Client Memo: Tariffs - Analysis and Investment Implications

President Trump recently unveiled a sweeping set of tariffs on exports from dozens of countries into the United States. Tariffs are duties imposed on imported goods by a government. They are intended to protect domestic industries, encourage local production, and generate tax revenue. In fact, tariffs were the primary source of U.S. government revenue for the first century of its existence, as the income tax was not instituted until 1912. 

President Trump has stated that his goal is to reinvigorate the U.S. manufacturing base. However, this will be difficult to achieve—largely due to the U.S. dollar’s role as the world’s reserve currency, which artificially inflates its value and makes American exports less competitive. 

The formula used to calculate the new tariff rates is unusual: 
0.5 × (bilateral trade deficit with that country ÷ U.S. imports from that country). 
The minimum tariff rate is set at 10% for all countries exporting to the U.S. 

Several countries will face significantly higher rates, notably: 

• European Union: 20% 
• South Korea: 25% 
• Taiwan: 32% 

Meanwhile, China faces an additional 34% levy on top of the 20% tariff already imposed seven years ago. 

The effective average U.S. tariff rate is now approximately 28%, up from just 2.5% at the end of 2024. This figure also incorporates last month’s announcement of new tariffs on foreign-made cars. 

Market Reaction and Broader Implications 

The market responded negatively, as the announced tariffs were more severe than even the worst-case scenarios modeled by major Wall Street investment banks. The negative effects are expected to ripple through the economy. I believe the current tariffs will eventually be reduced. Their excessive scale suggests they are likely intended as a negotiating tactic—consistent with Trump’s strategy in The Art of the Deal: start high, then settle at a level originally targeted. 

The key question is: how long will these elevated tariffs remain in place before being scaled back? 

Trade Exposure and Economic Context 

It’s worth noting that the U.S. has relatively low exposure to global trade. While it may sound counterintuitive, the U.S. is primarily an internally consumed economy. Only 11% of U.S. GDP comes from exports, compared to: 

• Germany: 43% 
• Mexico: 36% 
• Canada: 33% 
• Japan: 22% 
• China: 20% 

In other words, many of our trading partners rely far more heavily on exports to the U.S. than we do on them. 

Simultaneously, the U.S. economy is already in the early stages of a slowdown—a trend that began before the new tariffs were introduced. I had anticipated this, particularly in Q1, due to what I call a “negative liquidity gap.” This refers to the withdrawal of funds from investment accounts to pay capital gains taxes after strong market performance. 

When we experience two (or even one) strong up years, this phenomenon often triggers a mini correction. Most investors wait until the last moment to withdraw funds for tax payments, opting to stay fully invested for as long as possible. Then, in a short window, many sell to raise cash—creating a sudden market downdraft. 

The Wealth Effect and Consumer Spending 

We also have to consider the wealth effect, a term you may hear in financial media. It describes how changes in perceived wealth impact consumer behavior. When people see their investment portfolios rise, they tend to spend more. When values drop, spending contracts. 

Given that U.S. consumers account for 70% of GDP, even a modest pullback in spending could significantly slow the economy. That could lead to rising unemployment and broader economic repercussions—including the possibility of a recession. 

Policy Uncertainty and Our Strategy 

Above all, investors, businesses, and consumers were looking for clarity in Wednesday’s announcement. Instead, policy uncertainty has spiked to unprecedented levels, becoming a risk factor in its own right. Unfortunately, the announcement did little to ease concerns, and we expect markets to remain highly volatile in the near term. 

Fortunately, we’ve been proactive over the last year by shifting to a more conservative investment posture. We’ve increased allocations to high-quality individual bonds and introduced structured notes into our portfolios—tools that provide stock market exposure with 15–20% downside protection. 

This doesn’t mean we won’t experience losses in volatile markets like we saw on April 3rd. But it does mean we should be down significantly less, which is exactly the outcome we aim for during periods of stress. 

Sincerely,

Mark J Asaro, CFA