Howard Lutnick, the Commerce Secretary nominee for the Trump administration, is a proponent of balanced tariffs as both an income generating tool for the US government as well as a trade equalizer.
https://www.cnbc.com/video/2024/09/09/balanced-tariffs-make-the-most-sense-for-u-s-economy-says-cantor-fitzgeralds-howard-lutnick.html?msockid=188615fdd9e769231f1d007fd88668bb
He brushes off pushback of tariffs as a permanent inflationary risk by countering that China and India are two economies that have tightly controlled their inflationary pressures while maintaining the highest levels of import tariffs in the world. In the past, Mr. Lutnick has noted that the European Union has been able to maintain control over inflationary pressures despite levying consumer and producer import tariffs levied upon its citizenries, expressed as multiples of current US tariff rates.
https://www.thestar.com.my/business/business-news/2025/01/31/trumps-tariffs-to-restore-us-economy-and-respect
It should be assumed that a new, more muscular tariff policy on imports to the USA is, for all practical purposes, a fait accompli.
While most investors, on the surface, assume that tariffs represent headwinds at the corporate level, they might be overlooking, in plain sight, business models that benefit from higher prices for imports.
I refer to cross border payment processors. International payment processors, such as Visa and Mastercard, charge on a schedule. The schedule components include gross transaction volumes, product or service classification and order size. Additionally, cross border currency interchange fees apply. The greater the size of any order, the greater the amount of forex involved. Therefore, a 10%, by way of example, increase in the cost of all orders made abroad and forwarded to the United States, all else being equal, provides a disproportionate gross profit increase for a payment processor representing both sides of the transaction.
Opponents of tariffs will quickly note that the US government, not the producer or merchant, will levy the tariff fees. Nonetheless, tariffs become integrated into the final selling price of imported goods, leading to higher per ticket prices, benefiting a processor schedule that takes a minute fraction of that higher price as a fee.
Anti-tariff economists presume most types of good purchases are price elastic, that higher prices result in lower volumes. Should this be the case, a payment processor charging on a schedule will experience reduced revenue on the volume side, but may experience greater revenues accruing from the ticket size schedule. Under the current schedules of Visa and Mastercard, a shift from volume towards price may benefit the payment processors, even with no underlying change in total gross revenues.
Highly liquid American consumers may demonstrate a willingness to tolerate a 10%-25% increase on many types of imported goods. Numerous categories of products may not be as price elastic as the media currently assumes. For some percentage of the US market, even when presumably experiencing a steep increase in the cost of raw materials and semi-finished products from Canada and Mexico; final manufactured product will not rise by a 25% price as the raw materials under tariff only account for a percentage of that final value. Under that scenario, payment volume revenues will continue to grow and all of the ticket size schedule price increases will represent gross profit. A fairly healthy tailwind for interchange networks may be on the horizon.
Tariffs should not be evaluated in isolation, but rather, in totality, encompassing a number of variables.
As with China, with Europe, with Asia, with Canada, in fact, with most of the world, import tariffs do not necessarily result in reduced economic growth. Economic growth, or lack of the same, is due to a combination of factors. Currency changes WILL impact tariff effects upon the purchaser. In the event of Canada-US trade, by way of example: a 25% import tariff upon the Canadian suite of materials entering the United states would impact US finished goods only to the extent that of that input cost as a percentage of the finished output. If the Canadian dollar were to fall from the $.69 USD level to a $.52 USD value, US customers will have no change in their final prices, all else being equal.
Canada is in a perilous predicament. The nation primarily sells raw materials and commodity goods. Canada, as an economy, features an exceptionally high average cost of production and has no real alternative customers to those in the United States. Acting as a heavily protectionist economy in its own right, while espousing open access to foreign markets for raw materials, Canadian trade policies have sapped what little international goodwill from global trading partners may have existed, in years gone by. Short of meaningful wholesale internal changes to trading policy, Canada finds itself with few potential markets for goods and little sympathy among G20 nations, behind the scenes. The leftist country, further, has squandered any economic advantages through a high entitlement social safety net, and a disproportionate percentage of GDP resultant from direct government employment. In consequence, Canada manufacturing and exports are woefully uncompetitive on a global stage; very few businesses earn a gross profit margin even remotely close to a 25% tariff threshold that would permit “business as usual”, albeit with a lower profit.
What is highly likely, in the application of proposed tariffs, is that Canadian economy immediately becomes far poorer, with a Canadian currency decline likely to move lockstep with the tariff hikes.
It can be assumed that some percentage of increased tariffs levied by the United States against Canada, will be ameliorated in the US through a Canadian dollar currency decline. Potentially, all of that tariff hike will be offset, in a worst case scenario, by a fall in the “Canuck buck”. Hard liners within the Republican administration of the United States have, no doubt, modeled some currency changes into their forecasts, as should we all.
It is true that tariffs may be inflationary in isolation, but governments throughout the world implement domestic policies designed to offset potential inflationary pressures.
Why would the United States not do the same? President Trump is making a calculated bet that he can break, completely, at least one of the two economies involved, without incurring meaningful long term damage to the US economy. Currency shifts could make this policy change benign for the US producer/consumer in pretty short order. In the event of enough currency decline in the Canadian dollar and the Mexican peso against the USD, the US will clearly be the long term victor from a tariff hike.
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