Lexicon Financial Group Weekly Update — April 2, 2025

Apr 2

“Blockading squadrons are a means whereby nations seek to prevent their enemies from trading; protective tariffs are a means whereby nations attempt to prevent their own people from trading. What protectionism teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.”

— Henry George, American political economist

From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel

Looking Around

“Liberation Day” delivered the implementation of a universal tariff of 10 per cent on all imports as well as reciprocal tariffs by the United States (U.S.) on pretty much the rest of the world. President Trump enacted these tariffs on U.S. trading partners and, in particular, on those that contribute the most to the trillion dollar U.S. trade deficit. We won’t go so far as to call them reciprocal because… well, they aren’t. They are tariffs, but the method by which they were calculated has more to do with trade imbalances than actual tariffs. Nevertheless, the stated goal of these tariffs is to revive the industrial and manufacturing base of the U.S., and "make America wealthy again.”

To calculate the tariff rate, the U.S. has included means to cover non-monetary trade barriers. For example, when nations devalue their currencies to help boost demand for their products from other nations. (1) This is a challenge, because investors and economists like to be able to do the math to make logic-based decisions. And, in this instance, that’s difficult because nobody knows for certain exactly what has been baked into the tariff cake.

Let’s be clear. Tariffs on imports are an indirect form of taxation. The costs are either passed onto the consumer or paid by the companies importing the goods, lowering their profit margin. The end result will probably be somewhere in the middle – some companies who are at risk of losing customers may reduce profits just to stay in business, while others operating on already slim margins will surely pass increased costs to consumers.

We believe in the free market, but even we acknowledge that tariffs can provide strategic advantages to a country. These include:

Protecting domestic industries: Tariffs have the potential to shield domestic industries from foreign competition. If imported goods become more expensive, consumers are likely to purchase goods manufactured or sourced domestically. This can potentially preserve and grow jobs in key economic sectors.
Increasing government revenue: Tariffs may provide an additional revenue stream for governments in the short term. As importers pay duties on foreign goods, the government benefits from increased revenue which might create a short-term boost. However, if the economy shifts to purchasing domestic goods, tariff revenue declines.
Encouraging domestic manufacturing: Tariffs can incentivise companies to manufacture goods in their home country. By raising the cost of imported goods, businesses may find it more cost-effective to keep operations within national borders, bolstering supply chain resilience and contributing to national security.

But tariffs also have disadvantages:

Higher consumer prices: One of the most immediate impacts of tariffs is a rise in consumer prices (aka inflation). Goods ranging from electronics like laptops and smartphones to automobiles – items that are sourced in whole or in part from other countries – may become more expensive. Economists have concluded that tariffs can reduce the U.S. GDP by as much as 0.64 per cent. While President Trump and his supporters contend that previous tariffs didn't dramatically increase inflation, most experts disagree and assert that U.S. consumers typically bear the brunt of these policies.
Global economic slowdown: The ripple effects of tariffs are not confined to the country that enacts them. Economists project that China could experience a GDP decline of 0.68 per cent, while the EU might see a drop of 0.11 per cent.
Inflation and interest rate concerns: Tariffs can also contribute to inflationary pressures by driving up the cost of goods, which can cause central banks to raise interest rates, potentially slowing economic growth and increasing borrowing costs for businesses and consumers. The inverse is also possible: stock markets decline and central banks reduce interest rates to encourage investment. There are some pundits that believe this is what is actually going on, as the U.S. has a large amount of debt to refinance. Lower rates would help.
Supply chain disruption: Industries today rely heavily on global supply chains. This has helped lower costs of goods but tariffs threaten to upend this balance. Higher costs and increasing logistical challenges could disrupt technological, automotive and retail production.
Retaliatory trade wars: The greatest risk of tariffs is the potential for a trade war. Countries impacted by U.S. tariffs can and will retaliate with their own measures, escalating tensions and causing further economic harm.

