Financial Panorama

Can the use of tariffs achieve multiple objectives?

A global wave of tariffs

On April 2, 2025, also designated Liberation Day by the U.S. administration, President Trump unveiled a long list of new tariff rates that will be imposed on exports from many countries. For months, the president has been talking about imposing tariffs to achieve various objectives, such as forcing exporting countries to change their behaviour, increasing U.S. revenues or forcing companies to produce their goods in the United States.

If possible, this reshoring of manufacturing production to the United States will have to take place over a period of many years, whereas the tariffs have already been put in place. For example, obtaining all the necessary permits, as well as the actual construction of a new automobile production plant in the United States, could take three to four years and cost many billions of dollars.

In the current economic environment, uncertainty over tariff policies is creating a serious obstacle to business investment in the United States and elsewhere in the world, which is a negative factor for the global economy.

Are we seeing the emergence of a GST-like tax in the United States?

Tariffs are consumption taxes, and the U.S. government needs additional revenue to balance its budget and maintain the tax cuts in effect since 2017. It’s therefore possible that tariffs could play the role of the GST (goods and services tax) in Canada or VATs (value-added taxes) in Europe, which are, in effect, additional revenues for the government.

For example, the announcement of tariffs of up to 10% on products from Australia is probably not a large enough increase to prompt a reconfiguration of supply chains. A company importing a product from that country could probably split the difference, asking its supplier for a 5% price reduction and absorbing the other 5% itself. In the end, the consumer will pay a higher price and the government will reap an additional 10% in revenue on the imported product.

There could therefore be a scenario where goods and materials that the U.S. cannot produce in the medium or long term would face rates of 10%, such as aluminum, Canadian oil or uranium. In other cases, bilateral discussions could result in a rate cut, but probably not below the 10% threshold, which seems to be a minimum since it was adopted for the 90-day reprieve granted on April 9 to the 75 countries affected by the U.S. tariffs (with the exception of China). This 10% rate could also limit retaliation and be presented to NATO member countries as a tax to be paid in order to benefit from U.S. protection…, even if, in the end, the tariffs imposed will be paid, at least in part, by American consumers…

The magnitude and duration of the tariffs are therefore the two variables to watch. A lower, standardized tariff rate would be perceived as causing less uncertainty and would help postpone a sharp global economic slowdown. In such a scenario, business investment could pick up again.

Possible response of central banks

In Canada and Europe, inflation is close to levels that would allow central banks to lower rates in the face of an economic slowdown. Moreover, Germany has the capacity to increase its debt and thus stimulate its economy, which would also help Europe.

In the United States, inflation has been above target for months. The high tariffs that will come into force will therefore increase the price of goods. This additional inflation, combined with an economic slowdown, could cause an episode of stagflation, i.e. a situation where consumers see their purchasing power decline, even as the economy slows and job losses mount. Should such a scenario materialize, the U.S. administration could decide to reduce its tariffs.

In short, the hands of the U.S. Federal Reserve (Fed) could be tied until such time as, with unemployment rising steadily at home and inflation easing elsewhere in the world, it could finally implement measures to at least partially relieve the U.S. economy.

The U.S. Treasury’s 3-3-3 plan

U.S. Treasury Secretary Scott Bessent has been discussing his strategy for the next four years, the 3-3-3 plan:

1. Increase U.S. oil production by three million barrels per day, which is unlikely if oil prices fall, because then oil producers won’t be interested in raising their production.
2. Reduce the government deficit to 3% of gross domestic product (GDP), a difficult task given that U.S. government spending remains fairly fixed, even in the face of a potential economic slowdown.
3. Finally, increase real economic growth (excluding inflation) by 3%.

High tariffs over a long period of time will jeopardize this game plan.

Stock markets

Generally speaking, stock market indices fluctuate from day to day, but over the medium and longer term, it’s the earnings of the companies that make up the indices and their forecast growth, in addition to bond yields (mainly 10-year maturities), that determine their level.

However, the tariff-induced uncertainty alters all these variables. U.S. companies will soon be releasing their financial results for the first quarter of 2025. Their comments will tell us more about the real impact of the tariffs.

What about the USMCA?

The absence of additional tariffs for Canada and Mexico at the time of the famous April 2 announcement could be interpreted as a pause, pending a quicker-than-expected renegotiation of the USMCA tripartite agreement.

Elsewhere in the world

As for emerging economies, a devaluation of the U.S. dollar would be conducive to their economic growth. China, for its part, announced measures several months ago to boost its economy.

In short, countries with the means to stimulate their economies, whether fiscally or monetarily, will be able to cope with the protectionist measures currently in place.