MW Here's how Trump's tariffs could backfire - just as Reagan warned us

By Cam Hui

U.S. equity markets could lose out as America withdraws from global leadership

Ronald Reagan once said about tariffs: 'Sometimes for a short while it works - but only for a short time.'

Markets were rattled by policy under President Trump's first administration due to his unpredictable and chaotic nature. Trump 2.0 promises more of the same. But other than the transactional nature of dealmaking, what's the president's ultimate endgame?

Trump intends to undo the effects of globalization. Trump has been lamenting the U.S. trade deficit since the 1980s, and the trade deficit is a particular focus of his global view.

The big-picture road map was laid out in a November 2024 report by Stephen Miran, now the chair of the Council of Economic Advisers, entitled "A User's Guide to Restructuring the Global Trading System." More recently, a Bloomberg podcast with Jim Bianco of Bianco Research partly explained the broad strokes of the Miran proposals.

The first order is to reduce the U.S. federal debt, or at least its trajectory. Much of the debt was accumulated by the U.S. military since World War II as a bulwark of the global security order while America's allies were free-riding under the American nuclear umbrella. Trump 1.0 called on NATO allies to adhere to their military spending targets of 2% of GDP. Trump 2.0 raises the target to 5% of GDP. If allies can spend more on their own defense, U.S. military spending can fall - and so will the fiscal deficit, all else being equal.

Second, tariffs can raise revenue, motivate manufacturers to return production to the U.S. and indirectly weaken the U.S. dollar (DX00). Trump's focus on North American Free Trade Agreement participants also puts downward pressure on the trade-weighted dollar, which is more heavily weighted to the Canadian dollar $(USDCAD.FOREX)$ and the Mexican peso $(USDMXN.FOREX)$.

The U.S. is also implementing policies to boost American competitiveness, such as tax cuts, deregulation, fiscal consolidation and interest-rate cuts. It should be no surprise that Treasury Secretary Scott Bessent is focused on the 10-year Treasury yield BX:TMUBMUSD10Y as a key metric for the Trump administration.

Other measures include a clampdown on immigration and taking a harder line on deportations, the withdrawal of government from deemed nonessential functions, and a retreat from foreign aid and other global institutions in the name of fiscal consolidation.

The combination of these measures accounts for the Trump administration's message of short-term pain for long-term gain. There will be an adjustment period before the long-term benefits of these policies are realized.

The price of reshoring

The price of Trump's reshoring policies is being felt more immediately. It began in February at the Munch Security Conference with the speech of Vice President JD Vance. Instead of speaking about the European security framework, which was expected, Vance focused on European failings, such as the annulment of the election results in Romania and problems of mass migration in Europe. He further asserted, "It's important in the coming years for Europe to step up in a big way to provide for its own defense".

This message and subsequent American signals to its allies of a withdrawal of U.S. military protection have sparked a dramatic reaction. Germany's incoming chancellor, Friedrich Merz, engineered a EUR1 trillion plan of defense and infrastructure spending outside the country's fiscal debt brake. Portugal canceled its Lockheed Martin $(LMT)$ F-35 fighter jet order, citing American political unreliability. Europeans already saw how the Biden administration restricted Ukrainian use of American weapons and European weapons with U.S. components, and worried that future administrations in Washington might restrict their use or refuse to supply and support U.S. weapons systems sold to allies. The Financial Times reported that the EU rearmament fund excludes companies from the U.S., U.K. and Turkey as suppliers. Canada is reviewing its order for F-35 fighter jets and is in discussions with European suppliers.

So much for the revival of American manufacturing in defense exports.

America's message of 'you're on your own' has been received, loud and clear.

More shocking was the report from Independent Singapore about a speech at the Munich Security Conference by the defense minister of Singapore, which is one of the staunchest pro-American allies in Asia. He first "cited the inaugural speech of President John F. Kennedy from over 60 years ago, wherein he said that 'an iron tyranny' wouldn't take the place of colonial control - 'that was the moral legitimacy in which U.S. presence was in our region.'" Now, the minster said, "the image has changed from liberator to great disrupter to a landlord seeking rent".

He concluded, "Who, if anyone, any one country or region or bloc, can step in if the U.S. declines to protect the global commons and how effective, and against what resistance?"

America's "You're on your own" message has been received, loud and clear. The much-publicized blowup between President Volodymyr Zelensky of Ukraine and Trump at the White House sparked a groundswell of desire by Japanese citizens to arm Japan with nuclear weapons. It would be no surprise if South Korea and others in Asia go nuclear, which would create geopolitical instability in the region.

In addition to the withdrawal of U.S. military power, the withdrawal of soft power in the form of American aid to poor countries and news services such as the Voice of America and Radio Free Europe has left openings for countries such as China to step into the vacuum.

