“Tariff - that’s a beautiful word, isn’t it?” Lately, all we seem to talk about are tariffs, but the discussions rarely focus on orthography. For some, tariffs signify a new beginning, driven by the resurgence of American manufacturing due to re-shoring. For others, tariffs spell inflation, economic uncertainty, and strained diplomatic relations. For those in the first camp, let’s temper our enthusiasm, and for those in the second, let’s lower our defenses. Let’s examine this issue from an apolitical perspective to understand its implications for our economy, especially in the context of client portfolios.First, let’s recap: On April 2, 2025, President Trump signed an executive order (EO) imposing reciprocal tariffs to address large and persistent U.S. goods trade deficits. This action aimed to rectify trade practices that contributed to these deficits. The tariff levels imposed in the EO puzzled economists, as the White House's stated current tariff levels did not align with widely accepted figures within the investment and macroeconomic communities. The White House calculated the tariff levels other countries imposed on the U.S. by subtracting U.S. imports from U.S. exports and dividing this by U.S. imports from each country. President Trump stated that these figures included “the combined rate of all their tariffs, nonmonetary barriers, and other forms of cheating.” He announced that the U.S. would charge each country roughly half of what they charge us, with a minimum of 10% tariffs. By April 5, 2025, the previous tariff levels were rendered obsolete, and a 10% tariff was imposed on all countries except China, Canada, and Mexico, which were handled separately. This measure was part of a broader strategy to increase the United States’ competitive edge and protect national and economic security. On April 9, 2025, in response to retaliatory measures from trading partners, particularly China, the White House modified reciprocal tariff rates. This modification included increasing import duties from China after the PRC announced an 84% tariff on U.S. goods. After a series of back-and-forth one-upmanship, U.S. tariffs now stand at 145% on Chinese goods, and China charges the U.S. 125%. While the White House insists that deals are on the way from nearly all countries, there is an important consideration for client portfolios: how much do they rely on international trade?

Analyzing the revenue exposure of a portfolio is an excellent way to gauge its reliance on international trade. For example, while 100% of the companies within the S&P 500 index are domiciled within the United States, the index only derived 61% of revenue from the U.S. in the first quarter of 2025. China accounts for 9% of the revenue generated by the S&P 500, the Eurozone 8%, Germany (included in the Eurozone) 3%, and Japan 2%. The Nasdaq 100 index, comprised of 100% U.S. domiciled companies, only derived 52% of revenue from the U.S., 12% from China, 9% from the Eurozone, 3% from Germany, and 3% from Japan. The traditional driving forces behind U.S. equity markets, represented by the S&P 500 and Nasdaq 100 indices, heavily depend on consumers outside the U.S. buying their goods.

For a broader perspective, the MSCI ACWI Ex USA Index, which includes large and mid-cap companies from developed and emerging markets (excluding the U.S.), derives 20% of its revenue from the U.S. This index covers about 85% of global equity opportunities outside the United States. In comparison, the FTSE Developed Europe All Cap Index derives 23% of its revenue from the U.S., the MSCI Emerging Markets Index derives 13%, and the MSCI China Index derives 4%.

While the U.S. provides a sizable portion of international companies' revenue, U.S. companies also depend on international consumers to purchase their goods. As we strive for trade deals that benefit the U.S., we must not cut off our noses to spite our face.

While we contribute to the growth of other countries' economies, they, in turn, help to boost ours. Striking a balance in trade policies is essential to ensure mutual prosperity and economic stability. As we navigate these complex trade dynamics, we must remember that our economic well-being is intricately linked with the global market.

Revenue Exposure by Select Countries and Regions

Source: Morningstar Direct, personal research
Data as of quarterly report on 3/31/2025
Eurozone countries include Austria, Belgium, Croatia, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, and Spain.