by Ben Jennings, Lead Advisor, CFP®
It's been a dynamic first quarter of 2025 in the markets. The US stock market has rapidly shifted between achieving an all-time high in February and a correction (10% decline from the high) in March.
One topic impacting the markets in a big way is the anticipation of coming tariffs. To understand the impact of tariffs, it's important to consider some historical context about the US balance of trade - also called our trade surpluses or deficits.
The US began as a country with persistent trade deficits (from 1800 to 1870, we had a trade deficit for all but 3 years).
In 1870, following the Civil War, we began 100 years of consistent trade surpluses.
Starting about 1970, we shifted to trade deficits again, and 2025 marks the 50th anniversary of annual trade deficits for the US (we last had a trade surplus in 1975).
Below, you’ll see a chart showing the trend of monthly trade deficits over the past 35 years (Note: the dotted line is the average over the period, not the zero line!). A trade deficit happens when we (as a country) consume more than we produce - either taking on credit or transferring assets to pay for the difference.
While trade deficits were modest in the 1970s and 1980s, the deficit was over $900 billion annually in 2024 - comprising 78% of trade deficits worldwide (add up all the trade deficits worldwide, and we’ve got ~80% of them!). Note the $131 billion monthly deficit shown in the chart for January 2025 is a result of a temporary jump in anticipation of coming tariffs.
Tariff Use Through History
The US has a long history of using tariffs. Before Alexander Hamilton was singing and dancing, he was promoting the Tariff Act of 1789 - the first major piece of legislation passed by the newly formed US Congress and signed by President George Washington.
More recently, President Trump employed tariffs in his first term, and President Biden continued and even expanded many of these during his term in office. Entering Trump’s second term, tariffs are dominating headlines in an even bigger way.
Tariffs are used to raise revenue, to impact trade, and to influence foreign governments - though it’s hard to achieve all three purposes simultaneously.
The new administration seems to have each of these purposes in mind for various aspects of the tariffs they have proposed or implemented:
Initially, for example, the tariffs announced on Mexico, Canada, and China were focused on influencing those governments to make more significant efforts toward reducing the flow of fentanyl and undocumented immigrants into the US.
Other announced tariffs are focused on influencing trade in particular sectors (e.g., steel and aluminum).
Tariffs have also been presented as a tool to reduce the federal government’s budget deficits.
Impacts on the 2025 Market
OK, let’s tie all this back to this quarter’s market volatility. Tariffs are likely to slow economic growth, at least temporarily and in the short term. The pronounced and accelerating emphasis on tariffs in US policies is contributing to market volatility for a couple of reasons:
First, there’s some uncertainty day-to-day as to what tariffs might be in place and how other countries will react.
Secondly, even if we knew what tariffs the US and other countries might have in place later in 2025, we won’t know how that will impact companies' earnings (which drive market prices).
After reading this, you may not think better or worse about tariffs, but hopefully, this will help you put the evening news in a broader context.
Your Advisor is available to answer questions about current volatility and its impacts on your portfolio.