The U.S. certainly remains a pre-eminent economic and military power in the world. It can use its hard power to pressure individual countries to bend to its will. Trump has voiced his desire to control the Panama Canal, annex Greenland, absorb Canada as the 51st state and remake the Gaza Strip into a resort. Taken individually, each of those threats reveals the asymmetry of U.S. hard power. Taken together, however, the aggregate costs of these policies are considerable.

Read: Here's the real reason Trump wants to create economic chaos - and why investors should be more afraid

Geopolitics and your money

Investors have to consider the costs and benefits of Trump's initiatives, which consist of certain short-term pain for uncertain long-term gain.

I am not here to judge whether Trump's reshoring policies are good or bad. Michael Cembalest of J.P. Morgan Asset Management said it best recently when he wrote:

"Here's the interesting thing about the stock market: it cannot be indicted, arrested or deported; it cannot be intimidated, threatened or bullied; it has no gender, ethnicity or religion; it cannot be fired, furloughed or defunded; it cannot be primaried before the next midterm elections; and it cannot be seized, nationalized or invaded. It's the ultimate voting machine, reflecting prospects for earnings growth, stability, liquidity, inflation, taxation and predictable rule of law."

Nevertheless, investors must consider the costs and benefits of Trump's initiatives, which consist of certain short-term pain for uncertain long-term gain.

The U.S. security umbrella has provided Americans an array of benefits over the past 80 years, including: downward pressure on inflation from an untariffed globalized supply chain; lower interest rates as current account surplus countries recycle their dollars back to the U.S.; and higher asset prices from a lower cost of capital as foreigners recycle their trade profits by buying U.S. stocks, bonds and real estate.

America's withdrawal from global geopolitical leadership weakens the dominance of the U.S. dollar.

America's withdrawal from global geopolitical leadership weakens the dominance of the dollar and its "exorbitant privileged" position as a reserve currency. Remember that European banks play a big role in U.S. dollar liquidity intermediation. Their U.S. subsidiaries received support from the U.S. Federal Reserve through liquidity swaps during the great financial crisis of 2008-09, and global financial stability would be under severe threat if such facilities were to be withdrawn. More importantly, financial markets would undergo unprecedented turmoil if the market began to price in any hint of default risk of U.S. Treasury paper.

Already, the global financial system is starting to fracture along geopolitical lines. Countries may have to face a strategic trilemma. Pick two choices: Maintain U.S. dollar access, preserve policy flexibility or choose a side in the Sino-American rivalry.

In addition, shutting the door on immigration deprives the U.S. of a valuable source of innovation and productivity growth. Forbes reported in 2011 that 40% of Fortune 500 companies were begun by immigrants or their children. The immigration restrictions, just by themselves, could have a chilling effect on productivity in the long run.

U.S. stocks no longer a port in a storm

An analysis of the evolution of equity markets shows the share of U.S. market capitalization has risen to 60.5% in 2023 from 14.5% in 1900. When you combine the potential loss in factor productivity with lower capital cost effects of the "exorbitant privilege" of dollar dominance, the outperformance of U.S. equity markets will retreat as the U.S. retreats from global geopolitical leadership.

Any historical studies of past asset returns, as well as studies of return patterns such as "what happened to the market when ___ happened," have become virtually useless. Long-term charts are only interesting as historical relics and should not be relied on for investment planning purposes. The next 100 years will not look like the past 100 years.

MW Here's how Trump's tariffs could backfire - just as Reagan warned us

By Cam Hui

U.S. equity markets could lose out as America withdraws from global leadership

Ronald Reagan once said about tariffs: 'Sometimes for a short while it works - but only for a short time.'

Markets were rattled by policy under President Trump's first administration due to his unpredictable and chaotic nature. Trump 2.0 promises more of the same. But other than the transactional nature of dealmaking, what's the president's ultimate endgame?

Trump intends to undo the effects of globalization. Trump has been lamenting the U.S. trade deficit since the 1980s, and the trade deficit is a particular focus of his global view.

The big-picture road map was laid out in a November 2024 report by Stephen Miran, now the chair of the Council of Economic Advisers, entitled "A User's Guide to Restructuring the Global Trading System." More recently, a Bloomberg podcast with Jim Bianco of Bianco Research partly explained the broad strokes of the Miran proposals.

The first order is to reduce the U.S. federal debt, or at least its trajectory. Much of the debt was accumulated by the U.S. military since World War II as a bulwark of the global security order while America's allies were free-riding under the American nuclear umbrella. Trump 1.0 called on NATO allies to adhere to their military spending targets of 2% of GDP. Trump 2.0 raises the target to 5% of GDP. If allies can spend more on their own defense, U.S. military spending can fall - and so will the fiscal deficit, all else being equal.

