The US tariffs and what it means for your investments

Since the election of President Trump in the US for his second term, tariffs have been on the agenda, presented both as a coercive tool, a threat, and an opportunity, depending on whether you are incurring them, imposing them, or are protected by them.

The threat of the tariffs, and the actual deployment of them this week- on 2 April 2025- has sent shockwaves through world stock and bond markets. There is a lot of media attention on this topic this week.

In this article we discuss what it means for you as an expat living in Europe.

First, we will discuss what tariffs are, then the impact it might have on your investments and your plans, and finally what you should do about it.

What are tariffs?

I decided to go back to my economics text books and re-read the chapters on tariffs. To bring it all back to basics, the clearest definition of a tariff is that it is a tax. It is a tax on goods based on where a product is delivered from and to. It is paid for entry into a market.

We can use an example to make a point.

Companies in Country A can produce a widget that can be sold around the world for €100.

In Country B a company needs to sell their product for €110 to make the same profit. Therefore, companies from country A can export to country B and sell their products at a lower price than the locals. Local manufacturers can’t compete. This is called free tade.

To protect their local manufacturers, Country B imposes a 20% tariff on all widgets brought into their country. Now imported country A widgets must sell at €120 in country B, making them more expensive than the locally produced widgets.

Who pays the tax?

Whilst it is imposed on companies, ultimately it is usually paid at least in part by the consumer who must pay more for goods. That is why it is considered inflationary – see below.

Why would a country impose a tariff?

This is a question economists have debated for as long as there have been tariffs- and economists. It is again the sujet de jour.

Some of the main reasons that a country will impose tariffs are:

• to protect local industry

• in protecting local industry they are trying to protect local workers

• to attempt to restore equilibrium or a trade balance so that two countries import and export similar volumes or values of goods between them

• to protect against unauthorised (cheaper) copies of goods

• to reflect a distaste against a political, social or economic regime

• to raise tax revenue

These are generally the arguments for why a tariff should be implemented.

There are also counter arguments as to why tariffs are not efficient. Here are some:

• tariffs are inflationary. They push prices up everywhere.

• One country imposing a tariff can lead to retaliatory tariffs from other countries, pushing prices up everywhere.

• By using a tariff for the purpose of protecting an industry, it runs contrary to laissez faire, or free market economics. Generally democratic governments and particularly those of the political leanings of the US Republican party advocate for free markets, less interference and fewer regulatory obstructions. The argument goes that if an industry requires protection in the form of tariffs, it is not efficient. Free market economists state that the country should not support that inefficient industry, that they should buy that item where it is produced more efficiently and focus on areas where they have a competitive advantage. This argument presumes and requires a level playing field, which in reality is not the case.

• Whilst tariffs may be good for workers in protected industries, they can be bad for consumers (these are often the same people) as goods cost more.

• Many economists posit that it is an inefficient tax as it raises less tax revenue proportionate to the constriction it places on a market. Conter arguments suggest a consumer tax, like a VAT, is more effective in raising revenue.

What does it mean for your investments?

The markets have reacted to this as negative news, fearing it will be inflationary and that it will restrict international trade. The investment sector, which is driven by institutional investors, and by sentiment, thinks company profits may fall because of tariffs, and as such markets have fallen. This is where the debate gets complex because tariffs should be protecting of US industry which should see their profits grow, which would lead to a stock market rally. When you consider the largest companies listed on the US stock markets, much of their business, revenue and profit, comes from international and not domestic markets. And so with the fear that there will be retaliatory tariffs and a slow down in economic growth, stock markets have fallen.

In the short term markets are volatile. In the long term they grow. But they don’t grow in a straight line. The likelihood of a negative return from one day to the next when investing in stocks is over 49%! However, the risk of a negative return from investing in stocks over ten years is almost zero. Time reduces risk.

History illustrates that after markets rally they will fall, and that after they fall they will grow again. But over time they do increase in value, which leads to real wealth creation.

Conversely, we have seen a rally in bond markets recently. Generally as short term concerns mount in relation to stocks, defensive assets, like government bonds can increase in value. The concern around bonds in the context of tariffs is their inflationary impact. If they do cause sustained inflation, central banks may be required to increase interest rates again. In the absence of this, and in the current environment, interest rates continue to trend down and that is good for bonds.

What should I do about it?

It depends.

If you own a property and you receive an annual valuation of your property, as homeowners do in the Netherlands, and it has dropped by 20% from one year to the next, what would you do?

By the way, this is not a hypothetical question as we have seen this in the last decade.

What would you do?

When we discuss this most people would say that it is the market vagary, that the house still maintains its fundamental value and that next year it will probably increase in value again. Most people we speak with generally consider selling their property only if it has risen in value, not dropped.

This makes sense, and it is the same when it comes to managing an investment portfolio.

If you have a goal that is long term, and the underlying holdings in your portfolio remain sound, perhaps holding our ground will be the most sensible solution.

That does not mean you do nothing. As many of our clients will have experienced, when we move through economic cycles and events like this happen, portfolios are adjusted tactically to reflect the changing environment. We continue to do this where appropriate, making smart but not reactive recommendations and decisions.

If you need access to your funds in the short term, you should probably not be exposed to more volatile assets and if you are, it might be wise to consider a gradual risk reduction path. But it depends on your situation so get advice.

Whatever your situation, if you have any questions about how the current world events might affect you, your investments and your plans, speak with us. Contact us at infio@blackswancapital.eu and we can talk through your situation and provide the guidance and support that keeps you informed and on track.