Much has been made of President Trump’s seemingly erratic pronouncements on the economy, foreign policy and much else besides since his re-election. As regards his approach to tariffs, which concern investors and economists alike, a bit of context is perhaps helpful.   

The US has often betrayed strongly protectionist instincts going back to Reagan, Roosevelt, the Smoot-Hawley Tariff Act of 1930 (often blamed for the severity of the Depression) and President Mckinlay (Trump’s hero) in the 1890s. In some ways, they regard tariffs as a useful alternative to raising income tax. In Europe, we are more, by instinct, free marketeers, going right back to the ideas promoted by Adam Smith in the "Wealth of Nations". The USA constitutes a large trading bloc on its own and is well able to withdraw from any form of reliance on overseas markets, hence Trump’s approach to energy (‘drill, baby, drill’).

It’s a bit simplistic, but the way they look at it, the US pays about £820 billion to defend the West (and all of their increasingly liberal ideals) while operating a trade deficit worth £773 billion. That seems pretty unfair to the average American in the Mid-West brought up on self-sufficiency, sobriety and the Bible. Now they have a President highlighting borders over-run by illegal immigrants and drug running (around 81,000 Americans died from opioid overdoses in 2023). A key source of the main culprit, fentanyl, is China; it arrives via Mexico’s drug gangs.  You can perhaps understand where a populist like Trump is coming from.   

To a company like Diageo, the threat of tariffs in its biggest overseas – and fiercely competitive - market is potentially damaging. The company generates 45% of sales in the USA from products like tequila made in Mexico and whisky made in Canada. The company’s share price immediately reflected this unpalatable truth and is down -6.5% over the past week. Most of the UK’s considerable exports to the US is in services so will not be so badly affected but for the EU, think the big car makers like VW, Mercedes and BMW, already suffering from the onslaught of cheap Chinese EVs, it is more bad news.   

We have been here before, during Trump’s first presidency in 2018, when he enjoyed causing mayhem in markets with some (in the end) temporary tariffs. This time, however, he wants to rebalance the economy away from taxes on income and towards taxes on imports. And if jobs and wages go up as a result, then that is more important to most people than the increased price of a BMW or the loss of a Mexican cleaner. To the tariff enthusiast in the US, consumption of foreign goods may be penalised, but rising income tax penalises effort and incentive. To produce more goods and food at home is a moral imperative to Trump and the antidote to the muddle-headed liberals who believe the world must pool resources (the free marketeers) and sovereignty (the EU) to save the planet via the quest for net zero and DEI nirvana.   

Of course, there is a strong element of negotiating tactic and setting of the opening gambit high. The one month reprieve is just another step in the process. Northern US states’ dependence on Canada’s oil and natural gas – comparable to Russian energy exports to the whole of Europe before the Ukraine War - mean that in the end, a compromise will come about.   

I was reading how the last time they had a real dust-up with the Canadians, invading Upper Canada (what is now Ontario) and trying to capture Montreal back in 1812, it didn’t end well. The White House got burnt down. 

Any views or opinions expressed in this piece are those of the author and not necessarily representative of Church House.

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