The Trompe L’Oeil of Trade Policy: A Call for Strategic Clarity
- monumentsight
- Apr 3
- 8 min read
Updated: Apr 6
Mr. Trump said his administration determined the tariff rate for each country based on the monetary levies those nations charge on U.S. imports, as well as non-monetary trade barriers like regulations that make it tougher for American products to enter those markets.
The president added that the reciprocal tariffs are still only half the rates charged by those nations on U.S. products, characterizing his new levies as "kind."
Our Analysis
Trump's recent actions on tariffs, are supposed to help with narrowing the $1.2 trillion trade imbalance and eradicate trade deficits. Particularly those implemented during the Trump administration, can often be likened to a classic trompe l’oeil—an illusion that deceives the observer into perceiving a simplified reality. On the surface, tariffs are presented as straightforward solutions to trade imbalances and unfair competition, but much like the deceptive depth of a trompe l’oeil painting, the true effects are more complex and multifaceted, particularly when viewed from an economic or business valuation standpoint.
The Illusion of Economic Protection
From an economic perspective, tariffs are typically framed as protective measures—tools to shield domestic industries from foreign competition and restore balance to trade relationships. In theory, a 10% baseline tariff should elevate the price of imported goods, thereby making domestically-produced goods more competitive. However, this simplified solution overlooks the broader economic forces at play.
In reality, while certain domestic industries (such as steel and aluminum) may see short-term gains, the broader economic impact is far from clear-cut. Business valuations, for example, can be dramatically influenced by such policy changes. Supply chain disruptions, increased input costs, and higher consumer prices can erode margins for companies dependent on global supply chains, leading to downward adjustments in enterprise value (EV).
For instance, a company in the automotive sector may face higher production costs due to tariffs on steel or components sourced from overseas. These increased costs will likely be passed onto consumers, negatively affecting demand elasticity and consumer purchasing behavior. This, in turn, impacts forecasted revenues and can lead to lower valuation multiples in discounted cash flow (DCF) models or comparable company analysis considered in relative valuation methods.
The Layers Beneath the Surface: Hidden Economic Costs
Much like a trompe l’oeil, which contains hidden layers that reveal themselves only with careful inspection, tariffs introduce layers of complexity into the global economy that are not immediately visible. The short-term benefits—such as protecting certain sectors from foreign competition—are easy to spot, but the long-term costs can have serious implications for businesses and their valuation.
For example, the U.S. agricultural sector faces significant challenges when trading partners retaliate with tariffs on American goods, such as soybeans or pork. A reduction in exports can lead to revenue declines, forcing companies to adjust their earnings projections and capital expenditure (CapEx) plans. This directly impacts their risk profile and cost of capital, leading to lower valuations. Analysts may revise their weighted average cost of capital (WACC) assumptions upward, reflecting the heightened uncertainty and risk surrounding those businesses as of April 5, 2025 for a 10% tariff adjustment and as of April 9th, 2025, adaption of the reciprocal rates as discussed below.
Key Points on Tariffs & Reciprocal Trade Measures
A 10% baseline tariff is proposed, with the potential for reciprocal tariffs imposed by other countries on U.S. exports. Non-tariff barriers—such as import quotas, regulatory restrictions, and subsidies—may further impact trade flows.
Proposed Reciprocal Tariff Formula: For China & the EU's exports to the U.S., Trump's suggested tariff calculation is:
Trade surplus ÷ exports × 0.50 = Reciprocal tariff rate.
This formula suggests that if a country has a trade surplus with the U.S., a tariff equal to 50% of that surplus-to-export ratio would be applied.
Valuation Implications: A Shift in Risk and Return Profiles
Tariffs and trade barriers often shift the risk-return profile of businesses and industries. When analyzing a company impacted by tariffs, it’s crucial to adjust the forecasted cash flows and discount rates to account for factors such as:
Input cost inflation – Higher material costs affect the gross margins of manufacturers and service providers.
Competitive dynamics – Reduced competition due to tariffs can improve margins for certain domestic players but hurt others who rely on international sourcing for cost-efficiencies.
Regulatory and geopolitical risk – Tariffs introduce uncertainty in global markets, which may affect stock prices and market capitalization, influencing business valuation.
