Jan 29, 2025
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Last week, the era of Trump Tariffs 2.0 officially kicked off. The administration floated a 25% tariff on imports from Mexico and Canada, scheduled to take effect February 1st, alongside a series of other trade threats. These measures represent an aggressive return to the trade wars, raising the stakes for U.S. businesses and their global supply chains.
In his first term, former President Trump imposed tariffs on washing machines, solar panels, and steel/aluminum, as well as billions of dollars of Chinese consumer and capital goods.
President Biden maintained many of these measures and introduced new tariffs targeting strategic Chinese goods such as semiconductors and electric vehicles. Now, the current administration is pursuing a sharper escalation with higher tariff rates and broader targets.
In this investment perspective, we evaluate the potential economic impact of Trump Tariffs 2.0, their implications for industries and supply chains, and how corporations are better equipped to weather today’s trade turbulence.
The consequences of tariffs are well-documented, and the numbers are sobering. Oxford Economics
estimated that the trade war from 2018 to 2019 cost the U.S. approximately 245,000 jobs. The Congressional Budget Office (CBO) projected that a 10% universal tariff could reduce real GDP by 0.3% by 2034 while raising the price index of personal consumption expenditures (PCE) by 1% by 2026. Tariffs tend to be inflationary as higher costs are passed on to consumers; this in turn lowers aggregate demand resulting in job losses.
The proposed 25% tariff on Mexico and Canada is significantly higher than the 10% scenario modeled by the CBO and is likely intended as an opening salvo in negotiations. However, tariffs at this level would impose exponentially greater economic damage. Economic theory states that deadweight loss from tariffs—the loss in economic welfare that occurs when supply and demand are out of equilibrium—increases as a quadratic function, meaning the economic harm from a 25% tariff would be roughly six times greater than that of a 10% tariff (2.5² = 6.25).
The U.S. holds a stronger hand in North American trade negotiations, given its economic weight relative to Mexico and Canada. For example, Canada represents just 2% of S&P 500 revenues, while the U.S. accounts for nearly one-third of MSCI Canada revenues. Mexico’s manufacturing-heavy economy
is similarly reliant on access to the U.S. market.
However, the interconnected nature of supply chains means the impact of tariffs would ripple far beyond these headline figures. A company with entirely domestic revenues but a global supply chain could face significant cost increases. Conversely, a foreign firm with U.S.-based production facilities could avoid import tariffs altogether. The specific impact depends on supply chain flows and production geographies, which require detailed analysis to fully understand.
Sectoral exposure to tariffs varies widely. Service-driven industries such as healthcare, utilities, and financials are relatively insulated, given their limited reliance on physical goods and lower non-U.S. revenue shares. In contrast, global sectors like technology, energy, and materials are more vulnerable. The industrials sector, which heavily depends on integrated supply chains, would also likely experience significant disruption.
The first wave of trade wars during Trump’s presidency forced many corporations to rethink and diversify their supply chains. Over the past few years, companies have localized production and reduced reliance on single regions or suppliers. The COVID-19 pandemic further accelerated efforts to build resilience into supply chains, leaving businesses better equipped to navigate disruptions.
While these adaptations provide a buffer, the magnitude of the proposed 25% tariff would still present challenges. Industries with thin margins or limited pricing power could face serious pressure.
The proposed 25% tariff is likely an opening move in broader trade negotiations, but its economic and market consequences could be significant.
We have been in close contact with active managers to discuss the potential impact on portfolios and any adjustments they may make. We will continue to monitor developments, paying particular attention to sectors heavily reliant on global supply chains. For corporations, this is another chapter in the ongoing challenge of managing trade uncertainty.
Please feel free to reach out with any questions. ⬛
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