Since the beginning of the year, markets have corrected from all-time highs, and many in the media attribute this to the uncertainty surrounding the Trump administration’s tariff discussions. However, it’s important to remember that market corrections of around 10% occur almost every year. Given historical market volatility, the average annual correction typically falls between 7-10%, regardless of external factors.
In 2025, a correction would not be surprising, especially considering the S&P 500 posted strong returns of over 20% in 2019, 2021, 2023, and 2024. As of the end of 2024, the five-year average annual return for the index stood at a solid 14.5%. Thus, the current downturn could be a reflection of normal market fluctuations.
Understanding Tariffs
Tariffs are taxes on imported goods. They have been a part of American economic policy since the nation’s founding, originally serving as a primary source of government revenue. Beyond revenue generation, tariffs have historically been used to protect domestic industries, promote economic growth, or penalize unfair trade practices – the same approach our counterparts took. This strategy, known as mercantilism, has been a key tool for global economic powers throughout history, as they sought to maximize exports while minimizing imports.
The Shift in Trade Policy
For a century—from 1870 to 1970—the United States maintained a trade surplus. However, since 1970, the country has consistently run a trade deficit, which today amounts to approximately $130 billion, including goods and services. Several factors have contributed to this shift:
- Rising domestic consumption outpacing production
- Globalization and increased demand for less expensive manufactured foreign goods
- Better profit margins for companies and stock prices
- Higher commodity prices
- A shift away from mercantilism toward a policy of comparative advantage
Comparative advantage is the idea that countries should specialize in producing goods and services they can produce most efficiently, thereby fostering mutual economic benefits. In theory, this should lead to greater global output and consumption.
However, real-world trade dynamics are far more complex. National security concerns, strategic interests, political factors, and even national pride influence trade policies. Additionally, countries focusing solely on low-value economic activities often lack the resources to invest in advanced technology and defense industries.
Tariffs Today: An Uneven Playing Field
Unlike many of its global counterparts, the United States has largely moved away from mercantilist policies, allowing its industries to compete with minimal government intervention. In contrast, other countries actively use tariffs, subsidies, and regulatory measures to support their domestic industries. This has led to a significant shift in manufacturing away from the U.S.
A prime example of this imbalance can be seen in the automobile industry. The U.S. imposes a 2.5% tariff on European car imports, whereas the European Union levies a 10% tariff on U.S. car imports. This disparity has put American manufacturers at a disadvantage over time, contributing to the decline of various industries. Semiconductors and solar panels are notable examples of sectors suffering from foreign government intervention and domestic policy shifts.
The reality is that nearly every country uses tariffs to bolster its own economic success—often at the expense of U.S. industries. But to put things into perspective, even current tariffs might be able to raise $100 billion in annual revenues compared with individual income taxes raising $2.5 trillion and Social Security and Medicare taxes raising $1.7 trillion. The reality is tariff talk is more bark than bite compared to today’s overall U.S. tax policy. The expiration of the first Trump tax cuts of 2017 will have far more impact on the economy than any new tariffs. As trade policies evolve, the question remains: Should the U.S. return to a more mercantilist stance to safeguard its economic future and level the global economic playing field? Trump thinks so…
Tariffs & Trade: Will They Really Make a Difference in 2025?
In 2025, a correction would not be surprising, especially considering the S&P 500 posted strong returns of over 20% in 2019, 2021, 2023, and 2024. As of the end of 2024, the five-year average annual return for the index stood at a solid 14.5%. Thus, the current downturn could be a reflection of normal market fluctuations.
Understanding Tariffs
Tariffs are taxes on imported goods. They have been a part of American economic policy since the nation’s founding, originally serving as a primary source of government revenue. Beyond revenue generation, tariffs have historically been used to protect domestic industries, promote economic growth, or penalize unfair trade practices – the same approach our counterparts took. This strategy, known as mercantilism, has been a key tool for global economic powers throughout history, as they sought to maximize exports while minimizing imports.
The Shift in Trade Policy
For a century—from 1870 to 1970—the United States maintained a trade surplus. However, since 1970, the country has consistently run a trade deficit, which today amounts to approximately $130 billion, including goods and services. Several factors have contributed to this shift:
Comparative advantage is the idea that countries should specialize in producing goods and services they can produce most efficiently, thereby fostering mutual economic benefits. In theory, this should lead to greater global output and consumption.
However, real-world trade dynamics are far more complex. National security concerns, strategic interests, political factors, and even national pride influence trade policies. Additionally, countries focusing solely on low-value economic activities often lack the resources to invest in advanced technology and defense industries.
Tariffs Today: An Uneven Playing Field
Unlike many of its global counterparts, the United States has largely moved away from mercantilist policies, allowing its industries to compete with minimal government intervention. In contrast, other countries actively use tariffs, subsidies, and regulatory measures to support their domestic industries. This has led to a significant shift in manufacturing away from the U.S.
A prime example of this imbalance can be seen in the automobile industry. The U.S. imposes a 2.5% tariff on European car imports, whereas the European Union levies a 10% tariff on U.S. car imports. This disparity has put American manufacturers at a disadvantage over time, contributing to the decline of various industries. Semiconductors and solar panels are notable examples of sectors suffering from foreign government intervention and domestic policy shifts.
The reality is that nearly every country uses tariffs to bolster its own economic success—often at the expense of U.S. industries. But to put things into perspective, even current tariffs might be able to raise $100 billion in annual revenues compared with individual income taxes raising $2.5 trillion and Social Security and Medicare taxes raising $1.7 trillion. The reality is tariff talk is more bark than bite compared to today’s overall U.S. tax policy. The expiration of the first Trump tax cuts of 2017 will have far more impact on the economy than any new tariffs. As trade policies evolve, the question remains: Should the U.S. return to a more mercantilist stance to safeguard its economic future and level the global economic playing field? Trump thinks so…