Trump's Big Stick
Less than a week into Donald Trump’s second term as president, Colombia narrowly averted a trade war with the U.S. The disagreement arose after Colombia initially rejected two repatriation flights of migrants.
As of Wednesday, Trump had threatened tariffs on products from Canada and Mexico (25%), along with a 10% tariff on goods from China. And Americans could pay more for imports from Russia, tied to the Ukraine war, and Denmark, for refusing to cede Greenland to the U.S.
“Colombia’s quick capitulation this weekend may embolden Trump,” wrote The New York Times journalist Ana Swanson, “raising questions for the rest of the world about how far he will take the strategy.”
Tariffs tend to result in higher prices for American consumers and businesses, which could stoke inflation and lead the Federal Reserve to raise the federal funds rate or pause any cuts to it. This week, the Federal Open Market Committee held rates steady, between 4.25% and 4.5%.
“The big macro challenge is tariffs,” said John Behringer, a partner at RSM US, speaking on stage this week at Bank Director’s Acquire or Be Acquired Conference in Phoenix, Arizona. “You're going to have businesses that have exposure to countries” subject to tariffs, and the resulting inflationary pressures could mean “that rates don't move lower as fast as people expect.”
Tariffs infamously peaked before World War II, with the passage of the Smoot–Hawley Tariff Act in 1930. Average tariffs increased to almost 60% in the global trade war that followed, according to the Cato Institute, devastating American agriculture. As of 2023, the average rate on dutiable imports was 7%, according to the nonprofit Tax Foundation.
Today’s customers haven’t experienced the effects of large-scale tariffs. Lenders and credit analysts could be surprised by the effect on the loan portfolio, said Behringer. He advised AOBA attendees to identify three to five macroeconomic indicators for their bank to monitor for signs of trouble. “They're going to look different this next cycle — certainly the next four years,” he said.
Tariffs have traditionally been leveraged to protect America’s economic interests. But Trump appears to see tariffs as a big economic stick to wage his foreign policy battles. Banks and their customers could eventually feel those effects.
• Emily McCormick, vice president of editorial & research for Bank Director
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