Tariffs and Investing During Economic Uncertainty

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$5 trillion was just wiped out in the U.S. markets over the last two days due to Trump's "Liberation Day" tariffs.

Howard Marks, co-founder and co-chairman of Oaktree Capital Management (the world’s largest distressed debt investor), recently described our current situation as “the biggest change in the environment that I’ve probably seen in my career.”

Amid this turmoil, we turned to three legendary value investors—Howard Marks, Warren Buffett, and Peter Lynch—to understand tariffs, their implications for investors, and how to navigate periods of economic uncertainty.

We'll examine Marks' 2019 memo "Political Reality Meets Economic Reality" and his more recent April 4, 2025 interview (video below) to understand his evolving perspective on tariffs:

His memo offered a thorough analysis of tariffs that remains especially relevant today, while in his recent interview, Mark’s central discussion point is best reflected by this quote:

From his 2019 memo, while many view tariffs simply as a way to (1) reduce trade deficits, (2) support U.S. manufacturers, and (3) protect American jobs, Marks emphasized that the reality is far more complex.

In his April 4, 2025 interview, Marks highlighted the historical context of global trade's benefits:

According to Marks, for decades after WWII, global prosperity "lifted all boats," making free trade politically popular. However, more recently, several trends have disrupted this shared prosperity:

• Slower overall economic growth.

• Negative impacts from globalization on specific worker groups (e.g., manufacturing employees in steel, textiles, and auto parts production).

• Rising importance of specialized skills and higher education as determinants of income potential.

• Growing income inequality.

These economic shifts have created fertile ground for populism—political movements that channel public dissatisfaction against elites, experts, and established institutions.

Marks argues trade policies have become that target, despite the complex economic tradeoffs involved.

In the April 4, 2025 interview, Marks explains how trade benefits both parties:

This principle explains why trade deficits aren't inherently negative. In his 2019 memo, Marks addressed this common misunderstanding—the notion that trade deficits represent a "loss" for one country and a "win" for another.

He used the example of paying his barber: the barber gets money, Marks gets a haircut, and both benefit from this exchange. Technically, Marks has a “trade deficit” with his barber since money flows out from him, but he doesn't see this as a loss.

Similarly, when Chinese businesses sell to American consumers, both parties gain value from the exchange. This is particularly relevant to the current U.S.-China trade relationship, which Trump has frequently characterized as China “killing us” because of our trade deficit.

Importantly, Marks notes that China's economy is significantly more reliant on exports to the U.S. than ours is on exports to China (the U.S. imported $41.6B from China in Jan 2025, while exporting only $9.9B). This asymmetry, combined with China's need for rapid economic growth, makes tariffs a potential leverage point against China.

However, he cautions against oversimplification of tariffs' economic impacts, emphasizing four key points:

1. Economic actions have costs and consequences.

2. There are no simple solutions to complex problems.

3. Few people truly understand economics.

4. Politicians’ proposed solutions often escape proper scrutiny (because of #3).

These cautionary points highlight why we should carefully scrutinize economic interventions like tariffs, which often produce far-reaching and unexpected impacts throughout the economy.

The Impact of Tariffs

"Tariffs are an increased cost," Marks explained in the April 4, 2025 interview. "Somebody has to pay them."

So, who actually bears this burden? While tariffs are initially collected at the border (i.e., paid by exporters), they're typically passed on to consumers in the importing country through higher prices.

The real impact extends far beyond this immediate tax, creating cascading effects throughout the economy:

• Higher production costs: Tariffs on intermediate goods like steel and aluminum increase costs for U.S. manufacturers, making them less competitive or less profitable. In some sectors, U.S. capacity simply doesn't exist to replace imports.

  • Marks cited in his 2019 memo that Constellium ($CSTM ( ▼ 1.22% ) ), a Dutch aluminum company, claimed the U.S. produces only 13% of its annual aluminum needs, making domestic sourcing impossible.

• Supply chain distortion: To avoid tariffs, American manufacturers might reduce imports of raw materials but increase imports of finished goods, which often aren't subject to the same tariffs.

