The market is up since this past week’s decisive election of the once and future president, Donald J. Trump. The S&P 500, Nasdaq, and Dow – not to mention bitcoin – all reached record highs on Wednesday in the aftermath. Individual companies also reached all-time highs, including Amazon, American Express, Apollo Global Management, Caterpillar, Goldman Sachs, JPMorgan Chase, Morgan Stanley, Nvidia, Oracle, Palantir, Visa, Walmart and Wells Fargo. The market was further bolstered this week by yesterday’s 25-point rate cut by the Fed. The question looming over all this optimism is when we will see the promised new tariff regime – and what its impact will be.

During the campaign, Trump repeatedly advocated for a significant expansion of the US tariff regime. The proposals floated included a 10-20% general tariff on all imports, a 60%+ tariff on Chinese goods, a 100% tariff on nations shifting away from dollar trade, and a 100-2000% tariff on vehicles imported from Mexico. While tariffs were also imposed under the Biden administration, their rationale was largely geopolitical rather than representative of a new industrial policy. Trump’s tariffs, on the other hand, have been called “industrial policy on steroids.”

Tariffs would not require new Congressional approval. (As of this writing, Republicans have won a Senate majority but the House is still being decided.) Congress has delegated authority to the executive branch (which could theoretically be clawed back) through Section 232 of the Trade Expansion Act of 1962 (which allows the president to impose tariffs on imports that impair national security) and Section 301 of the Trade Act of 1974 (which allows the president to impose tariffs in response to unfair trade practices or trade-agreement violations).

Industry watchers believe that tariffs could be instituted unilaterally by the president after a review by the Commerce Dept under Section 232 or by the US Trade Representative (USTR) under Section 301. However, existing Congress-approved trade agreements that include a legal framework for disputes – such as the USMCA (United States-Mexico-Canada Agreement) – could make imposing tariffs more complex. (The USMCA is likely to be renegotiated during Trump’s term.) There are reportedly discussions underway with House Ways and Means on a broad tax package that would bundle legislative action on tariffs with tax cuts. Trump has touted tariffs – which are projected to raise $2T to $3.3T over the next decade – as a way to offset the cost of tax cuts, although they’re unlikely to fully cover the cost of the proposed cuts.

These tariffs, at their proposed scale, are expected to be inflationary. In general, importers (e.g. wholesalers, retailers, manufacturers) pay tariffs to the US government to bring products or inputs into the country, and much of the increased cost is typically passed on to consumers through higher prices. The director of the nonpartisan Penn Wharton Budget Model has said “there is no question prices would go up.”

When tariffs are passed, price levels on both imports and US-made products tend to increase. Goldman Sachs analysts have estimated that each percentage point increase in the overall tariff rate would increase prices by about 0.1%, which would imply a one-time 1-2% rise in price levels if a 10-20% universal tariff was instituted. Other estimates have put the cost to consumers at $1,200 to $2,600 per household annually. This isn’t even considering the likelihood of retaliation or an agricultural trade war sparked by the new tariffs, which could drive down US-China trade by as much as 70%.

According to the National Retail Federation (NRF), prices on products like toaster ovens, athletic shoes, coats, and toys could go up by as much as 18-56%. The NRF has estimated that higher prices due to tariffs could cost American consumers $46B-$78B in annual spending power. On the other hand, at least one study has found that retailers often absorb a significant amount of the cost of tariffs (which would carry a separate burden in layoffs or delayed investment).

Some US manufacturers will benefit – such as automakers and large-appliance firms – since higher prices for imported goods can bolster demand for domestic products. On the other hand, US manufacturers that use foreign inputs could face higher costs and become less competitive as a result. Tariffs can also be hard to remove once instituted.

A return to rising inflation would likely slow the pace of Fed rate cuts. A drawn-out rate-cutting cycle – or even a pause – would have cascading effects on debt, liquidity, capital purchases, real estate, venture funding, and the broader market. Fed chair Jay Powell has been clear that he would not step down if Trump asked him to resign, but his term runs out in Feb 2026 in any case. Trump has said, “I don’t think I should be allowed to order it, but I think I have the right to put in comments as to whether the interest rates should go up or down.” He will have the opportunity during his term to appoint a new Fed chair and another Board member (i.e. 2 of the 7 in total, each of whom serve 14-year terms).

The dollar has strengthened against other currencies this past week on the back of the administration’s expected pro-growth agenda. Over the longer haul, however, extreme tariffs could hasten de-dollarization, especially if there’s a broader decline in global trade with the US. (The US, for instance, is the largest buyer of German, Japanese, Taiwanese, and Mexican exports.) Some countries may push back on the perceived weaponization of the dollar and seek to diversify their trading partners (e.g. within regional blocs, among the BRICS, or with counterparties less friendly to the US). The estimated $7.8T in added government debt over the next decade – stemming from the even wider deficit accruing from Trump’s proposed fiscal policies – won’t help the dollar either.

It’s unclear to what extent Trump’s tariff proposals are serious. He’s certainly been consistent about his advocacy for tariffs, which are viewed as one of his main policy aims. However, some believe that the tariffs might be more of a negotiating posture vis-à-vis other countries, or at least would be moderated by a tiered structure that would result in a lower average tariff rate (e.g. perhaps a 20% tariff on Chinese imports vs. the 60%+ stated). It would also take time for either legislation or procedural executive action to implement tariffs, which could delay them until late 2025 or beyond. Even if it doesn’t actually take that long, the timeline could give the Trump administration more negotiating flexibility to enact tariffs when it wants.

Tariffs aren’t the only campaign proposal to consider. There’s also Trump’s proposal to lower the top corporate rate for domestic manufacturers to 15% (and otherwise keep the rate at 21%, where it landed permanently after the 2017 tax overhaul). He has advocated for increased drilling of oil and gas, faster approvals for nuclear reactors (which have bipartisan support), and efforts to make the US a major producer of rare-earth minerals. Trump wants to increase defense spending as well, although he has also said he would end the war in Ukraine “in 24 hours” and has called for Israel to end its conflict quickly.

Investors are betting on lighter regulation, lifting the stocks of banks (which are expected to see new head regulators), oil and gas companies, and commercial insurers with Medicare Advantage plans. Trump plans to repeal Biden’s executive order on AI regulation under the rationale that it hinders innovation, in favor of more self-regulation. Trump has also promised to end the crypto crackdown and fire SEC chair Gary Gensler on “day one,” after coming out strongly as pro-crypto. (The Trump family launched a new crypto venture recently with Trump as “chief crypto advocate.”)

Other campaign promises would have a negative impact on industries. Trump has promised to cancel Biden’s EV “mandate,” namely the EPA’s more stringent vehicle emissions standards released earlier this year. Trump is expected to seek a repeal of the IRA incentives encouraging the production and adoption of EVs. This would impact upstream battery companies and other EV inputs. Trump also wants to eliminate the Inflation Reduction Act’s (IRA) tax credits for clean energy and withhold any unspent funds. (Given that Republicans and oil companies like certain aspects of the IRA, he may try to use a scalpel to target renewables and EVs rather than a cudgel.) Solar and clean-energy stocks have been down this week.

Oct 30 2024 (Article with TDK Ventures): The coming election: What’s ahead for venture and startups

May 17 2024 (3 Shifts): The sweeping US tariffs on $18B of Chinese imports