Time to Price in Tariffs for the Long Haul
Investors should get used to tariffs sticking around -- and should understand what they mean for trading, and the world, especially China.
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The big news over the weekend was that the administration announced it will implement 30% tariffs on Europe and Mexico starting on Aug. 1, if major progress is not made around new trade deals. It was also reported that the U.S. government ran a quite rare budget surplus in June. Tariffs have become an important new revenue source for D.C. for the federal government that is bleeding a massive amount of red ink. Tariffs took in some $27 billion last month, an annual run rate right at $300 billion.
Investors should get used to the fact that tariffs are going to be a part of U.S. trade policy from this point forward. Even if the opposition party takes power early in 2029, I sincerely doubt they will implement a major policy reversal around tariffs. First, because by that time the government will have become too dependent on the revenue from tariffs. Second, because companies will have spent hundreds of billions and perhaps trillions of dollars building manufacturing capacity in the United States by then. Major investments in near shoring will have happened by that point as well. So, whether an investor agrees with these policies or not, this new world needs to be factored into investment allocation decisions going forward.
This paradigm shift on the policy front will have major global implications. Europe and China appear to be having increasing tensions around their trade issues. I will be quite interested on how all this plays out in China. The country has a much bigger debt issue than the United States. China’s debt-to-gross domestic product ratio is approximately 300% if one includes debt at the regional government level. The nation has significant demographic issues and is rapidly aging. The country also does not have a global reserve currency. Add in a massive real estate bubble that has been deflating in recent years and dependence on imports for most of its energy needs, the country is in quite the bind in my opinion.
China can’t very dump the $525 billion it exported to the U.S. in 2024 on the rest of the world. Rerouting these exports through other countries like Mexico, will not work as it has in the past, given tariffs will be applied to some extent universally. Nor can its manufactures eat the new tariffs without a major and negative impact on the jobs market. Will the country finally move to a consumer-driven economy like Europe and the U.S.? Will Pres. Xi survive this shift in fortune? Will the country focus even more intently on making the BRICs a major rival to U.S. hegemony and bypass western institutions in a push for a multi-polar world? Like I said, how things play out in China in coming years will be a critical focus area for investors.
Investors will also start to get a much better idea on what impacts tariffs will have on corporate profit margins and guidance as second-quarter earnings season kicks off. How many companies will see earnings estimates be downwardly revised after this quarter? How will this impact equities given the market feels priced for perfection right now?
Over the next month, I think we will all some further clarity on this front. In my column Wednesday, I will try to highlight some names that should be able to thrive in this new world.
At the time of publication, Jensen had no position in any security mentioned.