Second, tariffs can raise revenue, motivate manufacturers to return production to the U.S. and indirectly weaken the U.S. dollar (DX00). Trump's focus on North American Free Trade Agreement participants also puts downward pressure on the trade-weighted dollar, which is more heavily weighted to the Canadian dollar (USDCAD) and the Mexican peso (USDMXN).

The U.S. is also implementing policies to boost American competitiveness, such as tax cuts, deregulation, fiscal consolidation and interest-rate cuts. It should be no surprise that Treasury Secretary Scott Bessent is focused on the 10-year Treasury yield BX:TMUBMUSD10Y as a key metric for the Trump administration.

Other measures include a clampdown on immigration and taking a harder line on deportations, the withdrawal of government from deemed nonessential functions, and a retreat from foreign aid and other global institutions in the name of fiscal consolidation.

The combination of these measures accounts for the Trump administration's message of short-term pain for long-term gain. There will be an adjustment period before the long-term benefits of these policies are realized.

The price of reshoring

The price of Trump's reshoring policies is being felt more immediately. It began in February at the Munch Security Conference with the speech of Vice President JD Vance. Instead of speaking about the European security framework, which was expected, Vance focused on European failings, such as the annulment of the election results in Romania and problems of mass migration in Europe. He further asserted, "It's important in the coming years for Europe to step up in a big way to provide for its own defense".

This message and subsequent American signals to its allies of a withdrawal of U.S. military protection have sparked a dramatic reaction. Germany's incoming chancellor, Friedrich Merz, engineered a EUR1 trillion plan of defense and infrastructure spending outside the country's fiscal debt brake. Portugal canceled its Lockheed Martin (LMT) F-35 fighter jet order, citing American political unreliability. Europeans already saw how the Biden administration restricted Ukrainian use of American weapons and European weapons with U.S. components, and worried that future administrations in Washington might restrict their use or refuse to supply and support U.S. weapons systems sold to allies. The Financial Times reported that the EU rearmament fund excludes companies from the U.S., U.K. and Turkey as suppliers. Canada is reviewing its order for F-35 fighter jets and is in discussions with European suppliers.

So much for the revival of American manufacturing in defense exports.

America's message of 'you're on your own' has been received, loud and clear.

More shocking was the report from Independent Singapore about a speech at the Munich Security Conference by the defense minister of Singapore, which is one of the staunchest pro-American allies in Asia. He first "cited the inaugural speech of President John F. Kennedy from over 60 years ago, wherein he said that 'an iron tyranny' wouldn't take the place of colonial control - 'that was the moral legitimacy in which U.S. presence was in our region.'" Now, the minster said, "the image has changed from liberator to great disrupter to a landlord seeking rent".

He concluded, "Who, if anyone, any one country or region or bloc, can step in if the U.S. declines to protect the global commons and how effective, and against what resistance?"

America's "You're on your own" message has been received, loud and clear. The much-publicized blowup between President Volodymyr Zelensky of Ukraine and Trump at the White House sparked a groundswell of desire by Japanese citizens to arm Japan with nuclear weapons. It would be no surprise if South Korea and others in Asia go nuclear, which would create geopolitical instability in the region.

In addition to the withdrawal of U.S. military power, the withdrawal of soft power in the form of American aid to poor countries and news services such as the Voice of America and Radio Free Europe has left openings for countries such as China to step into the vacuum.

The U.S. certainly remains a pre-eminent economic and military power in the world. It can use its hard power to pressure individual countries to bend to its will. Trump has voiced his desire to control the Panama Canal, annex Greenland, absorb Canada as the 51st state and remake the Gaza Strip into a resort. Taken individually, each of those threats reveals the asymmetry of U.S. hard power. Taken together, however, the aggregate costs of these policies are considerable.

Read: Here's the real reason Trump wants to create economic chaos - and why investors should be more afraid

Geopolitics and your money

Investors have to consider the costs and benefits of Trump's initiatives, which consist of certain short-term pain for uncertain long-term gain.

I am not here to judge whether Trump's reshoring policies are good or bad. Michael Cembalest of J.P. Morgan Asset Management said it best recently when he wrote:

"Here's the interesting thing about the stock market: it cannot be indicted, arrested or deported; it cannot be intimidated, threatened or bullied; it has no gender, ethnicity or religion; it cannot be fired, furloughed or defunded; it cannot be primaried before the next midterm elections; and it cannot be seized, nationalized or invaded. It's the ultimate voting machine, reflecting prospects for earnings growth, stability, liquidity, inflation, taxation and predictable rule of law."