For instance, a global tech company may face higher costs for importing electronic components, while simultaneously dealing with the potential disruption of international markets due to trade conflicts. As a result, a valuation analyst would need to consider not only the direct cost increases but also the market sentiment and potential for market share loss as consumers and businesses shift away from higher-priced goods.
Misleading Simplicity: Oversight of Long-Term Trade Effects
The apparent simplicity of tariffs—imposing taxes on foreign goods to encourage domestic production—overlooks the broader economic dynamics and market distortions that come into play. Trade imbalances, once corrected through tariffs, may reappear in other forms, such as currency fluctuations or retaliatory tariffs, creating further uncertainty for business models and their financial forecasts.
From a valuation standpoint, understanding the ripple effects of tariffs is essential. Valuation professionals must take into account not just the immediate impact on revenues or costs but also the long-term adjustments in competitive positioning, customer behavior, and global market conditions. Companies reliant on global trade must be evaluated in the context of evolving geopolitical risk—a factor that can result in volatility in the stock market and significant changes in enterprise value.
The Trompe L’Oeil of Trade Policy: A Call for Strategic Clarity
Just as a trompe l’oeil is designed to mislead the viewer into thinking that a simple image is more complex than it is, the use of tariffs as a trade policy tool often obscures the underlying economic forces at play. Instead of relying on tariffs as a blanket solution to trade deficits or foreign competition, policymakers and businesses should pursue more strategic, long-term solutions that address the root causes of trade imbalances without distorting the global marketplace.
For businesses engaged in valuation, it is crucial to adopt a holistic approach when assessing the impact of tariffs. By understanding both the immediate effects on cost structures and the broader economic landscape, professionals can develop more accurate, forward-looking valuations that take into account the multi-layered nature of global trade. Only then can businesses position themselves for sustainable growth in an increasingly complex world economy.
Here's the full list of President Trump's reciprocal tariffs
The reciprocal tariffs are paid by American businesses that import goods from these countries. Economists expect those businesses to pass off the new tariffs to American consumers, who could face higher costs on everything from iPhones (made in China) to coffee beans grown in Colombia.
Chart: Aimee Picchi Source: White House
On April 2, 2025, President Donald Trump announced a comprehensive tariff strategy aimed at restructuring U.S. trade relationships. This plan introduces a 10% baseline tariff on all imports to the United States, with higher, country-specific tariffs targeting nations with significant trade surpluses or perceived unfair trade practices. There’s also been a sense of whiplash from Trump’s back-and-forth tariff threats and responding retaliation, including some recently-postponed taxes on goods from America’s largest trading partners.
Beijing responded with their own retaliatory tariffs on US products from fruit to automotive imports.
Businesses raced to adjust. Automaker Stellantis said it would temporarily lay off U.S. workers and close plants in Canada and Mexico, while General Motors said it would increase U.S. production.
Key Tariff Rates by Country:
China: 34% tariff on all imports.
European Union (EU): 20% tariff on imports.
Japan: 24% tariff.
South Korea: 25% tariff.
Taiwan: 32% tariff.
Vietnam: 46% tariff.
India: 26% tariff.
United Kingdom, Australia, Singapore, Brazil, Turkey: 10% tariff.
Canada and Mexico: Exempt from the new tariffs for goods compliant with the United States-Mexico-Canada Agreement (USMCA).
These tariffs are scheduled to take effect on April 5, 2025, with the higher, country-specific tariffs commencing on April 9, 2025. The White House
The administration asserts that these measures are designed to address trade imbalances and protect domestic industries. However, the announcement has elicited varied reactions globally, with several countries indicating potential retaliatory actions and expressing concerns about escalating trade tensions. Reuters
Businesses and consumers are advised to monitor these developments closely, as the tariffs are expected to impact international supply chains, pricing structures, and market dynamics.
Overall tariffs negatively impacted valuations for businesses reliant on imports but boosted some domestic industries. Trump-era tariffs had significant impacts on business valuation, particularly in industries reliant on international trade. Here’s how they affected valuations:
📉 Negative Impacts:
Increased Costs: Higher import tariffs raised the cost of raw materials (e.g., steel, aluminum), squeezing margins.
Supply Chain Disruptions: Businesses relying on foreign suppliers faced delays and cost fluctuations.
Market Uncertainty: Trade tensions created economic uncertainty, increasing risk premiums and discount rates.
