Trump’s Tariffs Policy, the U.S. Economy and Your Bottom Line

Tariffs Impact Update:

Since “Liberation Day,” (April 2) there’s lingering uncertainty regarding tariffs and implications for worldwide supply chains. In July, the Administration issued a statement that “large and persistent annual U.S. goods trade deficits constitute an unusual and extraordinary threat to the national security and economy of the United States that has its source in whole or substantial part outside the United States.”1

International leaders are meeting with the White House administration to clarify what the proposed tariffs will mean for their respective countries and to negotiate terms. Domestic companies are stockpiling as much imported inventory as they can afford in anticipation of further cost increases.

Tariffs aren’t set only at a country-by-country level, but also at the product level. For example, steel and aluminum imports to the U.S. will incur a significant tariff no matter the country of origin. The stated goal for applying tariffs to these products is to rebuild the U.S. steel industry.

There are currently exceptionally high tariffs (40%) for some goods that are “transshipped” from Asia to Mexico for modification, which is a common, legal practice under the North American Free Trade Agreement (NAFTA) and the subsequent United States-Mexico-Canada Agreement (USMCA). Under these agreements a company would ship an almost-finished good from Asia to Mexico, where a factory would make a minor modification and stamp the item “Made in Mexico.”

The challenge is for Mexican importers to make enough modifications that the product qualifies as “Made in Mexico,” while still benefitting from the lower costs of materials and labor that originate in Asia. However, if the product is transshipped but not modified, that is tariff evasion and is illegal.

The recommended tariffs and the U.S. administration’s highly individualistic approach to collective bargaining with other countries is unprecedented. U.S. participation in groups such as the World Trade Organization (WHO), as well as multi-country trade agreements, appears to be replaced with bilateral agreements and retaliatory negotiations.

Recent shifts in U.S. tariff policy are triggering sweeping changes across global supply chains and domestic markets. As new trade regulations take effect, businesses and consumers alike should expect increased costs and economic uncertainty.

• Significant price swings are expected as businesses deplete stockpiled inventories.
  
  
• Consumer goods will be more expensive, particularly for lower-income families as consumables take a larger percentage of income. However, the 2025 tariffs will impact all 10 deciles of U.S. households, ranging from $1,500 - $5,700 in extra costs per year. Median costs will be $2,500 per household.2
  
  
• Costs for all goods won’t increase. Tariff impact depends on where companies source materials and products and whether they can shift to other suppliers.
  
  
• The introduction of non-economic factors will precipitate decades-long tariffs negotiations with other countries. There are no guarantees our trading partners won’t ask for additional concessions, change tariffs on their U.S. purchases or enact further non-tariff barriers to international trade to protect local industries and interests.
  
  
• There could be increased disputes between the U.S. and its trading partners as bilateral trade agreement details emerge or aren’t delivered as anticipated. Even in cases where both parties reach an agreement, they may interpret them differently or have no ability to enforce them.
  
  
• Because their exports will be more expensive in the U.S., other countries will seek non-U.S. buyers to reduce dependence on American consumption and diversify their markets. These countries may also retaliate against what they view as unfair treatment from the current U.S. administration.
  
  
• Importers will continue to test how much of the increased costs they can pass on to the end buyer. Businesses will likely pass the entire cost of highly specialized items to end buyers. Conversely, businesses are more likely to absorb costs of ubiquitous products or negotiate with suppliers for lower prices.
  
  
• U.S. tourism will continue to decline, due in part to global citizens choosing to spend their disposable income in more peaceful locales with less attention to immigration enforcement.
  
  
• Potential reduction in job growth is possible as organizations that’ve adopted a “wait-and-see” posture since April become more comfortable in making strategic decisions and capital expenditures. However, immigrants will no longer fill lower paying, less desirable “new jobs.”
  
  
• If businesses can’t pass on tariffs as a cost increase, they will continue to reduce costs wherever possible to offset costs. For some, the reductions will entail layoffs, hiring freezes or requiring staff to do more with less resources. Reassessing advertising, packaging, warehousing and distribution expenses are also likely.

Given the evolving tariff environment, businesses should implement sound risk management strategies, diversify supply chains and adopt foreign exchange protections. Carefully considering pricing structures and contract terms will help maintain financial stability.

Deeming April 2 “Liberation Day,” President Donald Trump announced an executive order that establishes tariffs of 10% or more on imported goods from all U.S. trading partners. The 10% minimum is a baseline for countries that weren’t subject to the tax prior to the April announcement, while those partners previously charged will pay an additional “reciprocal” tariff.