The tariffs enacted by President Trump have the above-mentioned advantages and disadvantages. Looking at the graphic below, the potential for economic damage for the U.S. and its major trading partners is significant.

This economic damage also extends to other countries who trade with the U.S. These countries will enact counter tariffs which will then be countered by the U.S. This situation is much like the game of chicken that Wayne and I played as children. It is not over until someone blinks or gets out of harm’s way. (2)

Read and Watch

Want deeper insight into topics in your Weekly Update? Then, read and/or right click:

Global stock markets fall as new Trump tariffs loom

EU set to fine Apple and Meta amid escalating trade war

Can Trump's tariffs break China's grip on manufacturing?

Raymond James Markets & Investing: US equities should continue to be a long-term portfolio driver - CIO Larry Adam, March 31, 2025

Raymond James Economy & Policy: Tariff uncertainty to stay longer than expected; tariff costs to go higher - Chief Economist Eugenio J. Alemán, March 28, 2025

Looking Back

Unsurprisingly, most stock markets, including those in the United States (U.S.) and Canada, ended sharply lower, last Friday, thanks to investor fears of weak economic growth and higher inflation, as the Trump administration ratchets up tariffs. Economic data released last Friday revealed that Canadian GDP rose 0.4 per cent in January but a preliminary estimate showed activity flatlining in February. In Canada, the S&P/TSX composite index ended last week down 0.8 per cent. The technology sector bore the brunt of the losses last week but the materials sector (which includes metal mining shares), consumer discretionary sector, industrial sector, and the financial sector all ended the week lower as well. (3)

Major U.S. stock indexes ended down last week, thanks mainly to weakness in the information technology and communication services sectors. Value stocks outperformed growth shares for the sixth consecutive week. Several new tariff announcements - including President Trump’s announcement on Wednesday of a 25 per cent levy on all non-U.S.-made automobiles - as well as concerns around a broader economic slowdown and weakening consumer sentiment weighed on stock markets and sent them into negative territory.

Added to this, the Bureau of Economic Analysis reported that its core personal consumption expenditures (PCE) price index - the Fed’s preferred measure of inflation - rose 0.4 per cent in February, which is up from January’s reading of 0.3 per cent. On a year-over-year basis, the core PCE rose 2.8 per cent, remaining well above the Fed’s long-term inflation target of two per cent. All of this data helped drive stocks last week to near their worst levels.

European major stock markets followed suit and all ended lower last week. This made for a disappointing week overall for European markets, which had started last week in positive territory on the back of encouraging economic updates and geopolitical news. There was some positive economic and geopolitical news, as the eurozone private sector expanded for the third straight month in March - manufacturing production increased for the first time in two years. In Germany, business sentiment is trending higher, following parliamentary approval of the German government's plans to increase defence and infrastructure spending. On the geopolitical front, Ukrainian President Zelenskyy noted that talks between Ukraine and the U.S. had been constructive last week. This was followed by an announcement on Tuesday of a partial ceasefire between Russia and Ukraine, focusing on a cessation of naval hostilities in the Black Sea and the suspension of attacks against energy infrastructure.

Japan’s stock markets ended down last week. This was mostly due to the tariff on auto imports into the U.S. and weighed on the shares of Japanese carmakers and other Japanese exporters. Japan’s Prime Minister Shigeru Ishiba stated that the impact of the latest U.S. tariff announcement on the country’s key auto industry and the economy would be “very big” and that appropriate responses must be considered, with all options on the table.

Mainland Chinese stock markets ended last week little changed, despite the U.S. tariff announcement. Profits at industrial firms shrank 0.3 per cent in the first two months of the year over the year-ago period. This fell short of economists’ forecasts for an increase in industrial profits and underscored the urgency for China to bolster domestic demand amid the threat of higher U.S. tariffs.

Boosting consumption remains the Chinese government’s top economic priority as it seeks to counter rising geopolitical tensions and diminishing returns on investment at home. (4)

The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.