MW Free trade is over in the U.S. - and Trump's tariffs might even be working. Investors, take note.
By Kenneth Rapoza
Pay close attention to U.S. companies that have regionalized or localized supply chains
Managed trade, regionalized supply chains and tariff-backed fiscal policy are becoming the foundation of 'America Inc. 2.0.'
The free-trade era is over. U.S. President Donald Trump's tariff letters show that tariffs - to protect domestic industries and to raise revenue for a deeply indebted government - are the way forward.
The U.S. is moving toward more managed trade via quotas and other measures. Tariffs will be seen by the Treasury Department (and Congress) as a vital source of revenue for a government that refuses to cut spending.
Investors now should pay close attention to companies that have regionalized or localized supply chains, with minimal exposure to high-tariff suppliers and reliance mostly on the U.S. market for revenue.
Trump's tariff letters to more than 20 countries this week marks the end of the 90-day pause of the International Emergency Economic Powers Act tariffs, also known as the reciprocal tariffs, that the U.S. imposed on April 2.
Consider the shift in U.S.-South Korea trade. South Korea's letter said its exporters will now be subject to 25% tariffs on all goods - not counting the separate Section 232 tariffs on cars, car parts, steel and aluminum. If South Korea retaliates by imposing tariffs on American goods, Trump has threatened to increase tariffs in kind.
The U.S.-Korea Free Trade Agreement (KORUS) was already subject to 10% tariffs. But the 90-day pause suggested a chance for a deal, or even the removal of the 10% in a best-case scenario. That is no longer the case, and Korean tariffs are now as high as the Section 301 tariffs imposed on many China goods in 2018 and extended in 2024.
Some South Korean multinationals were not surprised. A prime example is Euisun Chung, executive chairman and chief executive of South Korea's Hyundai Motor Group (KR:005380) $(HYMTF)$. Chung saw the future last March. He envisioned a world in which KORUS was no more - and chose to invest around $21 billion in the U.S. to build more cars, make steel products for automotive, and build the robots Hyundai bought from its acquisition of Boston Dynamics in 2020.
All of this previously would have been made in South Korea, or in contractor factories spread throughout Southeast Asia and shipped to the U.S. at near duty-free rates. That's gone. Hyundai was prescient. KORUS died on July 8.
Other Asian nations received similar tariff hikes in their letters, with Vietnam being the one standout from a macro investor perspective. The VanEck Vietnam exchange-traded fund VNM has enjoyed a euphoric rally, as investors see the country emerging as Asia's winner with 20% tariff rates - the lowest in the region.
Some might say that Vietnam getting the best deal of all is the biggest takeaway from the tariff letters. Vietnam offered lower tariffs to the U.S., but so what? It's a poor country compared to South Korea. The U.S. trade deficit with Vietnam hit a record $14.7 billion in May, surpassing the $13.9 billion deficit with China, according to U.S. Census Bureau data.
The Vietnamese government was the first to publicly reach out for a deal to lower its initial reciprocal tariff rate of 46%. American multinationals such as Intel $(INTC)$ and Nike $(NKE)$ are all invested there. This keeps Vietnam the cheapest place to export from in the region.
RIP free trade: Inflation impacts and revenue needs
The USMCA comes up for its 30-year renewal next year. Investors should assume the worst.
Trump's willingness to kill KORUS bodes poorly for U.S. trade with Mexico and Canada. Although every other free-trade-agreement nation is losing their duty-free access to the U.S., the United States-Mexico-Canada Agreement (USMCA) is still hobbling along - despite Trump's announcement late Thursday threatening a 35% tariff on Canadian imports. The USMCA comes up for its 30-year renewal next year. Investors should assume the worst.
As for tariffs' potential impact on U.S. inflation, with these latest tariffs starting next month, we will need to wait until October to see if tariff-induced inflation materializes.
For now, inflation expectations fell in the New York Fed's survey for June. Shorter- and longer-term inflation forecasts are in pre-"liberation day" territory, the Wall Street Journal noted this week.
The Council of Economic Advisors $(CEA)$ recently said imported-goods prices are actually falling, if you can believe that. If this is truly the case - and one look at the websites of big retailers like Target (TGT), full of sales, suggests it might be - then Federal Reserve Chair Jerome Powell's fears of tariff-driven inflation are "dissolving before our eyes," says Vladimir Signorelli, head of investment-research firm Bretton Woods Research.
If the U.S. can't protect the most lucrative market in the world - its own - and its debt remains unfunded, a reckoning may come sooner than expected.
Meanwhile, the U.S. faces a mounting public-debt crisis, with liabilities exceeding $34 trillion and the federal government failing left and right to cut spending.
"Given this dilemma, the only viable path forward may involve extracting value from the rest of the world in ways that do not trigger domestic inflation," says Albert Marko, a former trader and now a political consultant for financial firms and governments. "This can take the form of tariffs and monetary mechanisms that preserve the illusion of stability while transferring real wealth to the U.S."
Once the U.S. government gets used to tariff revenue, it's going to learn to love it. This means free-trade deals - often loved by congressional Republicans - are no longer feasible. USMCA will be next.
There are risks here. The Court of International Trade in New York said in May that Trump's reciprocal tariffs are illegal. The U.S. Court of Appeals for the Federal Circuit is reviewing the case. A judgment could arrive by late August.
The new tariffs are effective Aug. 1. If the court sides against Trump, it may trigger tariff rebates for major importers and inject uncertainty into the administration's projected tariff revenue used to fund the tax cuts in the recently passed U.S. budget bill.
Treasury Secretary Scott Bessent and CEA Chair Stephan Miran have almost certainly gamed out this possibility. Alternatively, the administration could invoke other statutory authorities to reimpose or restructure tariffs as needed.
Read: Trump releases 8 more tariff letters. Here's how his new rates compare to 'liberation day' levels.
The rise of a post-free-trade, "America First" economic regime is unmistakable. Managed trade, regionalized supply chains and tariff-backed fiscal policy are becoming the foundation of "America Inc. 2.0." That's the big picture investors need to watch. It will shape how the U.S. confronts larger structural issues like the fiscal deficit, and how it responds to the rise of Chinese multinationals reshaping the global landscape. If the U.S. can't protect the most lucrative market in the world - its own - and its debt remains unfunded, a reckoning may come sooner than expected.
Kenneth Rapoza is an analyst for the Coalition for a Prosperous America, which represents U.S. producers and workers. He is a former journalist who has reported from Brazil and covered the BRIC economies.
Read: Inflation from tariffs should hit this year, consumer-brands company says
More: Trump's playbook may be tossed, but higher tariffs are here to stay - one way or another
-Kenneth Rapoza
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July 12, 2025 15:00 ET (19:00 GMT)
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