Trump’s Trade War: What’s the Endgame?

While the stock market damage caused by Liberation Day and its aftermath is reparable, it may take some time to fully recover. How can investors position for more volatility?

Michael W Arone, CFA, Chief Investment Strategist

The average stock is down 26% from its 52-week high, approaching a -2 standard deviation move, according to Strategas Research Partners.¹ That puts this stock market decline — a reaction to President Trump’s Liberation Day reciprocal tariffs and China’s retaliation — on par with the 1987 market crash, Long Term Capital Management failure, Dotcom bubble bursting, Global Financial Crisis, and Covid pandemic.

Fifty years of market history combined with extreme negative sentiment, indiscriminate selling, and investor capitulation suggests that markets may be getting close to a bottom. But investors should consider two things before diving back into risk assets with both feet.

First, no US administration has ever tried to reset the world’s trading system. Second, historically, lows are retested and/or undercut 85% of the time, usually between four weeks to four months later.²

So while the stock market damage caused by Liberation Day and its aftermath is reparable, it may take some time to fully recover. To use President Trump’s metaphor, the patient has survived the surgery, but recovery could be a long, slow, and painful process.

A Solution in Search of a Problem

Donald Trump has been talking about America getting ripped off by its trading partners for 40 years. First it was Japan. Then it was China. And now, its everybody! Finally rid of free trade, globalists like Steven Mnuchin and Gary Cohn, President Trump can pursue his radical trade agenda without limits. When all you have is a hammer, everything looks like a nail.

Market participants, consumers, businesses, and US trading partners are frustrated with the Trump administration’s reciprocal tariffs. Investors are selling first and asking questions later. The endgame is unclear, and the goalposts are constantly moving. Is the goal of reciprocal tariffs to improve the trade deficit? Raise US government revenues? Strengthen national security? Restore manufacturing jobs? Eliminate fentanyl from entering the country? End illegal immigration? Is it all those things?

Let’s further examine the three most identified economic goals of Trump’s trade policy.

1. Improve the Trade Deficit

The US has been running a trade deficit for more than 50 years, since the 1970s. Nominal US GDP in 1970 was $1.1 trillion. Today, nominal US GDP is $29.7 trillion. US GDP per capita in 1970 was $5,266 compared to $86,601 in 2024.³ Despite a growing trade deficit, the US economy has grown substantially and living standards have increased.

Over the past 249 years, the US has transformed from an agricultural economy to an industrial economy to an innovative technology-driven services economy. The US’ strength is its adaptability. Economic progress cannot be stopped or reversed. The US will not retreat to an industrial economy. The US has its challenges — but trade deficits aren’t likely the cause of them.

Persistent trade deficits are an inescapable consequence of issuing the world’s reserve currency. The US dollar accounts for 60% of global foreign exchange reserves. Yet, the US economy only contributes about a quarter of global GDP. The US dollar is bought or sold in nearly 90% of global foreign exchange transactions.⁴ The US had $3.2 trillion in exports last year, but its largest export is US dollars that the rest of the world use as central bank reserves, to invest in the US stock market, and for trade settlements.⁵

It’s a mathematical certainty that the world’s reserve currency must run a deficit.

2. Raise US Government Revenues

President Trump has often praised President William McKinley, who was first elected in 1896, for his support of high tariffs. Trump boasted in his Liberation Day comments that, “From 1789 to 1913 we were a tariff-backed nation, and the United States was proportionately the wealthiest it has ever been.”

Peter Navarro, Counselor to the President of the United States and architect of Trump’s trade policy, recently claimed that tariffs would raise $600 billion a year, about $6 trillion in government revenues over the next 10 years. That would imply about a 15% tariff rate on $4.1 trillion in US imports for the next decade. That is a substantial increase in the US average effective tariff rate.
 

Figure 1: US Average Tariff Rate Now Highest in a Century

Image

Source: Macrobond, SSGA Economics, TF, updated as of April 3, 2025.
 

But US consumers will likely bear the brunt of higher tariffs. Businesses facing slimmer profit margins may begin to cut jobs. The Trump administration believes that increasing revenue from tariffs will enable them to fast-track tax cuts. Still, there’s a timing mismatch. Tariffs are happening now. Tax cuts won’t come until at least later this year, possibly 2026.

