Diversified Portfolios Can Help Investors Weather Global Policy Changes
February 2025 – Since the start of the year, news headlines have focused investors’ attention on market concerns around equities, interest rates, and government policy. It’s no surprise that trade policy has emerged as a particularly significant headache for investors, as well as a source of confusion. How should investors begin to understand current tariff policy, and stay steady in the face of dominant media stories and uncertainty? Viewing the current administration’s tariff policy in context is a good place to begin.
The implementation of tariffs typically serves three primary purposes: generating government revenue, negotiating border security measures, and protecting domestic industries. However, from a revenue perspective, tariffs play a relatively minor role in government finances. According to the Congressional Research Service’s January 2025 report, tariffs account for less than 2% of total government revenue.(1)
Trade protectionism has deep historical roots, with notable examples like the Smoot-Hawley Tariffs of 1930. While these tariffs were intended to bolster U.S. manufacturing, they ultimately exacerbated the Great Depression. Today’s global economy operates on different principles, with free trade generally recognized as most beneficial when nations focus on their comparative advantages, creating products and services that benefit the international community.
Despite initial concerns, the trade disputes of 2018–2019 did not result in severe global repercussions. Instead, they led to new agreements like the United States-Mexico-Canada Agreement (USM- CA) and a trade deal with China, which helped stabilize economic growth. Businesses demonstrated resilience by diversifying their supply chains in response to these challenges.
The landscape of international trade has been marked by significant shifts in tariff policies this year, resulting from the Trump administration’s new measures, which have been implemented in fits and starts. These included an announced 10% tariff on Chinese goods and a 25% tariff on Canadian imports, while a proposed 25% tariff on Mexican goods was announced and then temporarily suspended. These actions notably prompted reciprocal measures from Canada, and China policy has shifted as well.
The dynamic nature of trade negotiations has created a rapidly changing environment where information becomes outdated within days or even hours. The ongoing exchange of tariffs and counter-tariffs, moving back and forth like a pickle ball match, has sparked concerns about a potential trade war. This uncertainty has contributed to strengthening the U.S. dollar, highlighting the intricate relationship between trade policies and currency values.
It is important to note that tariffs don’t necessarily trigger recessions; recessions may occur for many reasons and are a natural part of the business cycle. According to the Federal Reserve Bank of St. Louis and NBER data, the United States has experienced 13 recessions since 1940, with an average duration of 10 months. (2) We have experienced economic downturns before and we will experience them in the future.
While tariff threats have introduced uncertainty regarding global trade relationships, inflation, and economic growth, their actual economic impact remains unclear. Market reactions to tariff announcements often exceed their real economic effects, and there’s no guarantee that proposed tariffs will be implemented. This underscores the importance of distinguishing between market sentiment and actual economic consequences in the complex world of international trade.
While any policy, including tariff threats can create short-term market volatility, maintaining a diversified, long-term investment approach aligned with your goals remains the most prudent strategy when facing uncertainty.
1 Congressional Research Service (https://crsreports.congress.gov/product/pdf/IF/IF11030)
2 Federal Reserve Bank of St. Louis, NBER based Recession Indicators for the United States from the Period following the Peak through the Trough [USREC], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/USREC, February 20, 2025
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