Nevertheless, investors must consider the costs and benefits of Trump's initiatives, which consist of certain short-term pain for uncertain long-term gain.

The U.S. security umbrella has provided Americans an array of benefits over the past 80 years, including: downward pressure on inflation from an untariffed globalized supply chain; lower interest rates as current account surplus countries recycle their dollars back to the U.S.; and higher asset prices from a lower cost of capital as foreigners recycle their trade profits by buying U.S. stocks, bonds and real estate.

America's withdrawal from global geopolitical leadership weakens the dominance of the U.S. dollar.

America's withdrawal from global geopolitical leadership weakens the dominance of the dollar and its "exorbitant privileged" position as a reserve currency. Remember that European banks play a big role in U.S. dollar liquidity intermediation. Their U.S. subsidiaries received support from the U.S. Federal Reserve through liquidity swaps during the great financial crisis of 2008-09, and global financial stability would be under severe threat if such facilities were to be withdrawn. More importantly, financial markets would undergo unprecedented turmoil if the market began to price in any hint of default risk of U.S. Treasury paper.

Already, the global financial system is starting to fracture along geopolitical lines. Countries may have to face a strategic trilemma. Pick two choices: Maintain U.S. dollar access, preserve policy flexibility or choose a side in the Sino-American rivalry.

In addition, shutting the door on immigration deprives the U.S. of a valuable source of innovation and productivity growth. Forbes reported in 2011 that 40% of Fortune 500 companies were begun by immigrants or their children. The immigration restrictions, just by themselves, could have a chilling effect on productivity in the long run.

U.S. stocks no longer a port in a storm

An analysis of the evolution of equity markets shows the share of U.S. market capitalization has risen to 60.5% in 2023 from 14.5% in 1900. When you combine the potential loss in factor productivity with lower capital cost effects of the "exorbitant privilege" of dollar dominance, the outperformance of U.S. equity markets will retreat as the U.S. retreats from global geopolitical leadership.

Any historical studies of past asset returns, as well as studies of return patterns such as "what happened to the market when ___ happened," have become virtually useless. Long-term charts are only interesting as historical relics and should not be relied on for investment planning purposes. The next 100 years will not look like the past 100 years.

(MORE TO FOLLOW) Dow Jones Newswires

April 02, 2025 09:42 ET (13:42 GMT)

MW Here's how Trump's tariffs could backfire - -2-

In addition to the long-term implications, the short-term implementation risks of Trump's reshoring plan are considerable. What Trump may have miscalculated is that U.S. net investment implication of -75% of GDP exposes the U.S. to foreign selling of U.S. assets. The rest of the world can fight back against tariffs by unloading U.S. securities rather than weakening their currencies. Trump also has a limited ability to accelerate the timing of the post-detox and pro-growth phase of his plan because of the thin Republican majority in the House.

The UCLA Anderson School of Management announced that it is on recession watch should the full effects of Trump's policies of tariffs, DOGE cuts and mass deportations be enacted. It added: "implementing [these] ...supply shocks in what mirrors the sequence of supply shocks that led to The Great Inflation of the 1970s...[But if] this administration has expressed its desire to reign in the independence of the Federal Reserve...[and] succeed in influencing monetary policy decisions, it will likely lead to interest rates that are too loose to quell inflation, yet too tight to counter the downturn, leading to a longer period of low growth and high inflation, i.e. a stagflation."

Trump's tariff regime could backfire.

Trump's tariff regime could backfire. As former President Ronald Reagan cautioned in 1987:

"You see, at first, when someone says, 'Let's impose tariffs on foreign imports,' it looks like they're doing the patriotic thing by protecting American products and jobs. And sometimes for a short while it works -but only for a short time."

Reagan added: "What eventually occurs is: First, homegrown industries start relying on government protection in the form of high tariffs. They stop competing and stop making the innovative management and technological changes they need to succeed in world markets. And then, while all this is going on, something even worse occurs. High tariffs inevitably lead to retaliation by foreign countries and the triggering of fierce trade wars.

"The result is more and more tariffs, higher and higher trade barriers, and less and less competition. So, soon, because of the prices made artificially high by tariffs that subsidize inefficiency and poor management, people stop buying."

Reagan concluded: "Then the worst happens: Markets shrink and collapse; businesses and industries shut down; and millions of people lose their jobs."

Cam Hui writes the investment blog Humble Student of the Markets, where this article first appeared in a longer form. He is a former equity portfolio manager and sell-side analyst.

Also read: What is Treasury chief Scott Bessent focusing on for Trump 2.0? Not the stock market.

Plus: The top 10% of Americans are propping up the economy. Here's what will happen if they stop spending.

-Cam Hui

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

April 02, 2025 09:42 ET (13:42 GMT)

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