Tariffs, Illusions & the Cost of Looking Strong

We are imposing higher tariffs to force foreign companies to adjust, but in reality, it risks driving up prices to a point where American consumers are unwilling to pay. For businesses, this could mean lower sales and squeezed profit margins, which directly impact company valuations. If the price elasticity of demand for those goods is high — meaning consumers are sensitive to price changes — the reduced demand could lead to lower revenue projections, ultimately decreasing the company’s value. Some foreign companies might even decide that the U.S. market isn’t worth the cost of doing business, choosing to scale back or exit, which further limits competition and drives prices even higher. It’s a short-term solution with long-term costs that end up hurting both consumers and the businesses that rely on them.

🎨 Trompe l’oeil Economics: A Surface-Level Fix?

The term trompe l’œil, French for “deceive the eye,” refers to an artistic technique that creates the illusion of three-dimensional realism on a flat surface. Tariffs, critics argue, function the same way in trade policy. They give the impression of strengthening the economy and punishing unfair foreign trade practices — while the underlying mechanics reveal a far different reality.

This illusion becomes dangerous when it begins to erode consumer confidence. As prices rise due to tariffs, Americans experience a reverse wealth effect — they feel poorer, reduce discretionary spending, and delay major purchases. A $10,800 imported ring from Belgium, for example, now costs $11,909 under the 10% tariff implemented on April 1. Starting April 9, that same ring will incur a combined 30% tariff, raising the cost to $14,074. That’s a significant premium with no added value — just tax.

And because U.S. alternatives don’t always exist — especially for goods like Brazilian alexandrites, Burmese sapphires, or European luxury items — the intended behavioral shift (buy American instead) doesn’t materialize.

The trade deficit measures the net difference between what the U.S. imports and exports. The Trump administration argues that tariffs will force foreign producers to lower prices or open up to U.S. exports — but in practice, American consumers continue buying many imported goods anyway, now at a higher cost. This could actually increase the dollar value of imports, or simply shift consumption to other foreign markets, not to domestic producers. Put simply: charging Americans more doesn’t solve the trade imbalance. It just adds a new layer of taxation that looks productive — but fails to address the structural issues in global trade or supply chains.

Imagine adding one-time gains to an income statement and calling it sustainable profit. The numbers might seem impressive at first glance, but they don’t reflect the true, recurring financial health of the business.

From a business perspective, especially for small retailers and luxury importers, the ripple effects are serious. Many face shrinking margins, delayed orders, and fewer high-ticket sales. Others may shift operations overseas to avoid tariffs altogether — which undermines the very “America First” intent of the policy.

For consumers, the hit is direct. Tariffs are regressive, disproportionately impacting those with less disposable income. At scale, this policy could depress overall demand, slow job growth, and feed inflation.

Tariffs raise prices on imported goods, which reduces consumer purchasing power. If demand for those goods drops, businesses suffer lower revenues, leading to layoffs and reduced investment. With weaker demand and rising unemployment, the risk of a recession grows. Essentially, tariffs can backfire by hurting consumers, slowing economic activity, and creating a cycle that leads to slower growth or even contraction, without actually addressing the trade deficit.

From an accounting standpoint, businesses will see increased cost of goods sold (COGS), which reduces profit margins. To maintain profitability, many companies may cut back on expansion, delay capital expenditures, or implement cost-cutting measures, including layoffs. These decisions impact overall business valuations, which are likely to decrease due to lower earnings projections and reduced future cash flows. The recession triggered by Trump’s reciprocal taxes (tariffs) would likely be a demand-driven contraction. As tariffs increase the cost of imported goods, American consumers face higher prices on everyday items, leading to reduced disposable income. This reduction in spending translates into lower revenues for businesses, particularly those relying on imported goods or materials.

The wealth effect comes into play when consumers, feeling the pinch of higher prices and stagnant wages, scale back on purchases, further reducing revenues for businesses. As sales drop, companies may experience a decline in working capital and find it more difficult to service debts, impacting liquidity and financial ratios. In this type of recession, the primary factors are weaker consumer demand and reduced business investment, leading to a slowdown in economic activity and potentially higher unemployment. Accounting metrics such as profitability, liquidity, and solvency will be under pressure, with companies possibly facing declining stock valuations and difficulties in managing cash flow.