Bi-Weekly Geopolitical Report – Tariff Trilemma: The Three Rs Driving US Trade Policy (9/2/2025)

Are tariffs working the way the Trump planned? Confluence Associate Market Strategist and Certified Business Economist Thomas Wash joins Phil Adler to focus on the purpose of the Trump tariffs and discuss what investors should pay attention to in the weeks and months ahead.

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Podcasts from Confluence Investment Management LLC, featuring the periodic Confluence of Ideas series, as well as two bi-weekly series: the Asset Allocation Bi-Weekly and the Bi-Weekly Geopolitical Report (new episodes posted on alternating Mondays).

Phil Adler: 00:07

Welcome to the Confluence Investment Management Bi-Weekly Geopolitical Report. I'm Phil Adler. Tariffs working the way the Trump planned? Confluence Associate Market Strategist and Certified Business Economist Thomas Wash joins us today to focus on the purpose of the Trump tariffs and discuss what investors should pay attention to in the weeks and months ahead. Thomas, the title of your report is the tariff trilemma, the r's driving US trade policy.

Phil Adler: 00:37

Your title suggests that tariffs can be divided into three types, each with different purposes. What are they?

Thomas Wash: 00:44

There are three types of tariffs, and they are reciprocal tariffs, revenue tariffs, and restrictive tariffs. Reciprocal tariffs are tit for tat tariffs aimed at lowering trade barriers. The central goal is mutual reduction. If one country lowers its tariffs, its trading partner will reciprocate. This approach ultimately seeks to bring down overall tariff rates.

Thomas Wash: 01:04

Now, revenue tariffs are designed with the specific goal of generating income for the government. We like to think of them as kind of Goldilocks like tariffs because the rates are not so high that they deter imports entirely nor are they low enough to make trade free. Now consequently, they are typically set at a moderate level to maximize revenue collection. Lastly, restrictive tariffs are a form of protectionist trade policy. They are explicitly designed to limit the flow of imports into a country in order to protect domestic industries.

Thomas Wash: 01:39

As a result, these tariffs have the highest rates and are often the most controversial.

Phil Adler: 01:45

And, Thomas, is it reasonable to say that these three goals, these three types of tariffs are difficult to achieve at the same time, creating this trilemma and the need to make a choice as to priorities.

Thomas Wash: 02:00

Well yes, I mean basically the idea of a trilemma is that you can achieve at least two of these goals but not all three of them. So when we look at each tariff they all have their own drawbacks. Reciprocal tariffs despite their goal of lowering trade barriers can harm domestic industries. Revenue tariffs while effective at generating government income are designed to strategically manage or limit the flow of imports making them an inefficient tool for broader trade policy goals. Finally, restrictive tariffs, which are intended to protect domestic industries, often provoke a cycle of retaliation from other nations.

Thomas Wash: 02:34

This dynamic does not only fail to reduce trade tensions, but can also reduce overall trade activity.

Phil Adler: 02:42

And what would you say are the Trump administration's tariff priorities?

Thomas Wash: 02:47

Well, the administration's trade strategy appears to be a hybrid approach, drawing on all three tariff categories, but with a clear preference for revenue and restrictive tariffs. The underlying philosophy is that The US has been a victim of unfair trade practices, which justifies the imposition of tariffs in the first place. Instead of fully repealing the tariff rates that he announced earlier this year, the administration has only come down on those announced rates using them as a tool for negotiation. Looking forward, their two primary objective, First is to leverage tariffs as a significant source of government revenue to help address the national debt, and second, to employ restrictive tariffs to shield strategically vital industries such as semiconductors, automobiles, pharmaceuticals from foreign competition.

Phil Adler: 03:32

Thomas, let's focus a bit on these priorities. Regarding revenue tariffs, how much is The US profiting by generating revenue from these tariffs?

Thomas Wash: 03:42

You know, the recent round of tariffs has generated an unprecedented amount of revenue for US government with their share of total receipts increasing month by month. The sheer scale of this revenue stream will likely make it politically and economically challenging to reverse the policy in the future as it has become a valuable source of government income. It is important to note, however, that this revenue is still not sufficient to completely replace other forms of taxation.

Phil Adler: 04:07

And just for perspective, how does this revenue compare to the size of The US debt?

Thomas Wash: 04:14

Well, I I think a better way of looking at it is to look at tariffs as a share of total government receipts. This approach allows us to see how much money is being generated to pay down a national debt. Now by this measure, tariff revenue accounts for about 2%, which is above where it was before these period policies were put in place. However, this percentage could change significantly if trade policy is adjusted with the primary goal of maximizing revenue.

