Ruchir Sharma: Mapping the high tariff world

U.S. President Donald Trump waves as he returns to the White House on April 20, 2025, in Washington. Photo by AP Photo/Alex Brandon

Article content

The trade war dust has yet to settle, and may never under United States President Donald Trump. But there is no going back to the low tariff world, led by America for much of the post-second world war era. The effective U.S. tariff rate is likely to remain well above 10 per cent, far higher than the 2.5 per cent rate that prevailed until last year. So it is time to start mapping the new, high tariff world.

Article content

Article content

Article content

America’s trade offensive has already created enough doubt among domestic businesses and global investors to radically redirect long-established supply chains and capital flows.

Article content

Article content

The big losers are likely to be the biggest beneficiaries of globalization — American multinationals. As barriers to trade and capital fell in recent decades, U.S. corporations increased profits much faster abroad than at home. Profit margins for S&P 500 companies had held steady since the 1960s. Then margins nearly doubled to around 13 per cent after 2000, coinciding with China’s entry into the WTO.

Article content

Many U.S. giants generated “supernormal” profits, far higher than their developed world rivals, by cashing in on the appeal of American brands and outsourcing production to nations with the cheapest costs. Today, U.S. multinationals generate more than 40 per cent of their revenue abroad. The biggest gainers were manufacturers, which on average pay their workers overseas 60 per cent less than staff at home.

Article content

Now, American businesses will think twice before setting up new factories abroad and decisions will not be driven by the straightforward logic of maximising profitability. The large multinationals in particular will see profit margins under constant pressure.

Article content

Article content

Article content

Amid anger over tariffs, “Made in America” is attracting more controversy than customers. Two in three Germans say they are avoiding U.S. products. Social media campaigners are organizing boycotts in Sweden and France. No nation is more irate than Canada, where consumers are switching from U.S. to Japanese whisky, cancelling U.S. streaming services and calling off trips to their southern neighbour.

Article content

Article content

It is hard to imagine a scenario in which the U.S. emerges as a net winner of these tariff wars even if it achieves some of its objectives, from creating more factory jobs to punishing allegedly unfair trade partners. The drag from higher prices, lower efficiency and damage to its policymaking credibility will outweigh any benefits.

Article content

Investors, who had become mesmerized by the extraordinary profitability and growth of the largest U.S. companies, are fast realizing the folly of concentrating so much capital in one country. This decade so far, the U.S. has attracted 80 per cent of the money flowing into stock markets worldwide, but those flows are starting to shift. Institutional investors around the world are aggressively paring back their US exposure.