The Trump administration had implemented an additional 25% tariffs on imports from Canada and Mexico, as well as another 10% tariff on China imports in March. However, Canada and Mexico won’t be impacted by Trump’s April announcement.

The recent tariffs are the highest in more than 100 years. The strong, negative market reaction to the announcement prompted a 90-day pause on the tariff’s implementation. Advisors, analysts and businesses are waiting to see what will change over the next months.

Some political analysts see Trump’s initiatives as steps toward the equitable trade policies the U.S. needs. Economists, however, see the initial tariffs, pauses and subsequent announcements as another saga in the ongoing Trump trade war – this time against the U.S.’ friendliest neighbors and allies. Some debate President Donald Trump’s authority to initiate tariffs without Congressional approval.

Trade Acts give the Executive Office limited power to regulate trade.

The U.S. Constitution empowers Congress to regulate foreign trade, impose duties and collect revenue. However, the Reciprocal Trade Agreements Act of 1934 granted the Executive Office some power to negotiate trade agreements. Since then, Congress introduced and amended various trade agreements, giving former and current presidents more influence in establishing trade policy.

• Section 232 of the Trade Expansion Act of 1962, in response to a Secretary of Commerce investigation reported to the Department of Defense, authorizes the President to bypass Congress when imposing tariffs or other restrictions if national security is threatened.
  
  
• Section 301 of the Trade Act of 1974 grants the President additional authority to negotiate trade agreements, as well as protect domestic industries from import surges. Congress may approve or reject the proposals but cannot alter them.
  
  
• The Trade Act of 1979 broadened the President’s capacity to negotiate trade agreements, enabling modifications to both tariff and non-tariff trade barriers.

In recent years, both former President Biden and Trump exercised rights to impose tariffs on goods entering the U.S.

Trump’s trade policy addressed global tariffs and foreign trade relations during his first term.

During his first administration, Trump imposed “America First” protectionist tariffs on many foreign-made products, including washing machines, solar panels, steel and aluminum. Citing national security concerns, China was the primary target of Trump’s tariff policy. The tariffs were also intended to address what he considered “unfair” trade practices, while spurring Americans to buy more U.S.-manufactured goods. China retaliated with its own $3 billion tariffs on U.S. goods, further exacerbating the U.S.–China trade war which remains between the two countries.

The federal government collected $34.6 billion in customs, duties and fees during Trump’s first year. In 2019, the Office of Management and Budget reported $70.9 billion collected. When compared to the U.S. GDP, however, these were modest returns.3

As part of the “America First” effort, the Trump administration also withdrew U.S. participation in key global agreements – two of which were related to trade. These included the 2017 and 2020 withdrawals from the Trans-Pacific Partnership (TPP) and the North American Free Trade Agreement (NAFTA), respectively. The administration replaced NAFTA with the United States-Mexico-Canada Agreement (USMCA), intended to create more balanced trade and a more level playing field for American workers.

Biden kept most of the prior administration’s tariffs in place. And while the U.S. is still a member of the World Trade Organization (WTO), it is no longer actively promoting a “rule-based open international trading system” or the WTO.4

Trump’s tariff policy is hotly contested.

Within hours of swearing in for his second term, Trump announced additional 25% tariffs on imports from Canada and Mexico. Trump and some economists believe the tariffs will redress perceived unfair trade practices against the U.S., making them more “reciprocal and balanced, as well as a benefit to American workers ... and businesses.”5

Global trading partners don’t like imposed U.S. tariffs. Historically, applying tariffs prompted foreign exporters to lower their prices. But more recently tariffs increased pass-through costs to U.S. firms or American consumers.6

While Trump believes the 2025 tariffs will be favorable to the U.S., they are hotly contested — for reasons beyond the additional costs to exports and imports. Trump also issued the tariffs in response to what he considers Canada and Mexico’s unsatisfactory results in stopping illegal immigration and the flow of fentanyl into the U.S. Using tariffs as a tool to enforce non-financial administration policy issues is new. Other methods, such as diplomacy and foreign policy, are usually preferred when dealing with migration, cross-border intellectual property or other global issues.

After the initial volley, the Mexican and Canadian governments issued retaliatory tariffs against the U.S. Before the April 2 announcement, Trump had initiated then delayed additional tariffs against more countries and products, including wine produced in the European Union and Canadian steel, aluminum and lumber, as well as new blanket tariffs on Chinese goods. These countries announced retaliatory tariffs on U.S. goods in quick succession, including China’s reciprocal 34% on all U.S. imports April 4. China has since levied a 125% tariff on U.S. goods and is increasing its focus on trading with Vietnam and other South Asian countries, as well as encouraging domestic consumption.

