How Trump’s Tariffs Could Backfire: A Cautionary Tale from Reagan
As the world watches the onset of President Trump’s second term, the economic policies reminiscent of his first administration come back into focus. Particularly, his stance on tariffs evokes Ronald Reagan’s warning that while tariffs “sometimes for a short while [work]—but only for a short time,” the long-term consequences pourrait be dire for the U.S. equity markets and its role in global leadership.
The Deconstruction of Globalization
President Trump has been vocal about his intent to reverse the effects of globalization, particularly addressing the U.S. trade deficit which has been a concern since the 1980s. In a November 2024 report titled “A User’s Guide to Restructuring the Global Trading System,” Stephen Miran, the chair of the Council of Economic Advisers, outlined a roadmap that focuses on reducing federal debt and encouraging domestic production through tariffs.
A prime strategy involves pressuring NATO allies to increase their defense spending from the current 2% of GDP to 5%. This move is designed to allow the U.S. to reduce its military expenditures, which have contributed to the national debt. Such growing defense budgets in allied nations could potentially destabilize existing alliances and create shifts in military dynamics globally.
Tariffs: A Double-Edged Sword
The idea behind tariffs is to generate revenue and spur American manufacturing to return to domestic shores. However, this approach can have unintended consequences, such as indirectly weakening the U.S. dollar and heightening tensions with trade partners. Trump’s emphasis on renegotiating trade deals, including those with Canada and Mexico, carries immediate repercussions for the trade-weighted dollar, creating an environment rife with uncertainty for investors.
The Price of Reshoring
The shift towards reshoring has already begun to generate resistance from American allies. During a recent Munich Security Conference, Vice President JD Vance’s focus on European security failures, coupled with a decline in U.S. military protection, has led some countries to react defensively. For instance, Germany’s incoming Chancellor Friedrich Merz has proposed a €1 trillion plan for defense and infrastructure that falls outside existing fiscal constraints, while Portugal has canceled an F-35 order due to perceived unreliability from the U.S. administration.
These signals have not gone unnoticed, with even staunch allies like Singapore expressing concerns over the changing perception of U.S. intentions. Once viewed as a liberator, America is increasingly seen as a “great disrupter,” which could influence the trajectory of international relations.
Geopolitical Turmoil and Market Stability
The gradual withdrawal of U.S. military and soft power could create a vacuum for rival powers, most notably China, to fill. This shift has potential implications for the global economy and stock markets that must be considered by investors. Challenges could arise from rising nuclear ambitions in Asia, particularly in Japan and South Korea, which may seek their own deterrent capabilities should U.S. support wane.
The consequences of Trump’s restructuring efforts will not only be felt geopolitically but also financially. The long-standing benefits provided by the U.S. security umbrella, such as lower inflation due to untariffed global supply chains, may diminish. As the U.S. retreats from its role in global leadership, so too could the strength of the U.S. dollar as the preeminent reserve currency.
The Imminence of Market Volatility
Investors must re-evaluate their strategies in light of these geopolitical changes. The equity markets, once considered a “port in a storm,” may no longer hold the same stability as domestic policies reshape the landscape. With the share of U.S. market capitalization having sharply risen in the past century, the inevitable retreat from global leadership could reverse these gains. Low interest rates and recycled capital from trade surpluses that previously buoyed asset prices may shift dramatically.
Additionally, the Trump administration’s immigration restrictions could choke off innovation and productivity growth. Immigrants have historically played a significant role in driving American entrepreneurship; stifling this flow may have long-term ramifications for economic performance and equity returns.
Future Outlook: A New Economic Landscape
In a world increasingly divided along geopolitical lines, investors face a strategic trilemma where they must choose between maintaining access to U.S. dollar liquidity, preserving policy flexibility, or taking sides in the escalating Sino-American rivalry. The potential resurgence of trade barriers and weakened global alliances points to an uncertain future.
As the trajectory of U.S. initiatives unfolds, it remains imperative for investors to weigh the immediate pain against the uncertain promise of long-term gain. The lessons from history suggest that the next 100 years will diverge from the past, urging a re-examination of investment assumptions in light of Trump’s policies and their broader implications for the economy and financial markets.