Tariffs and deregulation: A US equities perspective

US President Donald Trump’s trade tariffs are widely expected to have an inflationary effect on the US domestic economy. However, rather than being outright inflationary, we think tariffs are more of a bargaining tool for Trump to achieve certain fiscal objectives. This has led to an increase in policy uncertainty, which could lead to slower economic activity. 

Since his inauguration, Trump has imposed tariffs of 25% on imports from Canada and Mexico,[1] and 20% on imports from China.[2] He has also threatened tariffs on the European Union and committed to so-called reciprocal tariffs on a range of other countries.[3] The fear is that tariffs could ramp up the cost of goods for US importers who could pass these on to retailers and, in turn, to end consumers.

Nevertheless, while we believe there are certainly inflationary forces at play in the global economy, such as secular drivers like deglobalisation and decarbonisation, our views on tariffs as a contributing factor are more sanguine. We do not think tariffs will be as inflationary as the market fears.

We do not think tariffs will be as inflationary as the market fears.

External revenue

As part of this deal making, we would highlight Trump’s rhetoric on creating an “external revenue service.” [4] The intention of this is to collect tariffs, duties and revenue from foreign sources to relieve the tax burden on internal sources, i.e. domestic companies.

Trump believes there should be an external revenue service. When it comes to renegotiating tax policy in 2025, we could see tariffs as part of that package – the idea being to generate more revenue from external partners, maybe through broader tariffs, at the same time as cutting taxes internally.

It is indeterminate whether this is inflationary or not, so we are not convinced that tariffs overall will be inflationary. However, we do believe that interest rates around current levels probably make sense for the economy and the yield curve may be a little steeper. Importantly, it has led to policy uncertainty which could potentially lead to an economic downturn in the short term.

Banks

As well as imposing tariffs, Trump is seeking to roll back regulation across a wide range of industries. This has been evidenced by a flurry of executive orders since his inauguration, tackling areas including government spending, defence, immigration and climate.[5]

Banking is another sector that we believe could come under Trump’s deregulatory lens. Prior to Trump’s inauguration, the Federal Reserve announced a cut to a proposed increase to capital requirements under the Basel III regulation.[6] But we think there is a possibility that the Trump administration could water this down further.[7] 

During the 2008 global financial crisis, more regulation was required and the banks needed more capital. They have spent over a decade building capital levels and the banks in the US, especially the large banks, are now in very good shape.

If capital requirements are indeed left untouched, we believe financial stocks could help stimulate the economy through increased lending activity. They could also return more capital to shareholders in the form of dividends.

If capital requirements are indeed left untouched, we believe financial stocks could help stimulate the economy through increased lending activity.

Energy

Energy is another sector potentially in line for a cutback in regulation. Trump’s ‘drill, baby, drill’ pledge could increase the domestic supply of oil and natural gas but that could be offset by a tougher diplomatic stance on Iran and Venezuela, restricting supply. [8][9] When you net these two forces, the oil price and natural-gas price appear to be favourable at their current levels.

We are positive on natural-gas players because of the huge electricity demand needed in the US to support the manufacturing renaissance that Trump is seeking to enable through lower taxes on domestic companies. We see this trend continuing.

We would also caution investors about getting too excited about a coming surge in US energy supply. Trump telling the energy companies to ramp up production is like ‘pushing on a string’. Many of these companies have become much more disciplined over the last decade and have increasingly focused on returning capital to shareholders through dividends and buybacks as opposed to increasing production. We believe this is positive for dividend investors.

[1] FT. Donald Trump confirms he will impose 25% tariffs on Mexico and Canada on Tuesday. 3 March 2025.

[2] FT. US to raise tariffs on China and push ahead with Canada and Mexico levies. 28 February 2025.

[3] FT. Donald Trump threatens to impose 25% tariffs on EU goods. 26 February 2025

[4] Guardian. Trump says he will create ‘external revenue service’ to collect tariff income. 14 January 2025.

[5] BBC. What has Trump done since taking power. 29 January 2025.

[6] FT. Federal Reserve halves proposed capital requirement rise for largest US banks. 10 September 2024.

[7] The Banker. Further Basel delays expected as UK and EU wait on Trump. 20 January 2025.

[8] BBC. Trump vows to leave Paris climate agreement and ‘drill, baby, drill’. 21 January 2025.

[9] The National. Trump-led US may tighten oil markets with stricter sanctions on Iran and Venezuela. 6 November 2024.

Authors

John C Bailer

Deputy head of equity income, portfolio manager