shift their demand toward domestically produced alternatives, which can stimulate local economic activity and create incentives for businesses to invest in expanding their operations. The current expectation is that the cost of goods will increase, and many seem to fear that increase may be double digits.
We don’t expect this will happen because we’ve already seen a dramatic increase in expected investments in the U.S. So far, approximately $6 trillion of capital investments have been committed to the U.S. These investments include chip manufacturing, steel production, automobile manufacturing, pharmaceuticals, etc.
The addition of tariffs without the growth of U.S. production (and hence increased domestic production) would certainly lead to higher prices. However, the addition of tariffs in an environment of increased domestic competition due to foreign investments does not necessarily have to lead to sharp price increases. During both President Trump’s and President Biden’s recent terms, the U.S. effectively employed tariffs (albeit on a smaller scale) without any discernible increase in prices.
In May of 2024, when President Biden announced new tariffs on $18 billion of imports from China (adding to the previous tariffs from President Trump), Janet Yellen said:
"I don't believe that American consumers will see any meaningful increase in the prices that they face. President Biden announced tariffs on roughly $18 billion of imports from China. They're very carefully targeted at sectors that we're supporting through legislation that President Biden passed with Congress: the clean energy sector, semiconductors—sectors where we consider it critical to create good jobs. We're seeing massive investment in manufacturing in these areas. And we think it's very important to protect our workers and our firms in these strategic sectors from the kind of dumping that results when China develops massive overcapacity in these areas. And we're not alone. Japan, Europe, Mexico, India, Brazil, South Africa—other countries are all concerned. These are areas where the investments that we're making will ultimately result in lower prices."
2 . As counterintuitive as it may sound, Yellen actually said she believed tariffs against Chinese goods would result in AMERICAN JOB GROWTH and LOWER PRICES. The key to achieving job growth and lower prices is to promote domestic investment, increased competition, and ultimately lower prices.
3 . The current implementation of tariffs is on a much larger scale, but it’s important to note that the offer stands for the reduction and/or complete removal of tariffs if:
- The products are manufactured in the U.S. ($6 trillion of U.S. investments have already been announced).
- Tariffs are waived by the other country involved on U.S. goods exported to their economy.
4 . Though it is too early to know exactly what will transpire next, here are some of the comments we are hearing from around the globe. We apologize for the relatively long list below, but we believe it’s important to review because it illustrates that the idea of a deep escalation of counter-tariffs and a full breakdown of global trade appears to be exaggerated.
a . Many of the ongoing discussions are aimed at balancing trade between the U.S. and its trading partners and should promote both domestic growth and potentially lower prices over time. It is true that some trading partners are more hostile and have indeed vowed retaliatory tariffs as one of their preferred countermeasures.
However, it’s important to note that one of the biggest proponents of this path forward is China, and that has been their response for more than the last four years. Thus far, it has not damaged the U.S. economy despite damaging their own.
i . China: which has experienced a dramatic decline in trade with the U.S., has said: "There is no winner in a trade war, and there is no way out for protectionism," the ministry said. Beijing has promised countermeasures. This has been China’s answer to U.S. tariffs since Trump’s first term and throughout Biden’s tenure.
The U.S. experienced no discernible inflation from the tariffs, but China’s trade with the U.S. fell dramatically, contributing to China’s lower-than-expected economic growth over the last four years. Perhaps they may consider another approach, like reducing Chinese tariffs on U.S. exports.
ii . Great Britain: Starmer told the Commons in his opening remarks: "Let me be clear with the House, a trade war is in nobody’s interest, and the country deserves, and we will take, a calm, pragmatic approach." The relatively low "10%" tariff on imports from Great Britain suggests the U.S. and Great Britain may be close to a new trade agreement, possibly reducing the tariffs between the U.S. and the UK to 0%.
iii . South Korea: As its economy reeled from the announcement of a 25% tariff on exports to the U.S., the acting president Han Duck-soo said, "As the situation is very grave … the government must pour out all of its capabilities at its disposal to overcome this trade crisis." Though we cannot predict the outcome, it is clear that South Korea would like to work toward the removal of tariffs on its exports to the U.S.
iv . Japan: Prime Minister Shigeru Ishiba described the implementation of tariffs as "extremely regrettable." Tokyo is still attempting to persuade the Trump administration to think again. Vehicles account for more than 30% of Japan’s exports to the U.S. Japan has unique safety requirements that differ from international norms, such as the "hood impact test." They also have a complex certification procedure for imported vehicles that adds to the cost of U.S. vehicles sold in Japan.
