Transatlantic Trade Monitor: Facts You Need Now | The Impact of Tariffs on Tax Valuation

By Tom Gottfried, Managing Director, National Tax Valuation, Valuation Research Corporation, and Philip Gregorcy, Senior Advisor, Valuation Research Corporation

The current Administration’s recent imposition of tariffs on U.S. imports has sent shockwaves through the global economy, with far-reaching implications for international trade, supply chains, and tax valuation. In this article, we will explore the rationale behind tariffs and their economic, technical, and tax valuation implications.

Trade Turbulence

On April 2, the Administration announced tariffs on approximately 90 countries, with a list of “reciprocal” rates declaring a 10% baseline import tax taking effect on April 5. Country-specific tariffs, ranging from 11% to 50%, were also announced for Canada, Mexico, and around 50 to 60 other countries, effective April 9. However, these tariffs were suspended for 90 days just hours later. The initial announcement also included steeper levies on imports from China, the EU, South Korea, Japan, and Taiwan, in addition to a previously imposed tax of 20% on all imports from China earlier in 2025.

In the subsequent days, a series of tit-for-tat trade actions between the U.S. and China culminated in U.S. tariffs on Chinese goods reaching 145% and China vowing to impose retaliatory tariffs of 84% on American imports. Canada and the EU also retaliated with their own countermeasures, including a Canadian 25% levy on auto imports from the U.S. and a phased-in approach to EU tariffs on $23 billion worth of U.S. goods.

Considering the Strategic Tariff Rationale

The use of tariffs in modern, interconnected economies is a complex issue, with both positive and negative impacts felt throughout history. The current tariffs have a threefold rationale:

1. Reduce U.S. trade deficit: The trade deficit stood at $122.6 billion in February 2025, with exports of $278.5 billion and imports of $401.1 billion. The non-baseline tariff rates were calculated based on a country-by-country trade deficit, attempting to fill in gaps on an individual country basis. The 10% baseline tariff applies to all countries, regardless of their trade deficit, even for countries with a trade surplus, such as Australia.
2. Collect U.S. tax revenues and reduce the U.S. budget deficit: The tariffs aim to collect tax revenues and reduce the U.S. budget deficit, which stood at $1.83 trillion in 2024. Estimated annual tariff revenues range from $300 billion to $600-700 billion annually over the next decade, according to the Tax Policy Center and White House trade adviser Peter Navarro, respectively. However, tariffs alone may not be sufficient to fill the gap, especially if lower estimates are accurate. In addition, the tax cuts/extensions approved by Congress as part of the 2025 budget reconciliation plan may further increase the deficit.
3. Reorient international trade relations: The Administration’s tariff strategy aims to reorient international trade relations by linking economic, political and security relations more closely. Under this approach, trading partners that cooperate by reducing their trade surpluses with the U.S. and increasing investment in the U.S. economy may be able to negotiate a reduction in their tariffs.

Global Trade Dynamics and Macro-Economic Shifts

The imposition of tariffs can carry wide-ranging macroeconomic consequences, including the potential for reduced economic growth. The heightened uncertainty surrounding trade policy can deter business investment, erode productivity, and diminish exports. This, in turn, can lead to a decline in economic activity, as businesses and consumers become increasingly cautious about spending and investing.

Furthermore, tariffs can lead to inflationary pressures, particularly in sectors heavily reliant on global supply chains (e.g., coffee or cocoa, which is not grown in the U.S.). As tariffs increase the cost of imported goods, businesses may pass these costs on to consumers, leading to higher prices and reduced demand, creating the risk of stagflation. In a stagflation environment, where economic growth slows and prices rise, it becomes challenging for policymakers to balance the need to control inflation with the need to stimulate growth.

In addition to these effects, tariffs can also influence currency markets, potentially leading to an appreciation of the U.S. dollar against the currencies of major trading partners. While a stronger dollar can make U.S. exports more expensive and less competitive, it can also make imports cheaper, which can help to reduce the trade deficit. However, this effect is complex and depends on various factors, including the elasticity of demand for U.S. exports and the responsiveness of importers to price changes. In addition, the increased uncertainty may reduce trust in U.S. assets as safe assets and may lead investors to reduce their exposure to U.S. assets and move them into certain other foreign assets (e.g., German and Japanese assets) resulting in a depreciation of the U.S. dollar against those foreign currencies.

The impact of tariffs on interest rates is also uncertain and will depend on whether inflationary pressures or slowing growth take precedence in monetary and fiscal policy decisions. If inflationary pressures become a concern, interest rates may rise to combat them, which could further slow economic growth and make it more costly to invest in or expand manufacturing assets. On the other hand, if growth slows, interest rates may be cut to stimulate the economy, which could lead to higher inflation.

