Macro Minute: Week of April 7, 2025
Today, I am going to attempt to deconstruct the tariff announcement on April 2nd. As a baseline, I want to reiterate my tariff Macro Minute that I wrote on March 24th. Tariffs result in both higher costs for producers and lower quantities demanded at those higher prices by consumers. This is a less optimum output level from a purely economic perspective. Tariffs are experienced by all participants.
Let me break down how importing companies and consumers will be impacted. The importing company will pay a higher price on whatever component or good is imported. That tariff amount is taken in as revenue for the country that levies that tariff. The company has two options to process the higher input cost and will most likely be a combination of both. Option one is to absorb the higher cost from profit margins. Option two is to pass that higher cost directly onto the consumer. Option two was mostly used after COVID, increasing inflation during that period. The difference this time is that fiscal stimulus is not being sent out to the public to help pay the higher costs.
I want to incorporate this new slowing of economic activity created by tariffs into the current macroeconomic conditions. Before I continue though, I must give the caveat that this is a very fluid situation and that things will most likely change, probably between me writing this and you reading it. The tariffs that are being enacted are both a baseline 10% on all countries and reciprocal tariffs on nations that have trade barriers with the United States already. These reciprocal tariffs are usually half of the amount that other nations have in place on U.S. goods. There is a chance that over time both U.S. and other nations will lower these trade barriers but for now we are clearly in a mode of escalating trade tensions. The market is trying to adjust to these new higher trade barriers, but because of the continued uncertainty it is having a difficult time doing so.
Let’s analyze the market dynamics that are in place. U.S. equity markets have benefited greatly from the previous trade practices. Corporations have moved supply chains and taken full advantage of low-price production globally. This has led to the trade deficits and surpluses at different nations that have built up over time. The U.S. has a large trade deficit with most other nations. This means that U.S. dollars have been leaving the U.S. to go abroad to purchase goods. Those dollars are then used by those other nations to purchase U.S. assets. This has made the U.S. stock market highly valued and the U.S. dollar expensive.
This tariff announcement, along with other developments around defense and spending, are changing the previously established market dynamics. If the trade deficit narrows, there will be less dollars sent abroad and fewer U.S. assets bought by foreign investors. This will put downward pressure on U.S. assets and the U.S. dollar. It could add further pressure on U.S. stock prices if foreigners begin to actively sell U.S. assets. If things play out in a worst-case scenario, U.S. corporations could be hit by higher costs, lower demand, and less investors. The U.S. is still home to some of the best run and innovative companies in the world and, as such, they will be able to adapt to the new environment. It will take time, and profits could go down for a while. No one knows what the future will bring, but staying diversified and being open to multiple possibilities will be paramount in this ever-changing world.
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