Tarrifying

As I am sure you are aware, the market had a no-good, very bad week, to paraphrase the title of a children’s book. The much anticipated “liberation day” sunk markets like a lead balloon.  Even though a lot of uncertainty had been priced into stocks during the month of March, the size and scale of the reciprocal tariffs were not priced in.  Going into the weekend, we continue to see weakness in the markets as investors are not coming to the rescue this time, or alternatively put, there has not been a dead cat bounce.  It will take time for investors, analysts, and economists to digest exactly what the impact these new tariffs will have, but we can expect the effects to play out over the next quarter or two when the data begins to reflect the outcome.

Reciprocal tariffs were announced after the closing bell on Wednesday, when President Trump revealed tariffs as high as 49% on various countries and trading partners around the world.  At a minimum, every good coming into the United States will be hit with a 10% tariff.  The goal of these tariffs is to help offset the extension of the TCJA (Tax Cuts and Jobs Act) that is set to expire at the end of this year.  However, the plan is not just to renew TCJA but extend it to include a further cut to the corporate tax rate from 21% to 15%, while also eliminating the estate tax, repeal or raise the cap on the deduction for state and local taxes, create a deduction for auto loan interest, and cut taxes on tips, overtime pay, and Social Security benefits.  These cuts will reduce federal revenue by an estimated 16% or approximately $710 billion per year.  Therefore, when the president says his tariffs will generate $800 billion annually, it becomes clear what exactly he's attempting to accomplish.  However, tariffs aren’t as predictable as one might think.

How companies will respond to tariffs is still a big unknown.  It is not always the case that they’ll just pass the cost along (although we can assume many will).  There are five ways companies can react to the coming tariffs.

1. They can reshore production to the United States, thereby skirting any tariffs.  Companies mentioning this include Johnson & Johnson, which announced a $55 billion investment.
2. They can push suppliers to reduce prices.  The largest retailers have considerable leverage and companies reporting they will take this approach include Walmart.
3. They can raise prices to preserve profit margins.  Some companies have already warned of this including Target.
4. They can absorb the tariffs with lower profit margins.  Two companies that warned of this in their latest guidance include Nike and FedEx.
5. And lastly, they can lobby for exemptions to limit their impact.  Perhaps the biggest industry using this method is the U.S. automakers

Clearly, there is still a lot that is unknown.  One way to look at tariffs is to consider what are our largest exports and by extension, which industries could be most impacted.  Here is what I’ve found in order of largest to smallest:

1. Civilian Aircraft Parts $123 billion – top buyers being France, Germany, and Brazil.
2. Oil $118 billion –top buyers being The Netherlands, South Korea, and Canada.
3. Gasoline and Other Fuels $118 billion –top buyers being Mexico, Canada, and The Netherlands.
4. “Low-Value Shipments” (items valued at $800 or less) $68.2 billion – top buyers being Mexico and Canada.
5. Liquified Natural Gas (LNG) $62.2 billion – top buyers being Japan, Mexico, and the United Kingdom.

The top destinations for exports include Canada (16.9%; $394B), Mexico (16.2%; $334B), China (7%; $144B), Netherlands (4.3%; $90B), and the United Kingdom (3.9%; $80B).

As for the economic impact, that is an area of considerable debate.  At the moment, only China has retaliated with a 34% tariff on U.S. goods, although I believe we will see additional countries add tariffs in the days and weeks ahead.  However, how the pieces fall cannot be determined for now.  We continue to believe in diversification, which has served us well so far this year.  We understand fear grips people at times like this but recognize this isn’t the first time we have seen markets take it on the chin.  Some previous periods include the tech bubble in 2000, the financial crisis in 2008, rising interest rates and an escalating trade war with China in 2018, the pandemic in 2020, and now tariffs in 2025.  In each case, markets have recovered (some faster than others).  We remain steadfast in our investment strategy and believe that in the long run these current issues will be resolved.  

Bruce J. Mason, MBA