• Offshoring incentive: U.S. companies might move manufacturing overseas, cutting domestic jobs while gaining a competitive edge through access to untaxed materials.

• Competitive disadvantage: Foreign competitors gain advantages through access to lower-cost inputs, giving them better pricing power in U.S. markets.

• Price inflation: Domestic producers may raise prices in response to reduced import competition, resulting in higher prices across all brands.

• Trade retaliation: Trade partners rarely accept tariffs without retaliation, leading to escalating trade conflicts.

These cascading effects illustrate why tariffs often produce unintended consequences that ripple through the economy. What begins as a simple tax at the border transforms into a complex web of economic distortions that can ultimately harm the very industries and workers they were designed to protect.

Case Studies in Tariff Consequences

This insight from Marks is illustrated by historical examples of tariffs, where protection for specific industries has typically come at a much larger cost to the broader economy.

The following case studies demonstrate how tariffs redistribute economic resources rather than creating new value.

Warren Buffett on Tariffs as Economic Warfare

Warren Buffett shares Marks’ concerns on trade retaliation, describing tariffs in a recent CBS interview as "an act of war to some degree." While they "may not draw blood immediately," he warns they're "an act of aggression that invites retaliation."

Buffett points to the Smoot-Hawley Tariff Act of 1930, which raised import duties to protect American businesses but instead deepened the Great Depression as trading partners retaliated with their own tariffs, causing U.S. imports from and exports to Europe to collapse by ~66% between 1929 and 1932.

Tariffs on Automobiles

Automobile manufacturers are also typically harmed by tariffs. According to The New York Times:

Put simply, tariffs on this industry could lead to higher prices, reduced sales, industry contraction, and broader economic impacts.

Obama-Era Tire Tariffs

One targeted study illustrates the real cost: Obama-era tire tariffs cost American consumers an extra $1.1 billion in 2011 to preserve at most 1,200 jobs—nearly $1 million per job for positions averaging $40,000 in salary.

Bush’s Steel Tariffs

Similarly, Bush's 2002 steel tariffs protected 140,000 steelworkers while harming 6.5 million workers in steel-consuming industries.

Marks’ Investment Advice

In the April 4, 2025 interview, Marks suggested that in the current environment of market uncertainty, credit investments offer a relatively attractive opportunity:

While highlighting credit opportunities, Marks also discussed the market decline as potentially creating buying opportunities for stocks:

He emphasized that market dips shouldn't automatically trigger fear, noting that "everybody runs from the market when prices go down because they think it connotes risk. It's just stuff going on sale."

However, he cautioned that investors must judge for themselves whether current price declines are "excessive," which would warrant "jumping in with both feet," or "inadequate," suggesting patience until further adjustments occur.

Peter Lynch offers a refreshing counterpoint to macro-economic anxiety in his classic "One Up on Wall Street." While policymakers and pundits debate tariffs, Lynch reminds us that company fundamentals matter more than economic policy shifts.

Lynch developed what he calls the "cocktail party theory" – observing how eagerly people discuss stocks in social settings to gauge market sentiment, from indifference (market bottom) to widespread enthusiasm (market top). When everyone from dentists to neighbors starts offering stock tips, it's likely time for caution.

Lynch’s central message is that market conditions matter far less than company quality:

He also offers a particularly pointed warning about basing investment decisions on market forecasts:

Thus, rather than trying to forecast how tariffs might affect the broader economy, Lynch would advise investors to focus on identifying companies with strong competitive positions that can weather economic disruptions—regardless of trade policy.

Companies with pricing power, low debt, and diversified supply chains are better positioned to navigate tariff challenges than those without these attributes.

The Difficulty of Economic Forecasting

Howard Marks echoed Lynch's skepticism of forecasting in his April 4, 2025 interview, noting:

Both Lynch and Marks converge on the key takeaway for investors: amid tariff uncertainty, focusing on business fundamentals and buying quality companies at reasonable prices is more reliable than attempting to forecast economic policy outcomes or market movements.