Industry-Specific Challenges: Manufacturing, agriculture, and retail were hit hardest due to reliance on imports.
📈 Potential Benefits:
Domestic Growth: Some U.S. industries (e.g., domestic steel) benefited from reduced foreign competition.
Stronger Pricing Power: Companies with localized supply chains gained competitive advantages.
M&A Opportunities: Lower valuations in affected industries created opportunities for strategic acquisitions.
Impact of Trump-Era Tariffs on Business Valuation
The implementation of tariffs under the Trump administration significantly influenced business valuations, particularly in trade-dependent industries. Increased tariffs on imported raw materials, such as steel and aluminum, led to higher production costs, supply chain disruptions, and margin compression for affected businesses. Additionally, heightened economic uncertainty increased risk premiums, impacting discount rates and overall valuation.
Conversely, certain domestic industries benefited from reduced foreign competition, leading to improved pricing power and potential market share expansion. In valuation analyses, it is essential to account for these tariff-related effects, particularly when assessing historical financial performance, cost structures, and future revenue projections.
Impact of Trump-Era Tariffs on Telecom Valuation
The telecom industry was affected by Trump-era tariffs through higher equipment costs, supply chain disruptions, and regulatory uncertainty. These factors influenced capital expenditures (CapEx), operating margins, and long-term growth projections—key components of business valuation.
📡 Wireless Carriers (e.g., AT&T, Verizon, T-Mobile)
🔻 Higher Network Infrastructure Costs – Tariffs on Chinese telecom equipment, semiconductors, and 5G components increased CapEx for network expansion and upgrades.🔻 Supply Chain Disruptions – Restrictions on suppliers like Huawei forced carriers to shift to costlier alternatives, impacting margins.🔻 Increased Discount Rates – Policy uncertainty contributed to higher risk premiums in valuation models. ✅ Market Protection – U.S. policies limiting Chinese competition may have strengthened domestic carriers' market positions.
🌐 Fiber Carriers (e.g., Lumen, Zayo, Google Fiber)
🔻 Rising Material Costs – Tariffs on fiber optic cables and networking hardware increased build-out expenses for broadband expansion.🔻 Delayed Deployment – Higher costs and supplier restrictions slowed fiber network rollouts, impacting revenue growth assumptions. ✅ Government Support for Domestic Expansion – Federal infrastructure investments in broadband partially offset cost increases.
📞 Fixed-Line Telecom Providers (e.g., CenturyLink, Frontier, Consolidated Communications)
🔻 Higher Maintenance & Equipment Costs – Tariffs affected the cost of replacement parts and infrastructure upgrades.🔻 Lower Investment in Legacy Networks – Rising costs accelerated the decline of traditional copper networks as providers focused on fiber upgrades.✅ Potential Market Consolidation – Lower valuations in the fixed-line sector created M&A opportunities, affecting comparative valuation models.
Valuation Considerations
Cost Structure Adjustments – Increased CapEx and operating expenses should be factored into financial projections.
Risk Premiums – Policy uncertainty and supply chain volatility should be reflected in discount rates.
Growth Assumptions – Delayed network expansion may affect revenue projections, especially for fiber providers.
USF Update
A decision from the Supreme Court is expected by late June 2025.
On March 26, 2025, the U.S. Supreme Court heard oral arguments in the case of Federal Communications Commission v. Consumers’ Research, which challenges the constitutionality of the Universal Service Fund (USF). This fund, managed by the FCC, collects approximately $8 billion annually to subsidize phone and internet services in schools, libraries, and rural areas.
Key Points from the Hearing:
Constitutional Challenge: The plaintiffs argue that Congress delegated excessive authority to the FCC to manage the USF, and that the FCC further delegated too much power to a private entity, the Universal Service Administrative Company (USAC), which administers the fund.
Justices' Reactions: During the nearly three-hour session, justices from both liberal and conservative backgrounds expressed concerns about the potential negative consequences of dismantling the USF. Justice Sonia Sotomayor highlighted the fund's specific focus on phone and internet services, suggesting a clear legislative intent. Justice Neil Gorsuch, however, referred to the fund as "a tax that's unlike any other tax this court has ever approved."
Potential Implications: The outcome of this case could have significant ramifications for federal regulatory power and the future of programs aimed at ensuring universal access to telecommunications services.
Comments