Stock Market Insights: Winning the tariff war - Can the world economy handle the consequences?

Dr. Richard Baker, AIF®, is the CEO and executive wealth advisor at Fervent Wealth Management.

A few years ago, I built a baseball field on some land I owned along the river for my kids' teams to practice on. The ballfield was a great decision, but putting the porta-potty far away from the field was a bad decision when the river flooded and carried it downstream. Sometimes, unintended consequences sneak up on you. Love him or hate him, Trump is winning the trade war. Hopefully, he doesn’t win too much and cause negative unintended consequences.

President Trump announced last Tuesday night that a 15% tariff trade agreement with Japan, up from the previous rate of 2%, including the important Japanese automotive industry. This would increase Japan’s tariff payments from last year's $16 billion to $126 billion, which will help pay down the U.S. debt.

The Japan deal came on the heels of two other deals with Indonesia and the Philippines. The Indonesia deal alone increases the Indonesia tariff payments from last year's $1 billion to just over $7 billion.

Trump knows the U.S. market is the biggest customer in the world, and he thinks other countries should pay for access to U.S. customers and the protection of the U.S. military. So far, the different countries are agreeing to higher tariffs after doing the math of what the consequences would be to their economies if they were priced out of the U.S. market or lost access to it.

The U.S. is earning serious money from tariffs. In June alone, the U.S. Treasury collected $27 billion in customs revenue, a $20 billion increase from June 2024, and it will get even higher after the Japan tariff kicks in.

Although media headlines might suggest that the U.S. is lowering its tariffs, the fact of the matter is that the U.S. is increasing tariffs at a rapid rate. The average effective tariff on all U.S. imports as of July 2 was just over 13%, well above the 2% rate in 2024, according to JPMorgan Chase, which is the highest since before World War II.

The risk is that Trump could push other countries into tariffs further than what the markets can tolerate. With all the tariff fears, investors might expect the global economy to show signs of slowing, but the U.S. markets are again at all-time highs, and global growth remains a solid 2.5%. Investment, spending and international trade are all positive, despite the worldwide reworking of the tariff system.

The big fish yet to land is the European Union (EU). The Japan agreement has given the EU optimism that it might be able to achieve a 15% rate, which would be negligible for its markets. They may not like paying more, but they realize they need the U.S. more than the U.S. needs them. That is the penalty for having the weaker hand at the negotiating table.

The China deal isn’t finalized yet, but it will likely remain around 40%. Canada and Mexico, like the EU, need the U.S. consumer more than the U.S. consumer needs them. Our North American neighbors may not like it, but they will eventually agree to higher tariffs, albeit at a lower rate than the rest of the world. For the stock market, the important thing is that a 15% overall rate, like Japan agreed to, is back in play. And markets seem able to handle it.

The U.S. is the world’s largest economy and has the largest military. This means that other countries need the U.S. more than the U.S. needs them, and the U.S. is able to dictate terms, which others must live with. So far, the market likes it, but let’s hope the deals are not too lopsided as to hamstring the world's economy in the future.

One of the worst experiences of my life was having to find that busted-up rented porta-potty and haul it back up to the ballfield. Hopefully, Trump and his team don’t win so big that they force the markets to clean up a messy situation when unintended consequences arise down the road.

Have a blessed week!

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Securities and advisory services are offered through LPL Financial, a registered investment advisor and member of FINRA/SIPC.

Opinions voiced above are for general information only and not intended as specific advice or recommendations for any person. All performance cited is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested in directly.

The economic forecast outlined in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful.

Fervent Wealth Management is a financial management and services entity in Springfield, Missouri.