Interpreting the potential impact of Trump’s trade tariffs

President Trump’s “Liberation Day” tariffs on US trading partners last week have rocked worldwide markets, and investors understandably have questions about the impact these tariffs could have on the economy and everyday life. Natixis Investment Managers Solutions Portfolio Manager Jack Janasiewicz and Portfolio Strategist Garrett Melson offer their thoughts on the latest market developments and break down what may lie ahead for consumers, jobs, manufacturing costs, corporate profits, the deficit, sentiment and more.
 

Q: How did we get here?

A: Yes, everyone expected some form of tariffs to be put into place. But the announcement on April 2 detailing the size, scope and draconian flavor was well beyond what most expected. Complicating matters, the methodology that was used to come up with said tariffs was less than impressive. So, while the market was expecting tariffs, the actual announcement was worse than what the market had discounted.
 

Q: So which is it? Are tariffs a negotiating tool? Or are they a revenue generator to help pay for the deficit?

A: If they are truly being thought of as a revenue generator, then we should expect to see them stick. If they are meant as a negotiating tool, then we can assume a more optimistic outlook where they can be negotiated down or even off. But here’s a catch – because these tariffs are being executed via executive order and not being approved through legislative action, they cannot count as revenue offsets for the budget. So, yes – they might be considered a revenue raise for the government. But they won’t help Congress pass a budget bill.
 

Q: Are tariffs being used for something even greater – say, to transform the entire global trade structure?

A: This has been something Trump has talked about for years – restructuring the global trade system. And while there certainly can be changes to the system, the idea also has some serious economic consequences that might not prove to be beneficial to the US economy. There is a reason why lower value-add products are made overseas – because the cost of labor is much lower. This helps keep corporate margins healthy, which, in turn, means consumers can pay a lower price. Move these low-cost jobs back to the US and that dynamic dramatically changes. Sure, it might bring jobs back to the US. But by offering lower value-add manufacturing here in the US, it also means you have to make a choice: Charge a higher price to manufacture said goods, or replace these incremental cost increases with automation.

Corporate America is in the business of creating profits. Why else would you start a company? By switching to producing lower value-add goods, it creates several economic challenges: reduced profits, limited job growth, reduced competitiveness and greater dependence on other countries for higher value-add products. In aggregate, this lowers the standard of living, as fewer high-skilled, better-paying jobs are created. Bringing back manufacturing jobs to the US, while preserving profit margins and simultaneously cutting the deficit, simply cannot coexist. These three things cannot be true at the same time. Period. End of story.
 

Q: How should we think about earnings going forward?

A: Who knows. The clarity around that just got quite clouded really quickly. What will the demand destruction look like? Will capital expenditure (planned spending by companies) grind to a halt? Slowing growth will hurt profits globally, which will feed through to consumers and consumption. But how much? We just don’t know. And complicating things is that global supply chains are once again getting torn apart. Bring all these jobs back to the US? It takes years to build factories. And complicating this is the fact that the US labor force and cost structure are not built to handle this change. It will take years, if not more, to be able to transform the US economy into this new manufacturing base that Trump dreams about. Earnings season will start later this week. Investors will be parsing every word for any glimpse into the future. Expect to see "uncertainty" repeated over and over. And this won’t help analysts with their earnings forecasts. Less visibility. More uncertainty. Expect downgrades, to say the least.
 

Q: Does the methodology behind the tariff rates make sense?

A: No. None whatsoever. The basic idea was to take the greater of the two quantities: 10% of the US trade deficit with a country, divided by the total quantity of imports from that country, divided by 2. Bilateral deficits are not tariffs. They take into consideration trade in goods, while trade in services is just as important. Let’s look at Madagascar, for example. The tariff rate was determined to be 47% based on its trade deficit with the US. The administration has attempted to hide behind the claim that trade deficits are a function of tariffs and other nontariff trade barriers, but that is simply not the case. 

