Trump, Tariffs and AI Innocence
For an introduction to tariffs, see the 1986 film Ferris Bueller’s Day Off. The classroom scene, absent our protagonist, specifically discusses the Smoot-Hawley Tariff Act (“anyone?”). The act raised US import duties on over 20,000 goods to protect domestic industries, triggered global trade retaliation and worsened the Great Depression. Given the introduction of tariffs by President Trump, some are looking at this period as offering a precedent of sorts.
Similarities between Smoot-Hawley and the Trump Tariffs exist. Then, as now, the US went after some of its closest allies. Canada was the country’s most important trading partner in the 1930s, accounting for ~20% of total US trade in goods and services, yet it still faced tariffs in response to American protectionism. Canada’s reaction was furious retaliation. It imposed tariffs on 16 products, accounting for almost 30% of US exports to Canada, and forged alternative ties with Britain at the British Empire Economic Conference of 1932.
Today, Canada is also retaliating (and not just on the ice hockey rink). A furious Prime Minister Trudeau said: “now it’s not in my habit to agree with the Wall Street Journal, but Donald, they point out that even though you’re a very smart guy, this is a very dumb thing to do.” Ontario Premier Doug Ford has threatened to shut down the electricity supply to 1.5 million customers in New York.
The introduction – and threat –of tariffs on such a close neighbour is seen as an act of economic war. Trudeau went on to explain that “what [Trump] wants is to see a total collapse of the Canadian economy…because that will make it easier to annex us.” It is not just liberal Canadians who have this perspective. Warren Buffett stated that tariffs are “an act of war, to some degree…Over time, they are a tax on goods. I mean, the tooth fairy doesn’t pay ’em!”
A stark contrast to the 1930s is the absence of business pushback, at least so far. An article published in Time on 16 June 1930 recorded the protests from business leaders, as “Henry Ford stayed overnight with President Hoover to repeat his belief that the bill was ‘an economic stupidity’,” while Thomas Lamont, CEO of JP Morgan, said he “almost went down on his knees to beg Herbert Hoover to veto the asinine Hawley-Smoot tariff.”
US big business is now an echo chamber. Lamont’s successor, Jamie Dimon, has said opponents of tariffs need to “get over it”, a stark contrast to his previous views. His expletive-ridden rant about working from home seemed aimed at an audience of one in the White House. The views of the CEO of the largest car manufacturer in the States are well known. The mantra is clear: you are either with us or against us.
Investors aren’t so much at a crossroads; rather, we are travelling through a spaghetti junction where the lights change randomly and the lanes merge and split unpredictably. Norms – political, constitutional, diplomatic, legal, journalistic, ethical, investment – are out, clouded by what I call Trumpian Random Logic. In this state, we have reached a new epoch, one in which an administration that does not believe in climate change threatens to take over Greenland “one way or another” – a land that has become strategically more important to the US precisely because of melting ice sheets.
What does such unpredictability mean for investors? We continue to believe that a dominant theme of 2025 will be diversification, specifically away from US LargeCap. The fundamentals – the sheer gargantuan size of the Magnificent 7, which dominate passive indices – and the politics, mean that investors must look to other areas of the financial markets for better value and lower risk.
Europe is already benefiting. As we wrote last week, Germany has moved to lift its debt brake, allowing greater investment in areas of the economy such as infrastructure and defence. A rapprochement between Trump and President Zelensky – who, just like Churchill, wore black mufti to visit a US president during a war – could lead to a peace deal in Ukraine, further supporting European equities.
The UK quoted market, so unloved, so beaten up, may at some point see a flicker of international interest; private equity has already started shopping here.
Against this backdrop, investors will have to answer familiar questions cast in a new light: who will be the long-term winners? How to judge these when the operating environment can change from day to day? Which countries/industries/companies can respond effectively to tariffs? Which supply chains are threatened? Who can move nimbly to take advantage of new opportunities? To what extent should (or will) ethical, ESG and sustainability preferences change?
Under Smoot-Hawley, some domestic industries initially benefited. US textile, glass and cement producers faced less competition from imports, while sugar and wool manufacturers gained protection from foreign rivals. However, these gains were largely short-lived as the economy deteriorated.
The biggest casualties were agriculture and export-reliant industries. Farmers suffered as retaliatory tariffs crushed demand for US wheat, pork and cotton, while industrial giants like automakers, machinery producers and steel companies saw international sales collapse. Consumer prices also rose, hurting spending and retail sales.
The winners and losers of Trump’s tariffs are not easy to judge. Some domestic manufacturers may benefit, but industries reliant on global supply chains – such as autos, consumer electronics and agriculture – face higher costs and potential retaliation. Note that both now and in the 1930s, farmers were promised that tariffs would support their industry.
History suggests that the overall economic impact of tariffs will be negative. Protectionism has a poor track record. The early signs point in this direction: US GDP growth has already been revised downward, signalling a weaker outlook.
This brings us to what Trump ultimately wants. At the core of Trump Random Logic is the president’s egotism. He cares about the stock market. He will want it to go up. A long bear market or an economic recession will not suit his Golden Age agenda. It is difficult to see how a trade war, or a threat of one, avoids either outcome.
As investors look for diversification opportunities, we recommend three things: 1) stick closely to company management, as they should know best how their businesses are faring; 2) remember that small companies are nimbler than their larger peers, a benefit if supply chains have to shift; 3) buy assets that are out of favour, particularly if they are supported by long-term structural growth themes and offer reasonable value. All three are key tenets of our investment philosophy; all three have stood the test of time.
Sub post: The Innocence of AI
Like many people, I am experimenting with AI. I asked it to review elements of this post and give me feedback. Here is what ChatGPT had to say about the Trudeau quotes from his press conference:
Trudeau Quote Verification: The Trudeau quotes sound a bit exaggerated, particularly the idea that Trump wants to annex Canada. If this was satire, it may need clearer framing.
The views expressed in this article are those of the author at the date of publication and not necessarily those of Montanaro Asset Management Ltd. The information contained in this document is intended for the use of professional and institutional investors only. It is for background purposes only, is not to be relied upon by any recipient, and is subject to material updating, revision and amendment and no representation or warranty, express or implied, is made, and no liability whatsoever is accepted in relation thereto. This memorandum does not constitute investment advice, offer, invitation, solicitation, or recommendation to issue, acquire, sell or arrange any transaction in any securities. References to the outlook for markets are intended simply to help investors with their thinking about markets and the multiple possible outcomes. Investors should always consult their advisers before investing. The information and opinions contained in this article are subject to change without notice.