High US import tariffs are meant to help reduce the budget deficits of the United States. “Whoever the next two or three presidents may be, they will face exactly the same problem: the country must find a way to reduce its deficits. Because they are unsustainable.”
So says Jim Caron, CIO of the Portfolio Solutions division at Morgan Stanley Investment Management. Caron was in the Netherlands last week to meet with clients and took the time—amidst the chaos in the financial markets—to speak with Investment Officer about US trade policy under President Donald Trump. First and foremost, he wanted to make it clear that it’s not his job to approve or disapprove of that policy, but rather to understand—or try to understand—it. Caron: “It is what it is. This is the reality we have to deal with. Whether or not you agree with that policy is a completely different question—and one that’s not for me to answer. To understand how we, as investors, should respond, my main goal is to grasp the underlying drivers of these events and developments.”
So it’s mainly about US public finances?
Caron: “Yes, about the enormous US national debt and the ever-growing budget deficits. If nothing is done, those will become unsustainable. That ties into the demographic structure of the United States. We’re facing enormous future expenditures. Starting in 2028, the last cohort of baby boomers—citizens born before 1966—will become eligible for Social Security and Medicare. Those are mandatory government expenses. In all forecasts, you see government spending begin to rise exponentially from 2028 onward. That’s not sustainable. If it continues unchecked, it could lead to a massive correction in financial markets. That’s why this issue must be addressed now.”
But there are different ways to approach that issue.
“Of course, but we have to understand that the choices here are not primarily political. I said this last year going into the elections: it doesn’t matter whether it’s Kamala Harris or Donald Trump; this mathematical problem is real and will remain if we don’t address it. But it’s not a political problem. We must also understand that this problem won’t disappear just because Trump is no longer president. Whoever the next two or three presidents may be, they will all face exactly the same challenge.”
Has there already been a start to addressing it?
“Absolutely. On one hand, I’m convinced that April 2, 2025, will go down in the history books. It’s the day we began resetting globalization. On the other hand, you can certainly debate the way this is being done—the implementation. We all knew tariffs would be raised, but investors were caught off guard by the scale. In my view, President Trump acted too aggressively and too quickly.”
Are higher import tariffs truly a necessary part of reducing the US budget deficit?
“There are roughly three ways to reduce debt and deficits. One, you can default. That’s obviously bad. Two, you can inflate the debt away. Nobody wants that either. The third option is to grow your way out of it. And that’s the goal—because growth can be taxed, and that generates extra revenue. So how do you stimulate growth? GDP is the sum of four components: consumption, government spending, investment, and the trade balance. With import tariffs, Trump is trying to improve the trade balance.”
Will that work?
“That’s one of the key points for debate. Will tariffs have the desired effect? Look, it’s fine to have a trade deficit, but the US trade balance is around negative 800 billion dollars. That’s an enormous imbalance in the global trade system. Combined with the demographic developments I just mentioned, that trade deficit is unsustainable. So I understand the effort to increase revenue by addressing that imbalance, and that’s what tariffs aim to do. But will that lead to production returning to the US? A lot of sneakers for the American market are now made in Vietnam. So is the solution for the US to start making its own sneakers again? Probably not.”
Does the new US trade policy mark the end of globalization?
“If we define globalization as a situation where countries run perpetual trade surpluses with the US: yes. And if we define it as a situation where China cheats in trade and dumps goods everywhere: yes, in that sense, we are reversing globalization. The US, during the era of offshoring, always made a trade-off: we were willing to sacrifice our factories and workers so we could buy cheaper goods. That was sustainable until China joined the WTO. After that, things went wrong. That’s why this reset is needed—a reset of globalization, driven by the necessity for the US to address its deficits.”
Isn’t that just protectionism? Maybe even a drift toward isolationism?
“Well, that’s not what I call it. Heated political debates are being held over this, and it’s all very sensitive. People get emotional quickly. And you get labeled and boxed in right away. That’s why I want to emphasize that this entire issue is, above all, a matter of arithmetic—not necessarily a political issue. The US has no choice but to address its deficits. It’s that simple. That’s also why this isn’t going away: this problem will be with us for decades to come.”