As Donald Trump prepares to begin his second term as president of the United States in January 2025, some of his proposed policies are a major concern for investors – especially the risks of inflation, tariffs and plans to slash parts of the federal budget.
Trump’s aggressive tariff agenda and plans to overhaul federal spending have prompted fears of significant economic disruptions. Experts, however, suggest that the situation may be more complex, with potential outcomes ranging from localised inflation to broader economic shifts.
Trump has long championed tariffs as a tool to strengthen American manufacturing and curb what he sees as unfair trade practices. In the past, he has called himself “a tariff man”, said his favourite word is ‘tariff’ and called them “the greatest thing ever invented”.
His new proposals include an additional 10% tariff on all Chinese imports and a 25% tariff on goods from Canada and Mexico. During his campaign, he even hinted at tariffs as high as 60% on some Chinese products. This marks an escalation from his first term, when tariffs were used selectively but sparked widespread debate about their economic impact.
John Plassard, senior investment specialist at Mirabaud Group, said these tariffs are part of Trump’s broader strategy to revitalise US manufacturing, deter companies from outsourcing jobs and reduce the federal deficit.
However, critics argue that tariffs tend to cause inflation, as importers pass the additional expenses onto buyers. “Economists, including Nobel Prize winners, warn that tariffs generally pass on costs to consumers, fuelling rather than containing price rises,” Plassard noted.
“In addition, Trump's plans to influence the Federal Reserve's decisions could compromise the latter's ability to fight inflation by creating political pressure against rate hikes.”
A report by the Peterson Institute for International Economics argued Trump's economic policies, if implemented, would lead to higher consumer prices than would otherwise be the case.
Historical data, however, tells a more nuanced story, Plassard said. During Trump’s first term, the tariffs imposed in 2018 and 2019 led to modest price increases in some goods, particularly on imports from China.
Michael Metcalfe, head of macro strategy at State Street Global Markets, pointed to a 2018 study by Alberto Cavallo and colleagues, which showed while tariffs increased costs for US importers, the pass-through to consumer prices varied significantly.
Metcalfe explained: “At the border, it was clear that the bulk of the first wave of tariffs in 2018 was passed through to US importers. The cost was not borne by Chinese exporters lowering their prices.
“For an average good, a 20% tariff would be associated with exporters lowering their prices by only 1.1%, leaving 18.9% of the increase to be paid by the US importer.”
Plassard said this meant the overall inflationary impact was limited. US headline inflation in 2018 and 2019 remained “relatively low” at around 1.9% and 2.3% respectively as companies absorbed some tariff costs to maintain competitive prices and the strength of the US dollar helped to offset some import costs.
“Economists have concluded that while tariffs have had an impact on prices and consumer costs in targeted areas, the overall effect on inflation has been less than initially feared,” he continued. “Even though the 2018 tariffs were more extensive and covered almost all sources of imports, their inflationary impact remained limited.”
Metcalfe noted that the impact in the store on consumer prices varied significantly. There was more pass-through to end consumer prices for the goods where tariffs were very high (such as washing machines) than for goods where tariffs were 20% or less, such as handbags, bicycles and refrigerators, leading to a “barely discernible” effect on consumer prices.
However, he cautioned that the economic environment in 2025 is different from 2018, with higher inflation already in place and tighter labour markets.
“This more recent inflation mindset may persuade US retailers to pass on higher import prices more thoroughly than they did before,” he argued. “There may also be a sense that 2025 tariffs, when they come, may be more permanent and in some cases larger than what we saw in 2018, especially in the case of China. Obviously we will need the detail of the tariff policy to assess this more clearly.”
While tariffs dominate the discussion, the Department of Government Efficiency (DOGE), a newly announced initiative by Trump, adds another layer of complexity. DOGE – headed by billionaire businessmen Elon Musk and Vivek Ramaswamy, aims to cut $500bn in federal spending.
Nigel Green, chief executive of deVere Group, warned: “These dual measures – protectionist tariffs and sharp government spending cuts – create a perfect storm of volatility for investors. The risks are significant and far-reaching, making this a pivotal moment for portfolio reassessment.”
Green said investors should prepare for “immediate volatility” in sectors such as automotive, technology and agriculture, which are particularly dependent on the interplay of exports, international supply chains and trade agreements.
“Markets hate uncertainty and the prospect of a full-blown trade war will send investors scrambling to reassess their exposure,” he added.
But while much attention has focused on the impact of tariffs on inflation and portfolios, Green said DOGE and its budget-slashing agenda could also have a similar scale impact on investments.
Industries such as defence contractors, pharmaceutical companies and IT providers have historically relied on robust government spending and are therefore particularly vulnerable to the new department’s mandate to eliminate what it deems “unauthorised or misallocated” federal budgets.
“Defence contractors are staring down the barrel of potential budget cuts to the Department of Defense, while pharmaceutical firms relying on federal health initiatives could see a sharp drop in revenues,” Green said.
“Even sectors like clean energy, which benefit from subsidies and incentives, may find themselves in the crosshairs of DOGE’s reforms.”