Tariff’s double-edged sword
President Donald Trump’s tariff policies have understandably sparked fierce debates, with supporters praising their intent to bolster American economic strength as a reflection of the nation’s geopolitical pre-eminence and critics warning of unintended fallouts.
At their core, these tariffs aim to reshape global trade dynamics in favour of the U.S. But are these measures a masterstroke for American prosperity, or do they risk unravelling the very economic stability they seek to secure? I thought it might be worth unpacking the motivations behind Trump’s tariffs, their potential upsides, and the complex consequences that could follow.
Why tariffs? The case for protectionism
An ideological set of goals drives Trump’s tariffs, each appealing in its own right. Trump’s administration argues that tariffs will:
- Revitalise U.S. manufacturing by making domestic production more competitive.
- Boost American exports by levelling the playing field for U.S. goods abroad.
- Reduce reliance on imports, curbing the flow of foreign products into the U.S. market.
- Narrow the trade deficit, addressing the gap between what America buys and sells globally.
- Strengthen supply chains by encouraging “onshoring” of critical industries.
- Combat unfair trade practices, such as dumping or subsidies by foreign competitors.
- Pressure other nations to negotiate better trade deals with the U.S., and
- Raise revenue for the treasury to offset the multi-trillion cost of tax cuts.
On paper, these objectives are hard to argue against. Who wouldn’t want a thriving manufacturing sector, secure supply chains, or a stronger negotiating stance on the global stage? Tariffs, in theory, could deliver these outcomes by making imported goods more expensive, thereby incentivising domestic production and consumption of American-made products.
The messy reality of economic interventions
While tariffs might aim to protect American industries, they don’t operate in a vacuum. Other nations, companies, and consumers respond – often in ways that complicate the original plan. Politics adds another layer of unpredictability, with leaders balancing domestic pressures and global posturing with the desire to be re-elected. The result is web of second and third-order consequences that could undermine the very goals tariffs set out to achieve.
The potential fallout: a sobering list
While Trump’s tariffs hold promise, they carry significant risks. Here are some of the likely consequences:
- Retaliation from trading partners, who may slap their own tariffs on U.S. exports, escalating trade tensions.
- Higher prices and inflation, as the cost of tariffs gets passed down to consumers.
- Reduced demand, as pricier goods erode consumer confidence and purchasing power.
- Economic slowdown or recession, with job losses both at home and abroad.
- Supply chain disruptions, as reliance on imports shifts without immediate domestic alternatives.
- A reshuffling of global alliances, potentially destabilizing long-standing economic relationships.
When the U.S. imposes tariffs, other countries often hit back. Some may come to the negotiating table – Trump’s leverage as the leader of the world’s largest economy gives him a strong hand of cards to play.
But others, driven by pride or political necessity, may double down, leading to a tit-for-tat spiral that leaves everyone worse off. Even if the U.S. “wins” these standoffs, the victory could be pyrrhic if American consumers and businesses bear the brunt of higher costs.
The price tag of protectionism
Tariffs are essentially taxes on imported goods, and someone’s ‘gotta pay’. Importers fork over the cash at the border, but they typically pass the cost along to consumers through higher prices. This applies not just to finished products like electronics or clothing but also to components used in American-made goods, amplifying the impact across industries. Could foreign exporters or manufacturers absorb the cost to stay competitive? Sure, in theory – but most operate on narrow margins, making that unlikely.
Historically, low-cost imports have kept prices in check. From 1995 to 2020, for example, the cost of consumer durables like cars and appliances dropped 40 per cent in real terms, while overall inflation averaged just 1.8 per cent annually. Those gains were fueled by global trade. If tariffs choke off affordable imports, what happens to inflation? Spoiler: it probably ticks up, squeezing household budgets.
The manufacturing mirage
Let’s say tariffs spurred domestic production, also known as onshoring. Building factories, however, for, say, flat-screen TVs or semiconductors takes years, not months. Council permission, construction, and financing all require long-term certainty, but tariffs can be reversed or renegotiated with each new administration. Trump’s own trade deals illustrate this: his 25 per cent tariffs on Canada and Mexico upended the U.S.-Mexico-Canada Agreement (USMCA), which he championed in 2020 to replace the North American Free Trade Agreement (NAFTA). If CEOs can’t trust that tariffs will stick, why bet billions on new plants?
Then there’s the workforce challenge. The U.S. lacks enough skilled labour to replace the millions of workers in places like China who produce goods. Training or relocating workers takes time and money. And even if manufacturing ramps up, the cost of American labour means domestically-made goods will likely be pricier than the cheap imports there’re used to. A U.S.-made smartphone could retail for thousands, not hundreds. For most Americans, already stretched thin, that’s a recipe for a lower standard of living – unless wages skyrocket, which risks an inflationary spiral.
Jobs saved, jobs lost: the trade-off tally
Tariffs often aim to save jobs in specific industries, but the broader impact can be less rosy. Take steel tariffs in 2018: reports suggest they preserved 1,000 U.S. steel jobs but cost 75,000 jobs in downstream steel industries, like auto manufacturing. Protecting one sector can kneecap another. How do you weigh the livelihoods of a few against the many? The maths is brutal.
Higher prices from tariffs can also dampen demand. If an e-commerce site decides to add a ‘Trump Liberation Tariff’ at the checkout some consumers will cancel their order, hitting corporate profits. When margins shrink, businesses cut back – fewer investments, fewer hires, maybe even layoffs. Historically, profit squeezes have been a reliable warning sign of recessions. If consumers feel the pinch and businesses pull back, the economy could stall, undermining the very growth tariffs were meant to spark.
The confidence conundrum
At the heart of economic vitality is what economist John Maynard Keynes called “animal spirits” – the gut-level optimism that drives spending, investing, and risk-taking. Tariffs foment uncertainty, which could sap that spirit. Will consumers keep buying if prices climb? Will companies expand if trade wars loom? In a world of higher costs and murky outcomes, caution will win out, slowing the economic engine.
Striking a balance
Trump’s tariffs reflect a bold vision: a stronger, more self-reliant America. The goals – more manufacturing, fairer trade, secure supply chains – are undeniably appealing. But economics is a game of choices, and every choice carries a cost. Tariffs could deliver short-term wins but they risk long-term pain if retaliation, inflation, or recession take hold.
As the U.S. navigates this high-stakes experiment, one thing’s clear: tariffs are no silver bullet. They’re a gamble, with outcomes as complex as the global economy itself. Only time will tell whether they usher in a new era of American dominance-or a cautionary tale of good intentions gone awry.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