They have also been known to delay granting approval for vehicles with enhanced technologies such as electric or hybrid vehicles, which can disadvantage vehicle exports to Japan. Japan has already proposed a $1 trillion investment in the U.S., and they may have to revisit their non-tariff trade barriers with the U.S. to achieve an exemption from tariffs. It is interesting that Japan has not threatened retaliatory tariffs.
v . India: The commerce department said the newly announced tariffs are a mixed bag for India, and not a setback. India noted that so far, pharmaceuticals are exempt from the new tariffs. Trump has made it clear that the $46 billion trade deficit needs to be resolved, and in response, India is considering slashing tariffs on $23 billion of U.S. exports to India, including gems, jewelry, pharmaceuticals, and auto parts.
vi . Australia: Prime Minister Anthony Albanese said that although “no one got a better deal” than Australia, the new tariff regime was a hostile act against an ally. Australia escaped comparatively lightly from the new Trump tariff regime—only incurring the blanket 10% tariff—but Albanese criticized the move. “President Trump referred to reciprocal tariffs. A reciprocal tariff would be zero, not 10%,” Albanese said. “The administration’s tariffs have no basis in logic and they go against the basis of our two nations’ partnership. This is not the act of a friend.”
Albanese said his government would not impose retaliatory tariffs against America—currently at zero in both directions—and said that, ultimately, the American people would bear the burden of Trump’s tariffs. Some critical minerals coming out of Australia, not available in the U.S., will be exempt from the new tariff regime.
vii . Canada: Canada has been exempted from the latest round of tariffs, but still faces a 25% tariff on steel and aluminum, as well as automobiles. Though Prime Minister Carney is not thrilled with the existing tariffs, he did note that Trump had preserved a number of important elements of its relationship with Canada. The 25% tariffs on Canada remain in place as President Trump proclaims Canada has not yet done enough to stem the flow of illegal drugs into the U.S.
viii . Mexico: President Sheinbaum has announced that Mexico will not pursue a tit-for-tat tariff fight with the U.S., but that they would announce a comprehensive program soon.
ix . Taiwan: Though Taiwan has stated they believe the newly announced tariffs are very unreasonable, Taiwan maintains a $74 billion trade deficit with the U.S. Taiwan has discussed countermeasures including
(1) increasing its imports of U.S. energy and
(2) reducing its own tariffs to promote more bilateral trade with the U.S.
It does not appear that retaliatory tariffs will be their answer. We believe it’s important to note that because of TSMC’s significant investment in the U.S., Trump’s administration has exempted TSMC from the newly announced tariffs.
x . Thailand: Though Thailand is actively and publicly looking for additional new trading partners to whom they can export their goods, they have also expressed a keen interest in opening new trade discussions with the U.S. aimed at leveling their trade deficit with the U.S.
b . It’s broadly accepted that the tariffs implemented during President Trump's first term (and maintained through Biden’s full term) led to significant reshoring in industries like manufacturing and steel production, boosting employment and capital investment in these sectors. We understand that the risk of recession cannot be fully ruled out, but we also acknowledge that ongoing trade discussions are taking place at a very quick pace, and many of those discussions revolve around reducing trade deficits and the bilateral removal of tariffs.
As there are documented instances where Trump’s administration has exempted various businesses that are engaged in leveling the playing field with the U.S., we have no reason to believe some, if not many, of these negotiations will end in the reduction or removal of tariffs, increased global competition, and continued investment in the U.S.
5 . The unspoken positive outcome of the tariff war is the announcement that domestic and foreign investment in the U.S. is now approaching $6 trillion. We cannot overstate the importance of this data. To give a comparison, the stimulus package implemented to support the U.S. during the COVID pandemic was about $5 trillion, funded by the U.S. government. We all witnessed how a recession was avoided, and America prospered (and investments appreciated) during that difficult time. The negative result of that stimulus was a significant increase in government debt.
Though it has not been much discussed, a $6 trillion investment in the U.S. should create many thousands of new jobs, and it should support ongoing wage growth. It should also promote increased competition, which will serve to mitigate inflationary pressures. Because this investment is coming from businesses and foreign governments, it will not increase U.S. government debt as the stimulus package did. Furthermore, it will create significant opportunities for the U.S. government to collect sales tax, employment tax, and personal income tax, which can be used to help reduce government debt.
The Wharton School in 2020 wrote a blog referencing President Trump’s proposal of a $1 trillion infrastructure investment. They stated it should boost GDP by increasing aggregate demand and productive capacity. For example, infrastructure investments can enhance long-term productivity by improving transportation, energy systems, and technology. They estimated the economic impact of President Trump’s $1 trillion infrastructure plan would increase GDP by as much as $720 billion.
Though they note the economic benefits often do not materialize immediately—meaning they may not cure a recession—they acknowledged they do indeed contribute to long-term GDP growth. As we are not currently in a recession, we are optimistic these newly announced investments in the U.S. will meaningfully contribute to our GDP growth in the coming years.
Sincerely,
Fortem Financial
(760) 206-8500
team@fortemfin.com
