Trump and the likely impact of Tariffs

Trump and the likely impact of Tariffs

Several clients have asked about the likely impact of the new Trump administration on the global economy.

Let’s look at tariffs. In 2018, the Trump government started a trade war with China, using tariffs to try to level the playing field on paper, it sounded simple: make Chinese imports more expensive, shrink the trade deficit, and bring manufacturing back to the US. Reality, however, is rarely that simple.

Tariffs: theory vs reality

Tariffs are like adding ankle weights to your competitor in a race. They slow them down, but they don’t make you any faster. In theory, tariffs are supposed to push businesses and consumers toward local products by making imports more expensive. The hope is that higher prices on Chinese goods will encourage people in the US to buy American.

But here’s the catch: global supply chains are so intertwined that when you introduce tariffs, they don’t just hit your competitor – they hit you too. Many US companies rely on imported parts and materials, and when tariffs make those imports pricier, the cost is often passed on to consumers.

The US-China trade deficit: a mountain too big to move?

The US-China trade deficit is what has driven Trump to promise tariffs as high as 60% on Chinese-made goods. For decades, the US has bought far more from China than it has sold. This trade deficit had reached $420 billion by 2018, which, as mentioned above, is when Trump first imposed tariffs and other trade barriers on China.

Since then, the deficit has shrunk, but as the chart below shows it remains very high. According to US Census Bureau data, in 2023 the US deficit in goods traded with China still stood at almost $280 billion.

The tariffs introduced in 2018 were meant to close the gap with China, but like squeezing a balloon, the pressure just shifted elsewhere. Companies didn’t stop importing, they started sourcing from Mexico or Vietnam instead.

The trade deficit with China shrank, but the overall US trade deficit barely budged. Worse, China retaliated, slapping tariffs on American goods like soya beans. Farmers in the Midwest, who had nothing to do with the trade war, suddenly found themselves in the crossfire, requiring billions of dollars in government subsidies to stay afloat.

On balance, new tariffs on Chinese goods are likely to have little impact on growth for the US but could have a more significant effect on Chinese growth, and not a negative one. As a result of tariffs, we expect Beijing to provide more direct government support for households and businesses, as foreign hostility, including tariffs, pushes China to strengthen its domestic economy more aggressively.

To sum up: in investment, just as in politics, it pays to think about where the ball is going next.

Logic Wealth Planning provides independent financial advice in Manchester, Bury, Rochdale, Cheshire, and the surrounding area, but not limited to the region.