That $600 billion a year in tariff revenue only happens if US consumers keep purchasing imported goods at higher prices. That doesn’t seem reasonable. It also doesn’t align with the goals of Trump’s trade policy. Will US consumers shrug off a 15% price increase on everything they buy at the store? It’s more likely that US consumers will purchase fewer imported goods which means less tariff revenue collected. And, if US consumers keep purchasing the same amount of imported goods at higher prices, it means that the US isn’t rebuilding domestic manufacturing capacity. That isn’t the desired outcome either.

Collecting $6 trillion in tariff revenue over the next decade would require US consumers to remain gainfully employed and buy the same amount or an increasing amount of imported goods at much higher prices. That’s not happening.

3. Restore Manufacturing Jobs

The Trump administration expects that more companies will choose to manufacture their goods in the US in response to higher tariffs. As a result, corporate tax revenues would rise as tariff revenues declined. But relocating manufacturing capacity doesn’t happen overnight. It could take years.

The Trump administration claims that more than 90,000 US factories and five million manufacturing jobs have been lost in the past 30 years. But will Trump trade policy bring them back? The reality is that many of those manufacturing jobs would have gone away regardless, as innovative technologies made manufacturing more efficient and consumer demand shifted.

A trade surplus doesn’t necessarily boost manufacturing employment. The Wall Street Journal reported, “Between 2000 and 2024, Germany’s trade balance as a share of its gross domestic product grew from a deficit of 1.5% to a surplus of 5.8%. During this same period, the country’s share of factory jobs fell from 20% to 16%. A 2021 study found that the decline in manufacturing job shares was similar in both US and German industrial hubs despite the stark differences in national trade balances.”⁶

Despite Germany’s growing trade surplus, manufacturing employment as a percentage of the labor force has been falling.⁷ Could the same thing happen in the US?

The Only Logical Outcome

There are lots of potential bad outcomes from the Trump administration’s attempt to transform the global trading system — rising prices, slowing growth, and increasing unemployment — and only one good outcome. Strangely, it’s an outcome that free trading globalists would welcome. The 397-page US Trade Representative’s 2025 National Trade Estimate Report that Trump was waving around at the Rose Garden Liberation Day ceremony lists hundreds of barriers to US exports — tariffs, VATs, intellectual property theft, forced technology transfer, subsidies to protect national companies and industries, currency manipulation, and limiting US businesses’ access to trading partners’ domestic markets.

Reagan implored Gorbachev to “tear down this wall.” President Trump is imploring US trading partners to tear down trade barriers.

Trump’s trade policy won’t balance the trade deficit, raise revenues, restore manufacturing jobs, eliminate fentanyl from entering the country, or end illegal immigration. That’s all just smoke and mirrors. Political posturing. But if Trump’s reciprocal tariffs result in a global reduction in trade barriers, that would be a positive outcome for the global economy.

It may take several months or quarters for the Trade War to play out. Capital market volatility is likely to remain elevated. To help position portfolios for this prolonged volatility, investors should consider:

• Safe havens like long-term Treasurys, T-bills, and gold
• Defensive sectors like Consumer Staples, Utilities, and Health Care
• More services than goods, like Health Care Services or Insurance rather than Autos and Semiconductors
• Dividend growers with stable earnings and solid balance sheets
• Alternatives to traditional asset allocation that seek to balance risks across growth and inflation environments to help prepare portfolios for whatever the future brings

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Glossary
Gross Domestic Product (GDP) The monetary value of all the finished goods and services produced within a country’s borders in a specific time period. Economic growth is typically expressed in terms of changes in GDP.

Footnotes
1 “The Average Stock Is Already In A Bear Market,” Strategas Research Partners, April 7, 2025.
2 “3 Key Conditions, Reviewing Historical Analogues: ’62, ’81, ’87, '98, & Still Long The Short-End,” Strategas Research Partners, April 7, 2025.
3 Bloomberg Finance, L.P., as of April 7, 2025.
4 Bloomberg Finance, L.P., as of April 7, 2025.
5 John Mauldin, The Tariff Recession?, April 5, 2025.
6 Jared Bernstein and Dean Baker, “Tariffs Won’t Bring a Boom in American Manufacturing.” Wall Street Journal, March 26, 2025.
7 John Mauldin, The Tariff Recession?, April 5, 2025.

Disclosure
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Important Risk Information The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

The views expressed in this material are the views of Michael Arone through the period ended April 7, 2025, and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

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