Predictions for 2025: Tariffs

Trump has surrounded himself with advisors like Miran and Vance who want to reform the global trade “system” by weakening the dollar and potentially giving up reserve currency status. It is not obvious that such status is conferring any benefits. But Trump supports a strong dollar and reserve currency status, as USD strength since the election confirms. He wants to use tariffs as both threats to change counterparty behavior and disincentivize imports. Tariffs are just taxes, and changes in them have to be evaluated in context with overall changes to the tax code – including reducing other taxes. The 2018-19 tariff experience shows little discernible effect from tariffs on the trade deficit, growth, the dollar or inflation. The year-end correction in stocks and back-up in yields is driven by a narrative that the Fed believes, despite history, that tariffs are inflationary – and is already adjusting policy tighter in anticipation. Based on 2018-19, tariffs will come, and they won’t matter. The Fed’s inappropriate reaction is the bigger risk.