Reciprocal Tariffs and Us

On April 2,2025, President Trump announced new tariffs on nearly all major trading partners. These tariffs are “reciprocal” in that they correspond to tariffs each country imposes on U.S. goods and are on top of previously announced duties. The average tariff rate across countries is 25%, with rates for some as high as 49%. While the implementation of these tariffs was widely telegraphed by the White House, the level and scope are greater than many investors and economists expected. And the markets are reacting. Honestly, no one really knows what will happen. However, many people make a living making predictions, and this pandemonium is making everyone raise their voices. But this is no time to act and react. Instead, let us look at the facts first.

There are many arguments for and against tariffs, and the topic can be politically charged. Regardless of how we each feel about these measures, we will agree that these tariffs do represent a significant change in the global economic system.

Let us start by looking at some of the key facts. The newly announced tariff measures have been set at a minimum 10% rate, with levels varying based on the U.S. trade deficit with each country. China, for instance, faces a reciprocal tariff rate of 34%, which is in addition to 20% tariffs previously announced. The European Union will be subject to 20% tariffs, while Canada and Mexico will not be immediately impacted by new reciprocal tariffs and are instead subject to the previously announced 25% tariffs related to illegal immigration and fentanyl. There is also an across-the-board 25% tariff on all imported automobiles, effective immediately.

Historically, the United States has a long history of tariffs. In fact, tariffs and excise duty were the primary sources of federal revenue prior to the establishment of the federal income tax system in 1913. However, they fell out of favor after World War II as globalization took hold.

How do tariffs affect markets and companies? Although, it will take time to truly understand the impact, some areas will be affected more than others. While some domestic manufacturers might benefit from less foreign competition, in general markets tend to view trade barriers as negative for corporate profits, at least in the near term.

The most important takeaway for us is that this shift in trade policy will be an ongoing process. Change in trade policies force businesses to reconsider how they operate. They may adjust their sourcing strategies or may consider absorbing portions of the tariffs themselves. For example, in response to the 2018 tariffs, a portion of S&P 500 companies shifted their supply chains out of countries like China to reduce the impact from tariffs. While the companies figure out how to operate in this new environment, it takes time to adjust supply chains.

How do tariffs impact consumers? Arguments against tariffs are that they effectively tax consumers who ultimately pay higher prices for goods. Tariffs tend to be regressive because they impact everyone the same. People with lower income pay a higher percentage of their income than people with higher income because the cost of the goods is the same for all. This is particularly sensitive today due to the inflation that we have experienced over the past few years.

In times like these, it is important to remember that markets can be fragile in the short run but are resilient in the long run. Over the past century, markets have experienced significant global economic shifts including wars, recessions, bubbles, pandemics, political change, and technological revolutions. Each of these challenges likely felt insurmountable at the time to some. Yet, markets not only recovered, but rose to new levels over the following years and decades. While the past is no guarantee of the future, there are many reasons to believe markets and the economy can eventually move past the current set of concerns.

Perhaps Warren Buffett said it best in 2008, during the middle of the global financial crisis: " Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”

This is a helpful reminder that although market swoons can be unsettling, history shows that keeping a long-term perspective is the best way to stay on track to achieve our financial goals. As investors, it is important to focus on what we can control – hold sufficient cash to weather the transition, but let your portfolios stay invested as per your long-term strategy.

Lavina Nagar, CFP(R) is the president and founder of Maya Advisors, Inc., a financial planning and investment firm in Palo Alto, California.