While a disappointment to American fans of Mario Kart, the more important aspect for us is: what does Donald Trump’s attack on free trade mean for professional services firms?  

The first thing to make clear is that there won’t be much (if any) direct impact. President Trump’s rhetoric is focused on the US’s deficit in trade in goods, and the tariffs apply to imports of goods only. Indeed, the US has a trade surplus in services (thanks, in part, to its successful professional services industry). Similarly, the retaliation announced or threatened by other countries is focused on goods, not services. Nevertheless, the spirit of cooperation between the US and other countries is likely to evaporate, making it harder to expend political capital on things like aligning standards between countries to facilitate trade in services (see the failure of the US and UK to agree on accounting qualifications).

However, the indirect impact of tariffs on professional services will be plentiful. First, economic growth globally is expected to slow down, even if tariffs remain at the lower global rate of 10%. At the time of writing, Goldman Sachs has updated its forecast of the probability of a recession in the US in the next 12 months to 45%. While the disruption of a mild recession would normally be good news for professional services firms, because clients need to adapt to the economic climate, this comes off the back of a major shock to economic activity during COVID, and years of anaemic growth (and even recession) in European markets and elsewhere. In these circumstances, a slowdown (or even a reversal) of global GDP growth may hit clients’ ability to spend on professional services. Not only that, but days of sharp losses on global stock markets will make people think twice about IPOs and M&A activity, potentially curtailing firms’ work in deals, even if the markets have rebounded somewhat after many of the higher tariff rates have been paused. 

But second, and most importantly, the tariffs will have a major impact on the volume and flow of trade around the world. We see two potential scenarios for how clients might react to the impact of tariffs on trade. One is paralysis in an uncertain world; the other is action in an unreliable one. 

The uncertain world 

While the apparent aim seems to be to reshore manufacturing to the US, it’s unclear if the global 10% tariff rate is here to stay, or if they’re more a negotiating tactic for the US President to extract various political deals with major trade partners. Less than three months since President Trump’s inauguration, we’ve already seen tariffs on Mexico and Canada come and go and come again. Indeed, it’s symptomatic of this uncertainty and the radical sudden shifts in policy that we’ve already had to re-write this blogpost in response to President Trump’s unexpected announcement of a pause in the “reciprocal” tariffs for 90 days (with the important exception of China). But can we be sure that the previously announced tariffs will come back in 90 days’ time? And who’s to say the remaining 10% global tariffs announced on “Liberation Day” won’t be removed next week as well? Trump has signalled that he’s open to negotiation, potentially opening the door to cutting tariffs if deals can be reached.

Even if the Trump administration holds firm, there may be legal challenges to the President’s power to enforce these tariffs. (Does the US deficit in trade in goods really amount to a national emergency?) We’ve also seen a huge backlash from Wall Street as stock market indices slump, and there will be anxiety in the market as tit-for-tat tariffs with China ramp up, and the end of the 90 day pause approaches. Under these circumstances, even Republicans in Congress might join Democrats in pushing back against the President, as they recently tried to do on tariffs with Canada.

In the short term, the tariff regime is clearly very uncertain. As a result, many businesses are in a state of paralysis as they wait and see how this plays out. They will adjust as they can, and there may be a rush to import goods into the US at a 10% tariff before higher rates potentially kick in, but any big decisions about investment in new factories and facilities will be on hold for now.

Moreover, there is no bipartisan agreement about tariffs, so there are no expectations that this new policy direction is set to stay for the 10-20 years needed for payback on investment in new factories. True, President Biden kept the tariffs on China introduced in President Trump’s first administration, but these tariffs are of a different magnitude (especially if the higher “reciprocal” tariffs come back), and businesses won’t want to make a huge investment if tariffs disappear in four years. If the public mood moves sharply against tariffs, even a future Republican presidential candidate may want to separate themselves from Trump’s policy. Even before then, the mid-term elections in the US are only two years away, and there’s a possibility an explicitly anti-tariff Congress gets elected. So, even in the medium term, there is uncertainty about tariffs. Enduring the pain of tariffs for a couple of years may be better for some organisations than making a major investment in new manufacturing capacity when the tariffs may be gone before the first widget rolls off the production line. 