Who pays tariffs?

Tariffs, also known as “duties,” are a percentage of the imported goods’ value. Tariffs aren’t new. Historically countries used tariffs to protect their local industries or encourage economic growth with trading partners. 

Who pays tariffs on imports? U.S. Customs and Border Protection agents collect tariffs at ports. U.S. businesses, the importers, pay the tariffs to the U.S. Treasury.

Our trading partners impose their own tariffs on U.S. exports. For example, India imposes a 17% tariff on U.S. goods coming into the country. Brazil imposes an 11% tariff on U.S. goods. And Canada has a 250% tariff on U.S. dairy products, though it is theoretical, since it only applies once the U.S. exceeds its USMCA-negotiated quotas, which has never happened.

What will Trump’s tariffs do to the economy?

Mexico, Canada and China are the U.S.’ three largest trading partners, and Americans buy about $1.5 trillion in goods and services from these countries.7

Initially, U.S. importers might absorb tariffs which results in lower short-term profit margins. However, long-term results are often higher prices for “downstream buyers” and consumers. In addition, tariffs can reduce the variety and quantity of products available if imports become too expensive and unprofitable.8

U.S. importers may try to renegotiate prices with global exporters to remain competitive. The net effect would trigger lower export sales.

Economists are attempting to quantify current and potential U.S. tariffs’ impact and retaliatory responses. However, the President’s tactics are unprecedented, therefore it’s difficult to precisely measure impact on inflation, consumer prices, GDP and interest rates.

Here’s what we know:

• In response to early tariff talks, the U.S. stock market tumbled 10% below its record in March. Major U.S. indexes are performing lower than before the tariff’s announcement. The Dow Jones Industrial Average fell about 4%. The S&P 500 and Nasdaq both dropped approximately 5%.9 “The market dislikes uncertainty,” says Mike Babbitt, who leads Synovus’ Trade and Supply Chain Origination team. “The volatility we’re seeing is the result of unease related to how the U.S. economy will fare in this ongoing trade war.”
  
  
• Since the inflation rate is higher than the 2% target, the Fed was expected to continue cuts in 2025. In January, Trump demanded the agency lower rates. However, Raphael Bostic, president of the Federal Reserve Bank in Atlanta, recently said the Fed would likely “wait a while.” Fed Chair Jerome Powell stated officials were in “no hurry to lower interest rates” given uncertainty about how the economy will react to Trump’s policies.10 The Fed held steady on the decision in April, with Powell citing the potential for increased inflation and slower growth. The agency continues to maintain interest rates as they are. However, there could be reductions before the end of the year.
  
  
• Tariffs and retaliatory tariffs will increase inflation and consumer prices, as well as slow U.S. exports. However, opinions on how much prices will rise are mixed. For example, Federal Reserve Bank of Boston authors estimate “a 25% tariff on Canada and Mexico, combined with a 10% tariff on China, could add 0.5 to 0.8 percentage points to the core Personal Consumption Expenditures Price Index (PCE) inflation, while additional 60% China tariffs and 10% on imports from other countries (proposed during Trump’s campaign), would add as much as 2.2 percentage points to core inflation.”11
  
  
• Higher tariffs will reduce U.S. GDP which is, of course, a measure of economic output. Morningstar estimates that “full implementation of a 10% uniform tariff hike and 60% tariff hike on China ... would reduce the long-run level of U.S. GDP by 1.6%.”12 This is due to lower consumer confidence and reduced spending which could lead to a recession as defined by two consecutive quarters of negative GDP growth.
  
  
• Recently, the U.S. dollar’s value exceeded that of the yen, Mexican peso and Canadian dollar, while losing value versus the Swiss franc and the euro. The retaliatory tariffs will likely cause the U.S. dollar to weaken against other currencies and U.S. exports to become comparatively less expensive to foreign buyers. The Brookings Institute suggests exports to Canada and Mexico would decline 6% with a 25% U.S. tariff and 9% if the countries reciprocate.13

In 2024, there were nearly 13,000 goods on the U.S. International Trade Commission’s tariff schedule, so avoiding the duties will be difficult.14 The burning question regarding Trump’s tariff policy is who does it help or hurt?

Most global leaders don’t necessarily want a like-for-like tariff on certain goods. For example, Colombia wouldn’t pay more for their coffee if there was a tariff on U.S.- grown coffee since they don’t buy our coffee. We buy from them.