Phil Adler: 04:40

Thomas, a legitimate question is who is actually funding this pot of tariff money? What's the answer so far?

Thomas Wash: 04:48

It turns out that the answer that you want may not be as simple as you think. You know, for now, a big chunk of the cost is being shouldered by the businesses that import goods and the manufacturers overseas that sell them. But here's the catch. That can change. As companies adjust their global game plans to cope, it's very possible that those added costs will slowly trickle down and end up adding to price pressures domestically.

Phil Adler: 05:12

Turning to restrictive tariffs, the other main administration goal. They're they're designed to build up US industry. Any progress here?

Thomas Wash: 05:21

There appears to be a notable increase in business sentiment as firms now have a sophisticated understanding of how to navigate new trade and tax policies. This has led to an uptick in key spending announcements. However, it is still premature to determine if these tariffs have achieved their intended strategic goals. These policies have only been in place for a short period, and firms are still in the process of adapting their supply chains and investment strategies. The long term effects on domestic manufacturing and trade deficits will become clearer as these adjustments play out.

Phil Adler: 05:51

Well, how about forcing other nations to renegotiate tariff terms? It looks like many nations are agreeing to do this. So is this a success so far?

Thomas Wash: 06:02

The US appears to have secured significant concessions from its trading partners. These gains not only include lowering trade barriers, but also the amendment of laws previously deemed unfavorable to American interest. A noticeable achievement has been The US's success in persuading numerous countries to invest, either through direct investments or loans, into The US. This has been beneficial as The US works to expand its domestic capacity. One remaining area of focus is the regulation of Big Tech.

Thomas Wash: 06:29

While concessions were secured from Canada on this front, The US remains in ongoing talks with Europe to reach a similar agreement.

Phil Adler: 06:36

Do restrictive tariffs come with any dangers that we should be aware of?

Thomas Wash: 06:42

To be honest, restrictive tariffs pose the greatest risk to markets compared to the other two options. The most significant drawbacks is the potential for near term economic disruptions, particularly when they are imposed abruptly, leaving firms with insufficient time to reconfigure their supply chains. The severity of these disruptions can vary by industries, but they often result in increased price volatility and can lead to product shortages.

Phil Adler: 07:06

Thomas, in your report, you spend some time explaining the history of US tariffs and how the emergence of China forced a change in policy and resulted in a major shift when the Trump administration came to office this year. And I found this, as I read it, to be a valuable summary. But understanding how we got here doesn't necessarily inspire confidence that we can overcome current challenges. So are you confident that our current tariff policy is well thought out and provides sufficient guidance for US businesses to make intelligent spending decisions?

Thomas Wash: 07:42

I think US trade policy is evolving with the changing economic landscape, making its overall impact on the economy difficult to determine at this time. However, the administration has demonstrated a strong knack for adapting to new circumstances and providing relief when necessary. I believe that their ability to listen to business leaders and collaborate on policy execution is one of their strengths and should make business planning much easier for firms.

Phil Adler: 08:07

Well, once perhaps surprising result of the tariffs is the way US equities have responded. What is the market telling us?

Thomas Wash: 08:15

Well, the market's reaction so far suggests that initial fears about disruptive tariffs were likely overblown. The US and its trading partners have shown a remarkable ability to collaboratively work together to resolve their differences. This has helped restore investor confidence and encouraged the pursuit of new investment opportunities.

Phil Adler: 08:32

Should we expect the dollar to weaken further through all this?

Thomas Wash: 08:38

I think the dollar's future performance will likely be driven less by trade policy and more by economic growth projections and monetary policy in the coming months. While we remain optimistic about the economy, we acknowledge persistent risk that can weigh on both firms and consumers. For this reason we advocate for a neutral rather than an aggressive stance when it comes to risk. Additionally, monetary policy will play a significant role as concerns that the central bank may not be prioritizing its fight against inflation could lead to a move away from the dollars from foreign investors.

Phil Adler: 09:08

Well, final question. Is there a one key indicator tied to tariffs that investors should be looking at to guide strategy in the months ahead?

Thomas Wash: 09:18

Well, the primary metric we are monitoring are business earnings. We believe that sustained corporate profitability is a key indicator of economic health and should serve to bolster market confidence. While there are other factors at play, a consistent stream of positive earning reports would likely reassure investors and support market stability.

Phil Adler: 09:37

Thank you, Thomas. The title of this week's report is the Tariff Trilemma, the R's Driving US Trade Policy. And you can find a link to the written report on the Confluence website, conflunceinvestment.com. Our discussion today is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice.

Phil Adler: 09:58

And this does not constitute a solicitation or an offer to buy or sell any security. Our audio engineer is Dane Stoll. I'm Phil Adler.