Madagascar’s top export to the US is vanilla. The US exports some machinery and machinery parts to the country, a value that is far less than the vanilla it exports, creating a deficit. Madagascar has a per capita GDP of $575 in nominal terms.¹ This country simply is too poor to import anything significant enough to flip a deficit to a surplus, tariffs or no tariffs. And yet we slap a 47% tariff on them. Trade deficits reflect competitive advantages. And competitive advantages are accretive to the overall system. Econ 101 teaches us that competitive advantages in trade improve the entire system. No one is ripping anyone off when you are playing to competitive advantage.
 

Q: Is there an off-ramp here?

A: Yes. There are two as we see it. The Federal Reserve (Fed) can cut interest rates. And Trump can pivot and back down. Neither seems likely in the near term given comments from Chair of the Federal Reserve Jerome Powell on Friday and key administration officials from the Trump team over the weekend. The Fed is caught between a rock and a hard place. The risk of higher inflation near term – a reflection of tariff costs being passed on to the consumer – mixed with an economy that was already slowing into a potential trade shock leaves them fighting two outcomes. Neither of which is good – recession odds rising while inflation starts to reaccelerate. As Powell indicated, they are in no hurry to adjust rates until there is more clarity on policy actions from the administration.

And perhaps more importantly, the cost of capital matters little when a complete and utter lack of confidence is the underlying issue. On the Trump pivot – unless he can claim wins, it’s hard to see him stepping back. It makes him look weak and having paid a heavy price for nothing. So unless we see countries lining up to negotiate, it’s hard to see him reverse course. Wins? Sure, Taiwan has agreed to remove all tariffs with the US. But those tariff rates were just 1.7% – who cares? And Trump, as well as various administration officials, seem to be doubling down that the end isn’t fairer trade but eliminating trade deficits – eliminating tariffs doesn’t fix that. And think about this – with the US stock market cratering, why would you come to Washington to negotiate? Let the US economy burn to the ground and then see how those tariffs play out. Any off-ramp looks like a tough spin.
 

Q: Are tariffs really that big of a money maker?

A: The benefits are likely overstated by the administration. The end goal of tariffs dictates the size and scope of those tariffs. If the goal is to generate incremental revenue, then the tariffs can’t be so draconian as to weigh on trade flows – which is seemingly in direct opposition to the strategy unveiled last Wednesday. And if the goal is to restructure global trade and reduce deficits by depressing imports, then tariffs should be more draconian, but you won’t be getting much in the way of tariff revenue. To put it simply – the tariffs, as announced, will ultimately lead to slower growth. And slower growth likely leads to layoffs. And with layoffs comes less consumption. And less tax revenue collected by the Treasury. So the revenue side of the equation will face a double whammy – less consumption means less tariff revenue, and fewer people working means less tax receipts for Treasury. Lose-lose.
 

Q: What about Congress? Is there a risk here?

A: Yes. Congress likely flips in 2026. That’s just how this goes from a historical perspective. And even more worrying – the majority currently held in Congress is razor thin. A few defections here and a few defections there and that majority is gone. And if you are in a hotly contested Congressional seat, you might end up breaking ranks with Trump in order to save your own skin. Those in Congress want to save their jobs. If these polices turn out to be a recession trigger, you are more than likely to try to distance yourself from those policies. There is a real risk that House and Senate support starts to fade. And if it does fade, then what happens with the budget battle? Less likely to see tax cuts and spending and more likely to see just the opposite.
 

Q: Speaking of the budget battle – are the risks shifting?

A: They sure are. With recession odds on the rise, growth estimates might get revised down, which means lower tax revenue projection. And with a potential higher unemployment rate, less tax revenues again. And with the stock market down 15%¹ or more, the wealth effect kicks in. This all just makes those pay-fors even more complicated.
 

Q: Are there risks that are difficult to quantify?

