Authored by: Nicholas M. Brown, CFA, CFP

In their 2016 book War By Other Means, Robert Blackwill and Jennifer Harris argue that the United States has historically lagged in leveraging economic tools to achieve political objectives. That same year, the country elected a president who made economic policies—particularly trade tariffs—a central pillar of his foreign policy approach.

As President Trump embarks on his second term, his administration continues to use trade measures as a bargaining tool to pressure other nations into negotiations. Regardless of political perspective, investors and business owners alike are keen to understand the potential impact of these proposed tariffs on the U.S. economy and financial markets.

Understanding Trade Tariffs

Trade tariffs are government imposed duties placed on specific imports or exports, often used to influence economic activity and international trade relationships. When a tariff is applied, it raises the cost of foreign goods, with the intent of making domestic alternatives more attractive to consumers. While tariffs can protect local businesses from overseas competition, they can also lead to higher prices for consumers and retaliatory measures from other countries. The broader economic impact of tariffs depends on the industries affected, the scale of the tariffs, and how trading partners respond.

Thus far, the Trump Administration has utilized tariffs to gain concessions or accelerate negotiations on other geopolitical issues such as immigration, drug trafficking, and intellectual property concerns. As trade tensions rise, understanding the economic and investment implications of trade tariffs is crucial for investors and businesses alike.

The "Good" Impacts of Tariffs

A common argument in favor of trade tariffs is that they support U.S.-based businesses and encourage domestic production. However, their most immediate and strategic value for the Trump Administration lies in their ability to bring U.S. trade partners to the negotiating table, creating opportunities to address longstanding trade imbalances and other key geopolitical concerns.

This has already been demonstrated in real time. When President Trump announced tariffs against Mexico and Canada, both nations quickly engaged in substantive negotiations, resulting in concrete actions. Mexico took steps to address immigration and border security concerns, while Canada committed to tackling the flow of fentanyl into the U.S. These diplomatic breakthroughs illustrate how tariffs can be an effective tool in expediting resolutions to critical issues beyond just trade.

Proponents of trade tariffs argue that their potential economic downsides are justified by broader policy gains, such as reducing illegal immigration, curbing drug trafficking, and strengthening protections for U.S. intellectual property. These objectives, while difficult to quantify in direct economic terms, are considered critical to national security and long term economic stability.

The assumption is that the long term benefits of these policy achievements will outweigh the short term financial burdens imposed by tariffs. While higher costs and trade disruptions may occur, advocates believe that the leverage tariffs create in diplomatic negotiations can lead to systemic reforms that support American interests in the global economy.

The "Bad" Impacts of Tariffs

Tariffs, by design, increase costs. While their intended purpose is to make imports more expensive and protect domestic production, the complexities of a globalized economy make it nearly impossible to avoid unintended consequences. Many U.S. manufacturers rely on imported raw or semi processed materials for production. When tariffs drive up input costs, businesses often pass those expenses on to consumers—meaning that even products labeled "Made in the U.S.A." can see price hikes. Additionally, trade partners frequently impose retaliatory tariffs, making American exports more expensive and less competitive in foreign markets.

These two effects—higher input costs and retaliatory tariffs—can ultimately hurt the very industries tariffs aim to support. A 2022 Federal Reserve study on the 2018-2019 Chinese tariffs found that, when factoring in increased production expenses and reduced export demand, the U.S. manufacturing sector experienced declines in both employment and overall economic activity. Rather than shielding domestic industries, broad based tariffs can inadvertently stifle growth and hinder competitiveness on the global stage.

The "Ugly" Impacts of Tariffs

If there is one thing financial markets dislike, it is uncertainty, and trade tariffs inject a significant level of unpredictability. The imposition of tariffs creates friction by increasing costs across industries, making it difficult for investors to gauge the long term impact. Because tariff negotiations can shift rapidly, market participants struggle to fully price in potential consequences, many of which may take years to materialize. This uncertainty can cause knee jerk reactions, leading to volatile swings in the market as investors try to reposition their portfolios accordingly.

Moreover, the ripple effects of tariffs extend beyond immediate cost implications. Uncertainty surrounding trade policy can slow corporate investment, as businesses hesitate to expand operations or commit to long term projects in an unstable environment. When firms delay capital expenditures, it can have a broader dampening effect on economic growth, job creation, and overall market confidence. As investors seek safer assets, sectors tied to international trade may see a decline in stock performance, further exacerbating volatility.

So What Are Investors To Do?

• Diversify Across Sectors and Geographies – Given the unpredictability of tariffs, concentrated investors should consider broadening their portfolios to include sectors less impacted by trade tensions. Additionally, global diversification can help mitigate risks associated with U.S.-centric trade policies.
• Monitor Inflation and Interest Rate Trends – Tariffs can contribute to inflation, leading to potential interest rate hikes by the Federal Reserve. Investors should keep a close eye on inflation reports and Federal Reserve policy changes, adjusting their portfolios accordingly. Fixed income investors should be keenly aware of the impact the interest rate environment can have on a bond portfolio.
• Stay Prepared for Market Volatility – Trade negotiations can shift rapidly, leading to sudden market fluctuations. Equity investors should maintain a long term perspective and avoid overreacting to short term volatility. Holding a balanced mix of assets, including equities and fixed income investments, can help provide stability during uncertain times.

Conclusion

Trade tariffs remain a double edged sword, offering both economic leverage and potential disruption. While they can serve as a powerful tool in trade negotiations and domestic industry protection, their broader economic consequences—rising costs, supply chain disruptions, and market volatility—cannot be ignored. Investors must stay informed and proactive, adapting their strategies to mitigate risks while capitalizing on new opportunities that emerge from shifting trade policies.

Navigating these complexities requires careful planning and expert guidance. At Granite Harbor Advisors, we specialize in crafting resilient investment strategies that help clients manage risk, preserve wealth, and seize growth opportunities, even in uncertain economic environments. Contact us today to discuss how our tailored financial planning approach can help you stay ahead in an evolving global market.