Tariffs and Tensions: Analyzing Trump’s Trade Strategy

In the US, trade policy can rapidly oscillate depending on which political party controls the Senate, House of Representatives and Presidential Office. With President-Elect Trump set to take office, tariff policy will undoubtedly skew toward protectionism, falling in line with his administration’s previous tenure. In recent social media posts, Trump pledged to implement a 25% tax on all imports from Mexico and Canada, along with an additional 10% tax on imports from China, as one of his initial actions upon taking office. With these three countries being the US’s largest trade partners, these tariffs will significantly and immediately impact trade and prices.  

Tariffs are a critical aspect of global policy, often reflecting a country’s capacity and economic status. Higher tariffs protect domestic industries but can cause inflation, reduce competition and decrease efficiency; comparatively, low tariffs can cause key industries to be overrun by lower-cost and higher-volume foreign producers. The increased tariffs proposed by the incoming administration will, therefore, have a far-reaching impact on nearly every facet of the domestic economy.

Exploring Trump’s tariff policies

President-Elect Trump’s tariff policies aim to protect domestic industries and intellectual property, stem the tide of offshoring and encourage reshoring. During his first term, Trump maintained an aggressive trade policy, levying tariffs on most Chinese goods and readily engaging in minor trade wars with traditional allies, including the EU and Canada. A wide-ranging tariff on all imports could ignite issues with major trading partners, including the EU, Japan, South Korea and Taiwan, leading to retaliations on key US industries. Trump was also responsible for renegotiating the North American Free Trade Agreement (NAFTA), with the final deal including various labor protections, such as the Rapid Response Mechanism (RRM), which replaced the North American Agreement on Labor Cooperation. The US Trade Representative (USTR) has since used the RRM to mixed effect, targeting unfair labor practices among automakers and textile manufacturers in Mexico.

While not at the forefront of breaking news, the United States-Mexico-Canada Agreement, the replacement for NAFTA, is up for review in 2026. President-Elect Trump will likely make sweeping changes after claiming Chinese manufacturers are using Mexico as a backdoor to avoid tariffs. While Trump’s assertions have been met with mixed reactions, Canada’s Minister of Finance appears to “align” on basic strategy and policy. However, a generalized tariff on all imports may sour US-Canada relations, threatening this partnership.

Most notably, Trump plans to aggressively push new tariffs on Chinese goods, adding a 10% tax on any existing tariffs. Retaliation will pose a major threat, with China accounting for the second-largest percentage of US exports. While Canada represents the largest importer of US goods, the country’s manufacturing sector would struggle to supplement production in the way China might be able to.

Strategies for success for supply chain professionals

• Supply Chain Diversification: Companies must actively seek and establish relationships with suppliers in regions less or positively affected by tariffs. Companies may also implement multi-sourcing strategies to reduce dependence on single-source suppliers. Building redundancy into the supply chain ensures that businesses remain operational even if one source becomes unavailable or less viable because of tariffs.
• Cost Breakdown and Reassessment: Supply chain professionals can conduct a thorough cost analysis to understand the breakdown of expenses influenced by tariffs and identify areas for cost reduction without compromising quality. This practice can include re-evaluating transportation routes, packaging options and logistics strategies.
• Risk Assessment and Scenario Planning: Conducting comprehensive risk assessments is essential for identifying vulnerabilities within the supply chain that are influenced by tariffs. By developing detailed "what-if" scenarios, supply chain professionals can prepare for various tariff levels or retaliatory actions, ensuring resilience and readiness for potential disruptions.
• Strategic Inventory Management: Maintaining higher inventory levels for critical components can help businesses avoid disruptions caused by sudden tariff changes. Leveraging free trade zones for storage allows companies to defer or reduce tariff obligations, optimizing cash flow and supply chain efficiency.

How will the economy react to tariffs?

Trump had previously levied a wide range of tariffs, ranging from 7.5% to 25% on most Chinese products to a mixed effect. Some vulnerable manufacturers praised the move, while others highlighted unequal damages. Tariffs are typically most effective at protecting domestic companies when the manufacturing infrastructure is mature or can be subsidized to bring the US operations up to speed quickly. For example, the Biden Administration coupled increased tariffs on technology products this with financial support via the CHIPS and Science Act.