A: I’m glad you asked. Confidence. Confidence. Confidence. That’s certainly shaken. Business confidence. Consumer confidence. Sentiment. The helter-skelter policy initiatives have done little to instill a sense of confidence. So even if the tariffs get walked back, who’s to say that some additional unorthodox policies won’t pop up again? And with this backdrop, why would CEOs want to invest right now? With the stock market getting whacked, consumers are likely going to start to worry. We’ve already seen spending cooling to catch down to slowing wage growth. This relationship had been running in excess with spending outpacing wage growth – an unsustainable mix, implying that consumers were tapping savings to fuel spending. And with savings levels slowly being drawn down, that leaves less of a cushion to absorb declining sentiment. We should certainly expect to see consumption cool as a result. Nominal incomes are cooling, and there’s no reason to expect consumers to continue compressing their saving rates. And think about this – American households hold $38 trillion in total equities.¹ Mutual funds and ETFs had $24 trillion while institutional investors, such as life insurance companies, pension funds and government retirement funds, held $10.2 trillion.¹ The rest was held by foreigners. Households held $46.8 trillion in direct equities and mutual funds with the Baby Boomers accounting for more than half of that total. In addition, households held a record $15.2 trillion in IRAs. Altogether, equities as a share of assets held by households rose to 43.5% during 4Q2024.¹ Main Street is exposed to the equity markets, and a 15% drawdown will be felt. The risk is that the doom loop perpetuates.
 

Q: But aren’t we getting some good news on tariffs and negotiations with other countries?

A: Vietnam was willing to drop its supposed 90% tariffs. Argentina talked about going to 0%. India and South Korea are stepping up. Israel even dropped what little tariffs its had left before the announcement and still got slapped with 17% tariffs.¹ The EU was considering dropping auto tariffs from 10% to 2.5%. That’s an easy one to give up – can you see the French driving around in Escalades? Or the Italians in F-150s? Seriously. Now, however, the EU has shifted to countermeasures. This could be the next wave to hit stock markets. The EU has been working to finalize a first package of tariffs on up to EUR26B of US goods for mid-April in response to the steel and aluminum tariffs that took effect on March 12.
 

Q: We are pretty oversold. We should get a bounce, right?

A: Maybe. Maybe not. We need to see concrete evidence of that Trump pivot. And calling a few small countries who choose to negotiate wins isn’t going to fool anyone. The deals must include the major trading partners – China, the EU, Japan, Korea, and our neighbors to the north and south. Without those deals, we might not even see a bounce, let alone a sustained bounce. It’s all about confidence. That needs to be recouped, and serious deals with major partners is the answer. Administration officials need to stop trying to whistle past the graveyard with “tariffs are not recessionary.”  Or that “tariffs are aimed to benefit Main Street, not Wall Street.”  That’s not helpful with improving confidence.
 

Q: But wasn’t the latest payroll data decent?

A: The data doesn’t matter anymore. It’s playing second fiddle to policy. Impending impacts from tariffs override what are usually market-moving economic releases, like Consumer Price Index/Personal Consumption Expenditures (inflation and expenditure indices) and the jobs data. It’s all about economic policy going forward. And sure, gasoline prices are down along with mortgage rates. Helpful at the margin. But that’s because the commodity market is pricing a recession along with the rates markets. Estimates are saying that the average family will face roughly a $2,000 increase in costs from the tariffs. These same families spend about $2,000 on gasoline each year.¹ So to offset the impact from the tariffs, gasoline needs to drop to $0.00 per gallon. The drop-in mortgage rates and oil prices aren’t the results of supportive policy actions by the administration. Rather, it’s just the opposite. The only thing that matters with respect to the data is whether we start to see the linear cooling in labor markets morph into nonlinear deterioration.
 

Q: So now what?

A: Buckle up. Corporate and household balance sheets were strong heading into this. But the longer this plays out, the more recession odds drift higher. We can certainly see fits and starts in the days and weeks to come – these are likely to be more from market technicals and position squaring than anything else. We are hopeful that this ends soon and that the reset sets the stage for a strong rally in 2H25. By then, the Fed should be cutting interest rates, which should help provide incremental support. But in the meantime, expect lots of chop. And unless we get a Trump pivot, things can still go lower.