Trump tariffs: bluff, strategy, or economic overhaul?

Salena Zito famously observed in The Atlantic, “The press takes Trump literally, but not seriously; his supporters take him seriously, but not literally.” So how should investors interpret Trump’s tariff threats—literally, seriously, neither, or both?

Many market participants see Trump’s fiery rhetoric as a hardball negotiation tactic, honed over decades in the New York real estate market. They argue he understands the economic consequences of punitive tariffs—higher inflation, slower growth, and a potential market downturn. Given his well-documented obsession with stock market performance as a barometer of success, few believe he would implement a policy that could derail equities and hurt his political standing.

However, a minority see a more ideological motivation at play. They suggest Trump genuinely believes in permanently reducing income taxes and offsetting lost revenue through tariffs—effectively turning them into a consumption tax partly paid by foreign suppliers. Before the introduction of income tax in 1913, tariffs were the primary source of U.S. government revenue. Could Trump be aiming for a fundamental restructuring of the tax system, encouraging self-reliance and domestic job creation?

Which view is correct? Only time will tell. What we do know is that Trump’s guiding principle appears to be pragmatic self-interest. If tariffs were to trigger a market crash, wiping out gains in 401(k)s and reigniting inflation, it’s hard to see him holding firm. Case in point: on February 3, when markets were only slightly down—the Dow, S&P 500, and Nasdaq fell -0.28%, -0.76%, and -1.2%, respectively—Trump postponed tariffs on Mexico and Canada for 30 days.

At Plato, we avoid playing armchair psychologist. Predicting the tactical moves of a mercurial politician is beyond our remit. Instead, we focus on ensuring our portfolios remain resilient under any scenario—whether extreme tariffs or none. Our proprietary risk management software, PRISM, runs 100 daily stress tests across all portfolios, much like a bank assessing the strength of its loan book. By systematically modelling potential market shocks, we aim to position our investments for stability—regardless of how the tariff drama unfolds. We used precisely the same PRISM system to help us navigate the uncertainties of the U.S. presidential election last November.

Australian Companies at Risk

Even if Australia escapes direct U.S. tariffs, we will be caught in the crossfire of a U.S.-China tariff war. A tariff-induced slowdown in China will depress demand for Australia’s iron ore, coal, and LNG. A useful rule of thumb: a 1% reduction in Chinese GDP growth translates to a 0.2-0.3% reduction in Australian GDP growth. Companies to watch include BHP, Rio Tinto, Fortescue, South32, Woodside Energy, and Santos.

According to PRISM, the two stocks with the highest sensitivity to an aggressive tariff regime are Pilbara Minerals and Mineral Resources, due to the head-winds tariffs would create for Chinese-made batteries. Uranium plays Boss Energy and Big Yellow also show significant exposures.

A slowdown in the Chinese economy will also dampen demand for Australian agricultural exports. Companies with high reliance on China include GrainCorp, A2 Milk, and Treasury Wine Estates. However, these are not as sensitive to U.S. tariffs as the mining and energy sectors.

A secondary effect, however, could be China ramping up domestic capital expenditure to offset slowing exports—potentially benefiting Australia’s resource exports in the long run.

If U.S. tariffs on China were high and permanent, Beijing may pivot toward building domestic consumption to reduce dependence on unreliable export markets. If so, Australia’s export patterns to China could shift permanently.

Global Companies at Risk

Automakers are among the first in the firing line. About 25-30% of U.S. cars are manufactured in Canada or Mexico, and a typical auto part crosses the border six to seven times during production. The Canadian Automotive Parts Manufacturers’ Association recently warned that at a 25% tariff, “absolutely nobody in our business is profitable.” The most exposed companies include Toyota, Nissan, Honda, Hyundai, Volkswagen, BMW, and Mercedes-Benz, all of which have manufacturing plants in Canada, Mexico, or both.

Electronics and technology companies are also vulnerable. In 2023, the U.S. imported almost half a trillion dollars in electronics. The global companies most sensitive to U.S. tariffs include ASML, and leading chipmaker TSMC. While Apple has tried to diversify its supply chain, 70-75% of iPhones are still assembled in China. However, Apple may benefit if further tariffs are levied against Huawei. Among U.S. tech companies, Nvidia and Broadcom show the highest sensitivity to tariff shocks due to their reliance on TSMC and Samsung.

U.S. Beneficiaries

U.S. manufacturers that do not rely extensively on global supply chains stand to gain. Key examples include General Electric, Stanley Black & Decker, and Caterpillar. According to PRISM though the companies that will stand to benefit most from a high tariff regime are the consumer staples names, including Coca-Cola, Procter and Gamble, and Colgate-Palmolive.

Steel and aluminium producers—such as Alcoa, Nucor, and United States Steel—will also benefit from tariffs on foreign competitors.

Energy companies should gain as well. If cheaper oil and natural gas from Canada is interrupted, U.S. producers like Chevron, ExxonMobil, and ConocoPhillips would benefit. Currently, 15% of U.S. natural gas and 50% of its imported oil come from Canada.

Finally, tariffs will boost U.S. agriculture by making imports more expensive. Companies to watch include Hormel Foods, Archer Daniels Midland, and Tyson Foods. However, an important caveat: if Trump’s plan to remove 15-20 million immigrants were to be implemented seriously and literally, it could devastate U.S. agriculture by gutting the labour force. An argument can be made that Trump’s agenda threatens to disrupt the “magic pudding” of North American exceptionalism—built on U.S. innovation, Canadian resources, and Mexican labour.

The Long-Term Consequences

It’s important to distinguish between short-term and long-term beneficiaries. History shows that while protected industries often see improved profit margins in the short term, they risk becoming complacent and inefficient over time. Once tariffs are removed, they often struggle to compete—think of the decline of U.S. steel and auto manufacturers after past tariff protections ended, or the collapse of Australian car manufacturing in 2017. Using tariffs as a weapon against major trading partners erodes trust, fuels volatility, and hampers growth. Targeting geopolitical allies further undermines global stability.

While heavy tariffs are not Plato’s base case, we believe it is crucial to hedge against the worst-case scenario through rigorous analysis of company exposures and tariff sensitivities. By maintaining discipline and adaptability, we can position our portfolios to thrive—regardless of how the trade war unfolds.

Dr. David Allen is the portfolio manager of the Plato Global Alpha Fund. Click here to learn more about the funds.