Tariffs in 2025: Dispelling Myths from Reality

Diplomatic Maneuvering and Strategic Signaling

The Trump administration is attempting to reshape U.S. trade policy through active negotiations with major partners, including Japan, India, South Korea, the European Union, Canada, and Mexico. In today’s post, we are going to dispel the myths from the media and replace them with a more realistic perspective of the potential impact of tariffs on the US economy.

Myth #1: President Trump is Blindy Applying Tariffs to All Nations

This week, President Trump and the United Kingdom finalized a bilateral trade agreement. Key elements of the deal include:

• Reduction of Tariffs: The U.S. will lower its 25% tariff on British automobiles to 10% for the first 100,000 vehicles exported annually.

• Elimination of Metal Tariffs: Tariffs on UK steel and aluminum exports to the U.S. have been removed.

• Expanded Market Access: The UK has agreed to open its markets to a wider range of U.S. agricultural and industrial goods.

• Strategic Implications: The agreement signals that the U.S.'s 10% universal tariff baseline may be selectively relaxed through tailored, country-specific deals.

This deal is part of a broader strategic shift in U.S. trade policy toward enforcing baseline tariffs coupled with reciprocal arrangements.

Meanwhile, tensions with China remain high. In response to President Trump’s 145% tariffs, China has imposed significant retaliatory measures. However, high-level diplomatic talks between the two nations are scheduled to resume next week in Switzerland—marking the first such engagement this year.

Amid this evolving trade landscape, White House Press Secretary Karoline Leavitt confirmed that 18 trade proposals from various countries are currently under review. This underscores the continued global interest in securing access to the U.S. market, despite heightened tariff uncertainty.

Myth #2: Tariffs Create Runaway Inflation that will Shatter American Households

Contrary to widespread media narratives, tariffs don’t necessarily translate into runaway inflation. Historically, their overall impact on inflation has been modest. And in 2025, there’s a key mitigating factor: the declining U.S. dollar.

Currency Offset Effect:

The U.S. Dollar Index (DXY) has dropped approximately 8% year-to-date. The means foreign exporters are receiving more of their local currency for every US dollar they receive, and this allows them to lower prices while maintaining profit margins.

Source: https://www.marketwatch.com/investing/index/dxy

Example:

Consider a Japanese supplier selling electric window motors to an American auto manufacturer. With an 8% stronger yen, they can now reduce their dollar price by 8%, pay the 10% U.S. import tariff, and still net the same yen-denominated profit. In this case, the net cost increase to the American consumer is only about 1.2%—a manageable bump compared to the headline tariff rates.

Note: This flies in the face of most news articles, which typically reflect tariffs as a direct increase to prices, for example: a 10% tariff would increase the price of a $100 product to $110.

Myth #3: Tariffs will Destroy the American Economy

While tariffs are generally anti-free market, they don’t necessarily lead to the destruction of an economy.

One key point that is not being recognized by the mainstream media is what’s happened to the US dollar since President Trump took office.

A weaker dollar is a powerful setup for global growth. President Trump knows this and Scott Bessent, the US Secretary of the Treasury knows this.

Both President Trump and Scott Bessent have stated their intention to weaken the US dollar, and they have been successful to date in making that happen (see chart above).

The weaker US dollar can lead a pickup in global exports and more capital flowing into the United States. Both of these drivers can lead to economic expansion.

The Counter Narrative

While the media is overly critical of tariffs, we need to acknowledge the risks and costs of the current tariff experiment and their potential impact on the American economy.

1. The Impact on American Consumers

Consumer sentiment has taken a hit. The University of Michigan’s Index of Consumer Sentiment fell 8% in April, bringing the total decline since January to nearly 38%—the steepest three-month drop since the early 1990s recession.

As we stated earlier, tariffs can have a small impact on the cost of imported goods, and this acts as a small consumption tax. This disproportionately impacts lower-income households, who spend a larger share of their income on tradable goods. Over time, the resulting erosion of disposable income could suppress consumer spending— a cornerstone of U.S. economic growth.

2. The Market’s Response and Today’s Dilemma for CEOs

Stock market volatility has surged in response to tariff policy uncertainty. The VIX (Volatility Index) climbed to levels last seen during the initial pandemic shock, reflecting investor unease—not just about tariffs, but about their uncertain scope, timeline, and intent.

While the stock market has historically weathered tariff changes with minimal long-term damage, today’s situation encompasses higher tariff rates than we’ve seen historically. And the Trump administration seems to exacerbate market anxiety due to their strategic ambiguity.

CEO Decision Paralysis:

These unknowns complicate capital planning and long-term investments, and President Trump’s tendency to change course abruptly does not make it any easier for high-level decision makers. Some of the decisions they are tasked with include:

• “Should we invest $5 billion in onshoring a new plant?”

• “What happens if a future administration reverses these policies?”

• “Will the tariffs be lifted if Trump achieves concessions from China?”

Anecdotally – We speak to small business owners on a daily basis. Just this week we had a conversation with a CEO of a company that was postponing the purchase of a $750,000 piece of equipment. He was concerned about the direction of the economy and he wasn’t comfortable putting that much cash to work in an uncertain world.

The $750,000 sale that will not take place is $750,000 of less revenue for the manufacturer of that equipment. That is the cost to the American economy when an administration creates uncertainty. 

Decisions like this are being made daily and can ultimately contribute to lower GDP.

The Challenge for America Today

Today’s challenge lies in the sheer scale of the trade deficit. At $914.8 billion in 2024, the imbalance dwarfs historical levels. Economic theory warns that persistent trade deficits are unsustainable, raising the risk of future currency stress or political blowback.

That may explain why President Trump’s initial tariff proposals weigh in on the extreme side of the scale.

Conclusion: A Blunt Tool with Limited Reach

Despite their prominence in all the news headlines, tariffs historically have had limited macroeconomic impact:

• Modest effect on GDP, inflation, and equity markets.

• Minimal influence on correcting trade imbalances.

• Disproportionate burden on lower-income households.

In essence, tariffs act like a small tax on consumption— slightly noticeable, but far from transformative. Their true impact may be more psychological than fiscal, as markets and executives respond not only to the tariffs themselves, but to the lack of clarity surrounding their long-term direction.

As history has shown, tariffs rarely live up to their billing as engines of economic revival or tools for rebalancing trade. More often, they are noisy, blunt instruments— and their effects are muted by larger forces at play in the global economy.

If the tariff discussion continues to bring chaos and uncertainty to the US market, then President Trump’s tariff experiment may not end well.  If President Trump uses the tariff discussion to bring about parity with our trading partners while weakening the US dollar and driving down interest rates, it could make for a strong set up for global growth and a healthy opportunity for risk assets to appreciate in value.

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