Given the trade balance — how much the U.S. buys versus sells to other countries — the answer is that global partners suffer more when the U.S. imposes import tariffs because U.S. purchase volumes may decline. However, the deciding factor is which country is assessing the tariff and which of the 13,000 goods in the tariff schedule will be affected. Countries may be protecting a local industry with tariffs. For example, a developing economy that is heavily reliant on textile production may have a steep tariff on imported clothing, but no tariff on thread and cloth.

How will the Trump tariff policy affect Southeastern corporations?

The Southeast is home to many importers and exporters in industries as varied as agriculture, automotive, technology, chemicals, electronics and manufacturing. All will experience the impact of tariffs on the U.S. economy, including increased energy, aluminum, steel and chemical prices.

Sound risk management strategies can help buffer Trump tariffs impact.

Scenario planning can help assess how tariffs will affect your organization, while establishing risk management strategies to mitigate disruptions.

1. Determine liquidity and capital needs.

   Does your organization have sufficient liquidity to maintain day-to-day operations? To maintain stability during times of economic uncertainty, ensuring funds will be available now and in the future is critical. Cash flow models and forecasting are essential to clarifying short-, mid-, and long-term financial needs.

2. Evaluate your supply chain.

   “Look at the inventory levels of critical components and ensure they’re properly stocked,” says Babbitt. “There are many potential tariffs targeted at multiple countries and it’s difficult to predict which will be implemented. So, buy what you need before the tariffs become effective.”
   
   Babbitt also suggests considering suppliers from different countries. “Researching new vendors is time-consuming but important — especially now,” Babbitt says. “Some goods aren’t easily sourced from multiple locations. Scarcity and intellectual property rights make reconfiguring supply chains easier said than done.” However, if you have access to multiple vendors and suppliers, start negotiations right away. You’ll have other options available and you’ll increase supply chain resilience.

3. Manage foreign exchange risk.

   Given the many factors that impact foreign exchange rates, it’s difficult to see a path forward with any certainty. “Structuring your payments advantageously can create a hedge against foreign exchange volatility,” says David Grimaldi, foreign exchange sales consultant for Synovus. “If you’re buying or selling overseas, you could lose all your pricing margin because of the exchange rate. A foreign currency exchange strategy can save you significant dollars.”
   
   For example, a forward contract lets you lock in an exchange rate for foreign currency anywhere from three days up to 18 months. With this contract in place, you can buy or sell foreign currencies at a specific price, avoiding market volatility. Your exchange rate is already set,” so you aren’t subject to the whims of the market.
   
   Another strategy is a multicurrency account, which allows you to operate in the currency you choose, with no need to convert foreign currency collections and payments into U.S. dollars. This saves significant foreign transaction and conversion fees and can eliminate the inflated prices foreign exporters charge.

4. Carefully weigh pricing options.

   The cost of imports could rise by 25-30%. Raising prices in response to Trump’s tariff policy may seem like an effective way to offset increasing costs. However, carefully consider the implications. The most common tactic when importing costs rise is to implement a blanket increase across all goods and services. Some intermediate products, such as steel that goes into car bodies and lawn mowers, are more readily passed on to end consumers as “increased input costs,” when compared to finished products brought into the U.S. However, a finished product would have a more immediate impact on the profit margin.
   
   If you sell a commoditized product, customers are price sensitive or competition is stiff, blanket pricing might not be the best approach. Short-term pricing strategies could be a better alternative. Examples include:
   • Product bundling
   • Installment payment plans
   • Dynamic pricing that automatically adjusts to fluctuating demand or core cost inputs
   
   In addition to restructuring prices, think about revising contract language to cover inflation-triggered price hikes. When costs are rising, corporations with fixed cost contracts should consider other methods such as cost-plus or guaranteed maximum price contracts.
   
   Determine whether an income gain or secure market share is most important when considering price increases.

Seek trusted advisors who understand foreign trade policy.

Trump cautioned there would be a temporary “period of transition” while implementing his foreign trade policies.15 However, ambiguity is challenging for businesses and consumers. Act now to manage volatility and potential risk to your corporation.

Synovus offers risk and cash management, foreign exchange and foreign trading expertise. For more information, complete a short form and a Synovus Treasury & Payment Solutions Consultant will contact you with more details. You can also stop by one of our local branches.

Michael Babbitt is Head of Synovus’ Trade and Supply Chain Finance Origination Team. Babbitt also co-chairs the BAFT (Bankers Association of Finance and Trade) Regional Bank Committee which collaborates on international trade solutions.

David Grimaldi is a Synovus Foreign Exchange Consultant. Grimaldi’s expertise includes FOREX trading solutions, hedging strategies, risk management and derivatives.