In the short term, everyone loses in a trade war

Roughly six weeks from President Donald Trump’s inauguration was when the presidential honeymoon period seemed to end.

Trump has stayed true to his campaign promise to levy tariffs on foreign goods imported from our country’s largest trading partners: Mexico, Canada and China. And while he has enough political support for these policies, the financial feedback loop has been anything but positive.

With tariff uncertainty in the spotlight, the U.S. stock market suffered its worst day of the year March 10. The S&P 500 lost 2.7%, and the NASDAQ fell 4%. The strong selloff in stocks pushed the S&P to its first 10% correction since 2022. The NASDAQ, as of Tuesday evening, had already fallen 14% from its peak.

No single issue ever drives market movements, but Trump’s economic policy has taken center stage. The argument for tariffs is they can balance trade deficits, make American products more attractive (relatively speaking) and bolster U.S. industries.

The problem is in the short term, everyone loses in a trade war. Tariffs against foreign countries are inevitably met with retaliatory tariffs on American goods. That means more import taxes for consumers and companies on both sides. It’s a political staring contest in which prices keep going up until somebody blinks.

Trump’s political identity is rooted in “America First,” so it’s ironic U.S. stocks have sold off significantly and international stocks have soared. Year-to-date through March 13, the S&P 500 declined 6%. During the same time, the MSCI EAFE index (think: Non-U.S. Developed equities) has gained nearly 9%.

Europe makes up more than 60% of the international benchmark, and it’s interesting to see European stocks perform so well even though Trump scheduled 25% tariffs on aluminum and steel imports from European Union countries to take effect Wednesday.

It’s not just economic policies that are influencing global stock prices. Foreign policy is having an effect as well. Trump and his administration have indicated they might reconsider America’s commitments to NATO (the North Atlantic Treaty Organization).

The U.S. spends far more on defense than any other NATO country, and with austerity measures a definite priority in Washington, it’s understandable why the U.S. government would suggest other NATO countries pay more to protect their own borders and economic stability.

Foreign leaders have taken the hint. Stimulus measures have been announced in several countries designed to better position their military and their economies for a world less dependent upon the U.S. Earlier this month, Germany’s controlling political parties agreed to loosen regulatory measures and promote $500 billion of infrastructure spending. The German stock market then climbed to new highs.

China plays a different role on the geopolitical stage, but its own stimulus plans — which include $41 billion this year to boost Chinese consumer spending — have also garnered Europe’s interest for the benefits they might have on the global economy.

Let’s not forget international stocks have lagged U.S. equities for most of the past decade, so some of the year-to-date performance disparity is explainable as a reversion toward the mean. Still, U.S. tariffs and foreign policy maneuvers have triggered a change in market momentum.

There’s no guarantee these current trends will last. Trump retains the power to reduce tariffs or eliminate them altogether if he determines the potential gains do not outweigh the costs. Twice delaying the implementation of tariffs against Canada and Mexico are an example of his willingness to recalibrate, especially if financial markets remain volatile.

It’s possible, therefore, that the tariff trade unwinds. In the meantime, international stocks are enjoying a long-awaited turn as an outperformer.

Ben Marks is chief investment officer at Marks Group Wealth Management in Minnetonka. He can be reached at ben.marks@marksgroup.com. Brett Angel is a senior wealth adviser at the firm.