Finally, the imposition of tariffs can also strain trade relationships, leading to a decline in international cooperation and a broader decline in global trade activity. This can have long-term consequences for the global economy, as countries become increasingly protectionist and less willing to engage in international trade. As trade relationships deteriorate, the risk of trade wars and retaliatory measures increases, which can lead to a vicious cycle of escalation and further economic damage.

Micro-Economics and Supply Chain Reorientation Impacts

Beyond broader economic trends, tariffs also carry significant microeconomic implications that impact the structure and behavior of individual firms and industries. One of the primary goals of tariffs is to address strategic vulnerabilities in U.S. supply chains by encouraging domestic production. However, this approach can also introduce inefficiencies, disrupt established trade flows, and provoke retaliatory measures from trading partners, creating uncertainty and raising business operational risks.

As a result, companies may attempt to reroute their supply chains to avoid tariffs, shifting sourcing and production to non-targeted countries. While this strategy may mitigate the immediate impact on U.S. firms, it can also reduce tariff revenues and undermine the policy’s intended economic pressure. Furthermore, this approach may lead to a loss of competitiveness for U.S. companies, as they may struggle to adapt to the new trade landscape.

A long-term goal of this Administration’s tariff policy is to bring manufacturing back to the U.S., which could potentially revitalize domestic industry and reduce reliance on foreign production. However, this transition is not instantaneous and requires significant lead time, capital investment, and workforce development. The process of rebuilding manufacturing capacity is complex and time-consuming, involving establishing new production facilities, recruiting and training workers, and developing new supply chains.

The tariffs may also influence the location of intangible assets, such as intellectual property (IP). In some cases, IP associated with the U.S. market may be repatriated to the U.S. to align with domestic manufacturing, while IP associated with foreign markets could be shifted abroad to be closer to foreign production hubs and markets. These shifts in supply chain structure and asset ownership reflect a broader recalibration of how and where companies operate in a more protectionist global trade environment. As companies adapt to the new trade landscape, they must navigate complex issues related to IP ownership, transfer pricing between countries, and supply chain management, which can significantly affect their bottom line.

Tariffs and Transactions: Navigating Valuations and Deal-Making

Tariffs have introduced a new layer of complexity into the world of deal-making and valuation, causing companies and investors to approach mergers, acquisitions, and other strategic transactions with increased caution. As uncertainty around trade policy grows, potential buyers and sellers are delaying decisions, which can dampen deal volume. However, a broader focus on deregulation may help to offset some of this caution, and despite prevailing concerns, Q1 saw a modest uptick in deal volume. According to Pitchbook, Q1 2025 deal activity was off to a strong start, with 1,590 reported deals and an estimated 673 additional deals, which could represent an increase from Q1 2024. While Pitchbook’s estimate may vary, it suggests an initially positive trend in deal activity and that certain sectors are pushing ahead with deals, very likely those that favor long-term growth and stability in fundamentals, even amid policy unpredictability and headwinds.

The Wall Street Journal recently noted that April remains quiet for M&A activity, with deals in the U.S. down by 1% and value down by 45% by number in April through Monday, April 21st, as tracked by LSEG, compared with this same period as last year. This slowdown is consistent with market trends VRC is currently seeing, where companies exercise caution in their M&A decisions as they navigate the uncertain economic landscape. Despite this trend, some notable deals have still managed to move forward, likely driven by strategic considerations and long-term growth objectives.

The impact of tariffs on valuations may also materialize as significant. Valuation analysts and financial professionals may now need to integrate tariff-related costs into forward-looking expense projections, which may require running scenario analyses to account for the uncertainty surrounding the duration and severity of tariff impacts. The valuations also may need to address any adjustments in transfer pricing and supply chain models that are made to lessen the impact of tariffs.

Additionally, changes in inflation expectations, currency volatility, and long-term growth rate assumptions – all of which may be influenced by tariffs – must be incorporated into valuation assumptions.

In addition, discount rates and company-specific and country-risk premiums may also require adjustments, particularly in cross-border transactions, as tariffs could signal broader instability in international trade relationships. Given the various variables affected by tariffs, a more cautious and dynamic approach to valuation is necessary to navigate this complex landscape.

Imposing tariffs on U.S. imports has significant implications for tax valuation, requiring tax and valuation professionals to adapt to a rapidly changing economic landscape. As a leading valuation and strategic consulting service provider, VRC is well-equipped to help clients navigate these changes and ensure compliance with relevant tax laws and regulations.

Compliments of Valuation Research Corporation – a member of the EACCNY