Trade Tariffs and Market Uncertainty

Recent tariff policies have the potential to reshape global trade, with the U.S., Canada, Mexico, and China adjusting their import taxes in response to ongoing negotiations. To be clear, this situation has been changing rapidly and will likely continue to do so.  It’s probable that things will have changed by the time you read this.

If you remember President Trump’s first term in office, you likely recall the “trade war” between the U.S. and China.  (While media coverage on this decreased after COVID, it’s worth noting that President Biden continued and increased many of the same tariffs. In other words, this is a fire that’s been raging for a while.)  But to try and get a handle on what’s going on, let’s do a Q&A on tariffs.  We’ll start with:

What Are Tariffs, and Why Do They Matter?

A tariff is essentially a tax on imported goods and services.  Tariffs can be levied on almost anything: metals, food, appliances, lumber, you name it.  Whenever a U.S. business buys goods from a foreign country with a tariff on it, they will pay that tax along with the cost of the product itself.  So, when tariffs rise, it can have implications for both businesses and consumers.  And when countries slap tariffs on our products, it affects U.S. companies that export goods abroad. While the goal is often to protect domestic industries and encourage local production, tariffs can potentially increase consumer prices and disrupt international trade relationships.

The Argument for Tariffs

Traditionally, tariffs have served two main purposes:

• Generating Revenue:

Before the federal income tax was established in 1913, tariffs were a primary source of government funding.

• Protecting Domestic Industries

When you tax imports of specific goods, businesses may be more likely to buy from domestic producers instead. 

While revenue and protectionism are the traditional arguments for tariffs, President Trump’s reasons have been more varied. In his first term, his stated objective was to decrease the trade deficit between the US and other countries, primarily China. On the campaign trail, Trump talked about tariffs as a way to ensure more products would be made in America. And the White House has discussed securing the border and halting the flow of fentanyl as an objective.

Tariffs as a Negotiation Tool

The “reason” behind tariffs may seem academic, but it’s actually important – because it sets the conditions required for reducing tariffs in favor of free trade. For example, it’s conceivable that if the US, Canada, and Mexico were to set new agreements on border security, tariffs will be lowered, and the trade war would end.  The early signs for this are good. Recent agreements have linked tariff suspensions to border security measures, suggesting that economic pressure is being used to influence diplomatic negotiations. 

The Risks of Prolonged Tariffs

Potential for Increased Inflation

If companies must pay more for the goods they need, they will often pass those costs onto consumers.  That’s especially important during a time of higher-than-normal inflation. 

Supply Chain Disruptions

Businesses could turn to U.S.-based suppliers for many of these items, but there are issues.  Domestic industries can’t just replicate the volume of foreign trade overnight.  Furthermore, cutting down on the number of suppliers can snarl supply chains — the very problem that led to higher inflation in the first place.  It’s worth noting that inflation did not rise dramatically during President Trump’s first term…but we should also note that these tariffs are much more extensive than last time.     

Retaliatory Trade Wars

While tariffs can benefit certain domestic industries, a trade war can end up hurting as many industries as it helps. Other countries may impose tariffs on American products, making it harder for U.S. businesses to compete in international markets. Canada, for example, has announced tariffs on American steel, aluminum, food, and consumer goods.

The final argument against tariffs is that they don’t always work as intended.  For example, while the trade deficit between the U.S. and China narrowed during President Trump’s first term, the overall trade deficit actually widened by a significant margin.  More notably, when the U.S. raised tariffs on a large scale in 1930, the trade war that resulted ended up worsening the Great Depression — one reason the U.S. moved away from tariffs after World War II.        

Impact of Tariffs on the Stock Market

Typically, tariffs don’t impact the stock market directly.  However, they can potentially cause various indirect effects.  Again, the single most important thing to keep an eye on is probably inflation.  As you know, the Federal Reserve raised interest rates to 40-year highs to bring down consumer prices.  After inflation fell below 3% last fall, the Federal Reserve began cutting rates in response.  However, the Fed has signaled they only plan to cut rates twice in 2025.  Any significant uptick in inflation will only slow the pace of future cuts — or even cause rates to rise again. 

The good news is that the markets are driven by many factors, and tariffs are just one.  During President Trump’s first term, the trade war between the U.S. and China had a very small effect on the markets, occasionally injecting short-term volatility but having little sustained effect on performance.  And there are still many good reasons to feel confident in the stock market.  The economy is coming off a strong year.  Interest rates are lower.  Some sectors, especially in tech, are experiencing tremendous momentum.  For these reasons, we don’t intend to make major investment decisions based on tariffs alone. 

Investor Sentiment

Markets thrive on predictability. Prolonged trade disputes can lead to short-term sell-offs as investors seek stability.

While tariffs alone may not cause a major market downturn, their indirect effects—such as inflation and supply chain challenges—can influence broader market trends.

What’s Next?

There are still so many things we don’t know. And, at this point, the long-term impact of these tariffs remains uncertain. If negotiations between the U.S., Canada, Mexico, and China progress, some tariffs could be lifted. That would certainly be a positive result for everyone!  If tensions escalate, we could see prolonged economic effects.

At Cornerstone Financial Solutions, we continue to monitor these developments closely. While short-term market fluctuations are possible, we remain focused on long-term investment strategies. If you have questions or concerns about how these changes may affect your portfolio, feel free to reach out to us.

Any opinions are those of Cornerstone Financial Solutions, Inc. and not necessarily those of Raymond James. All opinions are as of 3/3/25 and are subject to change without notice. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Past performance is not a guarantee of future results. Adapted from material prepared by Bill Good Marketing, an independent third-party.

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