Understanding tariffs: a theoretical perspective on Trump's policy

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A businessman in a suit examines a large red downward arrow with a magnifying glass to understand the true financial performance of a company. The person is holding a briefcase in the other hand. The background is blue and the word "Sagora..." is written in the top right-hand corner.

Is a trade deficit necessarily a bad sign? What impact will it have on businesses?

Introduction

Markets have learned to be wary of sudden moves, but this one is sure to be a landmark. With a gesture that is as confident as it is controversial, Trump has for several weeks been returning to one of his old obsessions: redrawing the rules of world trade, even if it means fanning the flames that are already glowing red. 

Before dissecting the reasons for and repercussions of this tariff offensive, a brief diversions is in order. Let's take a look at the rules governing tariffs and their link with the balance of trade. 

What is a customs tariff?

An age-old instrument of international trade, the customs tariff is a charge levied on goods crossing an international border (mostly incoming goods). However, calculated as a percentage of the product's value, it is more than just an entry fee; it redraws, in its own way, the rules of the global game. A pencil stroke on a rate, and suddenly a shoe manufacturer has to reconsider the origin of its leather. 

Tariffs have the power to regulate international trade, protect national industries and generate revenue. But, disguised as common sense, they also shape power relations, sometimes fuelling diplomatic tensions.

The link between tariffs, trade balance and GDP

To understand why Trump is such a fervent supporter, we first need to go back to a fundamental concept: the balance of trade. In a nutshell, it measures the difference between the value of exports and imports. But in economics, the balance of trade also has a privileged relationship with a country's Gross Domestic Product (GDP), i.e. the total value of what is produced within national borders.

It's time for Aunt Agathe to dust off her old macroeconomics textbooks:

"A country buys and sells like any other business. When it exports, it brings in money. When it imports, it takes money out. By deducting the net income of capital from abroad (to keep only the production actually generated within the country), we obtain an approximation of the trade balance. In theory, if it is positive, it supports GDP growth. If it is negative, we speak of a trade deficit.

"Tariff, Trump's favourite word in the dictionary

This is not Trump's first attempt. After targeting aluminium at 10 % and focusing his attacks on China during his first term, he is back with even tougher import tariffs. True to his explosive unpredictability, it was hard to keep up with him: aluminium climbed to 25 %, while all imports from Canada and Mexico were tossed back and forth between announcements, withdrawals and reintroductions. The threat of reciprocal tariffs had also been looming for several weeks, but this Wednesday, US trade is closing in a little more. On this day of liberation, the Trump administration has decided: 10 % for everyone, 20 % for Europe, up to 54 % for China.

Behind this protectionism, the stated ambition is clear: "Make America Great Again" by making imports more expensive to encourage companies to produce in the United States, while boosting employment. But tariffs are not just a commercial lever, they also serve as a means of exerting pressure, as demonstrated by the recent tension with Colombia and the threat to tax French champagne and wine at 200 % if Europe does not lift its tariffs on bourbon. Much to the chagrin of Europeans, who would have to pay twice as much. 

Is the trade deficit necessarily bad?

On paper, Trump's logic seems implacable. But in reality, it comes up against a number of economic nuances. Of course, a trade surplus can support GDP growth (as seen above), but a deficit is not necessarily a sign of weakness. In the United States, high imports can be a sign that the population is buying a lot. What's more, the country attracts massive foreign investment, which strengthens the dollar, making imports more affordable. 

These foreign investments do not evaporate. It can flow into the economy in the form of investment in businesses, infrastructure and innovation, and so act as a real engine for growth. 

What does the rate increase mean for businesses? 

In recent weeks, the tariffs have rocked the markets with speculation about their scale and impact on the global economy, inflation and businesses. For businesses (especially those dependent on imports), the increase in customs duties means higher production costs. They are therefore faced with a Cornelian choice: absorb the increase and affect their margins, pass on the increase to customers and risk reducing demand, or rethink their supply chain.Agathe&Co U.S.which imports Canadian steel:

"With an initial rate of 10 %, a one million dollar lot cost 1.1 million. Now taxed at 25 %, the same lot costs 1.25 million. As customs duties are payable on imports, the cash outflow is immediate. The company can try to absorb part of the shock, but if it chooses to pass on the increase to its customers, they may look elsewhere or demand longer payment terms, requiring the company to advance even more funds." 

Once again, the importance of a optimised cash flow management is back in the spotlight, with a situation where cash outflows increase immediately, while cash inflows may gradually decrease. This imbalance weakens the company's ability to finance its business and investments, jeopardising its financial health.

Conclusion 

The increase in tariffs imposed by Trump is part of a protectionist rationale aimed at revitalising the US economy by focusing on the trade balance. However, as we have seen, a trade deficit is not necessarily an indicator of economic fragility and offers only a truncated view of reality. As well as impacting markets and inflation, these measures are also reshaping the corporate financial landscape, reminding us, if there were any need, that cash flow management remains an essential condition for business resilienceIn an environment where the rules of the game change according to political decisions.

Key points to remember about customs tariffs

  • A trade deficit is not necessarily synonymous with economic weakness.
  • Excessive protectionism can undermine the very companies it claims to defend.
  • The increase in tariffs will put pressure on the liquidity of the companies concerned.
  • In an uncertain environment, agile cash flow management remains essential.

Sources

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