In such an uncertain world, clients will remain in a state of paralysis and wait and see how this all plays out. Many European businesses will feel relieved they didn’t make investment decisions last week on the basis of a 20% export tariff given it’s been cut in half to 10% this week. Clients will reach out to consulting firms to help build clarity and plan for a world where tariffs are here to stay or where free trade returns. But in the meantime, major investments will be on hold. 

The unreliable world 

Notwithstanding all the uncertainty we described above, some may decide that President Trump’s move makes one thing certain: Regardless of the (perhaps temporary) relief of the pause in tariffs, the US can no longer be relied upon as a trading partner. Presidents, Congressional sessions, and treaties will come and go, and there may be periods of low tariffs and easier trade. However, foreign companies can no longer continue to operate on the assumption that the US economy will be open to them, as any position the US takes is fundamentally unreliable. Even if tariffs are removed entirely, it may take a generation before people can fully trust they aren’t coming back. These clients have learned from the first Trump administration. Many businesses with supply chains in China diversified in the past to produce in Vietnam or other parts of South East Asia. That now looks like it could be a mistake, if the swingeing tariffs scheduled on imports from Vietnam come into place after the pause. If businesses then had invested in manufacturing in the US, they would be in a strong position now. 

An analogy here is how we’ve seen European governments react to the US position on NATO. Although the US hasn’t left NATO or said it won’t fulfil its obligations under the treaty, Europeans feel they can no longer rely on the US and have to start building up their defence industry for a world in which the US isn’t there to help them. Waiting and hoping for a change in government and a return to the post-war consensus isn’t an option. 

In this unreliable world, globalisation is fundamentally broken (a view that the British Prime Minister appears to share), with the US in effect “Brexiting” from the rest of the world. The rest of the world may still carry on as before, with low tariffs between each other and building or even expanding free trade areas (see, for example, the expansion of the CPTPP or the recent agreement between the EU and Mercosur). However, even this cannot be guaranteed with a broken WTO and the lack of US political influence undermining enforcement of global free trade.  

In this scenario, the Rubicon was crossed on 2 April, and so the time to act is now. For anyone who wants to sell to the US, this means either moving manufacturing there or adjusting expectations about the ability to export to the US and penetrate the market and instead looking for growth elsewhere. These clients are likely to want economic insight on how trade flows around the world will shift and where new markets are to be found, and help adjusting supply chains. Those moving activities to the US will also need help setting up local businesses and not only building factories there, but sourcing as many in-country suppliers as possible to avoid tariffs on inputs. 

Similarly, those already based in the US but hoping to export may need to move manufacturing abroad to avoid reciprocal tariffs and build a non-American supply chain for other markets, while at the same time sourcing more inputs from the US for their domestic manufacturing.  

For a multinational, this has the potential to be vastly complex, with lots of internal transactions with transfer pricing and tax implication, logistical issues to maintain just-in-time production, legal issues with documentation, and shifts in the workforce. This will create demand for professional services support. 

In such an unreliable world, clients will need to change their strategy and invest based on the new reality. 

Which scenario is more likely? 

Writing a little over a week after the tariffs were announced, there’s obviously still a lot of uncertainty about how this will play out, especially as the Trump administration has already reversed most of the tariffs for now. The upshot is that right now, no one wants to make major investments, but business can’t stand still forever. For us at Source, it’s now an unreliable market, and our response will be to increase our focus on this subject so that we can guide professional services firms in helping their clients. As we start to gather more data and intelligence on how clients are reacting to the tariffs, we’ll share with you what that means for professional services firms. 

In the meantime, I’ve put my money down for a new Nintendo Switch 2, which, thanks to the UK-Vietnam Free Trade Agreement, is likely to be much cheaper for me than for my American friends.