A similar strategy may reap success in the future; however, new subsidies for domestic manufacturers are unlikely, given President-Elect Trump's proposals to cut government spending. Blanket tariffs will likely generate inflation for most industries where current domestic production lags behind domestic demand. For example, some American-owned companies increased production in China, stating that it was less expensive to import finished products at 7.5% than individual parts at 25.0%, despite incentives to produce and source inputs from US manufacturers. Others, like Apple, have preferred to diversify into Vietnam and other Southeast Asian countries with emerging manufacturing and technology sectors. Technology companies, like consumer electronics and semiconductor manufacturers, have led the charge. However, numerous confounding factors play into this shift, most notably China’s intellectual property protections and geopolitical concerns. While it’s challenging to fully attribute tariffs to this shift, more aggressive proposed trade policies will likely exacerbate these issues and accelerate these shifts. Supply chain relocation often carries significant upfront expenses, translating into higher costs for consumers.

Other companies simply plan to absorb costs associated with manufacturing in or importing from China, passing these costs onto buyers. These companies have decided that the cost of relocation supply chains is greater than the potential loss from pricing lower-income consumers out of the market. This trend suggests that tariffs could lead to renewed inflation concerns and higher consumer prices across the board, especially on textiles, electronics, metals, toys and other everyday consumer products.

Ultimately, these tariff policies aim to support domestic manufacturing, agriculture and textiles from increasingly prevalent import penetration and prevent non-competitive practices, which the current and future administrations both agree on. Some sectors may benefit more heavily from tariffs than others. The overwhelming tariff on Chinese EVs is well-documented, with certain industries, like golf carts and personal vehicle manufacturers, pushing for similar tariffs on Chinese imports. Generally, these policies protect manufacturers of essential, generic products without significant quality-based differentiation, like office supplies, shoes, screws, nuts and bolts. For example, domestic office supply manufacturers have benefited from a 127% tariff on paper clips since the early 90s, while New Balance reaps the rewards of a 20% shoe tariff.

Strategies for success for manufacturing professionals

• Supplier Diversification: Manufacturers may be able to expand supplier bases outside the countries affected by tariffs. This can involve sourcing raw materials and components from alternative countries to minimize the impact of tariffs. Building relationships with multiple suppliers enhances pricing power and ensures a more resilient supply chain.
• Nearshoring and Reshoring: Manufacturers will benefit from reshoring and shifting some production processes closer to key markets. This practice can help reduce dependency on imported materials and potentially qualify for local government incentives. Additionally, local production can offer quicker response times and reduced transportation costs.
• Pricing Strategies: Manufacturers must analyze the impact of tariffs on cost structures and develop pricing strategies accordingly. Companies must consider absorbing costs to retain market share, selectively passing costs to customers or exploring premium product offerings that justify higher prices.

How will tariffs impact geopolitics and trade relations?

Precedent from 2019 suggests that renewed trade wars will sour US relationships with favored trading partners, like the EU, Canada or Japan. However, repercussions from Chinese markets are the largest, most immediate threat to the US economy. The United States is the world's largest services exporter and second-largest goods exporter. China purchased more than $150.0 billion in US goods and services in 2022, trailing only Canada and Mexico. China has significant leverage to potentially retaliate against US tariffs, targeting various vulnerable net exporters.

The renewed conflict could also negate previous quotas and obligations reached under the January 2020 Phase I Agreement, especially for US agricultural and energy products. The agricultural sector is a common target for retaliatory tariffs, considering that the United States is the largest exporter in the agriculture, forestry, fishing and hunting sector.

The domestic tech sector looks to be a potential winner in tariff agreements, especially atop various domestic incentives and programs, ranging from the CHIPS and Science Act to the Small Business Innovation Research (SBIR) program. However, overprotection comes with risks; for example, many policymakers have noted that the Jones Act has eliminated competition in commercial shipbuilding markets, causing the US industry to lag and contributing to supply chain disruptions. A similar policy to reduce low-cost competition could harm long-term prospects for the US technology sector despite the potential for short-term growth and expansion.

Strategies for success for investment bankers

• Focus on Domestic Growth Opportunities: Investment bankers can prioritize industries likely to benefit from tariffs, such as domestic technology and manufacturing. By identifying high-growth sectors bolstered by government incentives like the CHIPS Act, bankers can align deals and financing strategies with favorable policies.
• Diversify Market Portfolios: To mitigate risks associated with trade conflicts, investment professionals should explore opportunities in non-affected or positively impacted regions and industries. Diversifying portfolios across geographies and sectors can help cushion potential losses from tariff retaliation or economic slowdowns in targeted industries.
• Leverage Expertise in Mergers and Acquisitions (M&A): Anticipating disruptions in global supply chains, investment bankers can guide clients in acquiring assets or companies that strengthen vertical integration or improve access to untapped domestic markets. Supporting strategic M&A can help firms counteract the challenges posed by tariffs.