Capital Groupâs Jared Franz and David Polak dissect the shifting sands of U.S. trade policy, the evolving role of tariffs, and the implications for markets and investors.
As the drumbeat of protectionism grows louder, financial professionals are rethinking globalization, market access, and economic strategy. In a recent episode of the Capital Ideas1 podcast, Will McKenna guides a rich conversation between Capital Group economist Jared Franz and investment director David Polak, unearthing critical perspectives on the future of U.S. trade, inflation, and investing.
Their message? Tariffs arenât just backâtheyâre embedded in a broader paradigm shift thatâs reshaping the global economic landscape.
From Late Cycle to Mid-Cycle: A Unique U.S. Rewind
The U.S. economy, once teetering at the late stage of its cycle, is showing signs of rejuvenation. Jared Franz sets the stage with an unconventional take:
âWe were in late cycle... and itâs my view that weâre actually moving the other way. So unlike any other cycle weâve had post World War Two, weâre moving back from late cycle to mid cycle.â
Franz described this as a rare reversalâa âBenjamin Button cycleââthatâs ushering in a surprisingly fertile environment for investors. Mid-cycle regimes historically deliver attractive returns, often in the 10% to 15% range, creating a sturdy foundation for navigating policy uncertainty.
The Tariff Toolbox Reopens
Against this backdrop, the discussion turns swiftly to the issue at hand: tariffs. The threat is real, and history is a guide.
âWhat does a tariff do? Right? It raises the price of goods and services... And we know from history, from the first Trump administration, that we did see an impact from tariffs... So we see that price level go up.â
Franz emphasizes that while tariffs do increase consumer prices, the pass-through rate is partial. On average, he estimates 30â50% of tariff-related costs reach the consumer. Still, even modest increases risk reigniting inflation concerns, particularly if tariffs are escalated in a stepwise fashionâa worst-case scenario:
âConsumers see it as an inflationary process rather than a one-off process... and they embed it into inflation expectations... Thatâs dangerous.â
For now, he notes, there's little evidence of this ratcheting effect taking holdâbut the risk remains front and center.
Strategic Targeting: Tariffs With Political Precision
Franz offers a nuanced take on how tariffs might be implemented in a second Trump term, arguing that consumer-focused carveouts are likely:
âIf you're a benign overlooker of the economy... you would protect consumers... and maybe you tariff more the non-consumer sector.â
This approach would align with political imperatives: protect voters from price shocks, while shifting the burden to businesses with greater price flexibility. Still, early signals have lacked clarity, prompting fears of across-the-board tariffs.
Europe in the Crosshairs
While much attention has centered on China, Franz suggests Europe could be next in line for tariff scrutiny:
âThe Trump team... believes Europe has prevented the expansion of markets by U.S. companies... Regulatory scrutiny on banks, regulatory scrutiny on tech... And one thing that has become known... is that reciprocity is important.â
Indeed, tariff imbalances are stark. On average, U.S. exports face double the tariffs imposed on European goods entering the U.S.âa fact that could fuel both the justification and the political appetite for new barriers.
âTheyâve enjoyed this benefit for decades. Now thereâs payback.â
And the stakes are high. For heavily export-dependent nations like Germany, loss of access to the $30 trillion U.S. economy would be a significant economic blow:
âThatâs recessionary for those countries.â
Tariffs as a Negotiating Weapon
Beyond protectionism, Franz describes tariffs as a potent bargaining chip, designed to force structural concessions:
âThatâs going to be the quid pro quo... we wonât put you in recession as long as you give our companies access to your market.â
Demands could span defense spending, pharmaceutical pricing, regulatory harmonization, andâcriticallyâthe localization of production. European and Asian companies, take note: investing in U.S. facilities may be the cost of continued market access.
âThe faster these firms understand that, the faster they'll get in the good graces of the administration.â
A New Globalization: Still Alive, But Transformed
Despite the protectionist tone, Franz dismisses the idea that globalization is dead:
âWe haven't seen a collapse... just seeing it at basically the same rate it was.â
However, the character of globalization is shiftingâfrom sprawling international supply chains to regionally concentrated production. The goal? National resilience and political buy-in.
âThe marginal factory is gonna be... closer to home and maybe actually domestically in the U.S.â
This transition, Franz suggests, is more than economicâitâs existential. Voters demand change, and governments are responding with policy tools designed to rebuild industrial bases and restore a sense of control.
Investment Implications: Winners and Losers
Franz highlights sectors likely to benefit in this new regime:
âItâs gonna be construction companies, itâs gonna be industrial companies... Also, like, just transport. Rails is a good example.â
Banks may also gain from increased loan demand tied to factory construction and infrastructure financing. Conversely, margin-sensitive sectors like retail face headwinds:
âRetail is a good example... Thatâs a tough one.â
Automation, robotics, and AI may provide a lifeline, particularly in labor-intensive sectors where reshoring would otherwise be uneconomical.
The Productivity Counterweight
Franzâs most optimistic note comes at the intersection of AI, automation, and demographic decline. He sees the potential for a new era of productivity-led growth:
âWhat if you donât need the demographics to help you and all the growth comes from productivity? Thatâs big.â
In this light, the U.S. could become a leaner, more automated industrial powerhouse, capitalizing on technological breakthroughs to offset aging demographics and supply-side pressures.
Failure of Imagination: The Hidden Risk
Polak closes with a powerful reminder:
âOften we think of risk to the downside... but thereâs also the risk of failure of imagination.â
Indeed, Franz acknowledges the possibility of a positive surpriseâan abrupt rollback of tariffs if favorable trade deals are struck:
âThat would be to me something akin to a nirvana scenario... strong growth... low inflation... a great environment for not only the tech firms, but also non-tech, the rest of the S&P 493.â
Still, he cautions, itâs not a scenario heâs prepared to bet on.
The Takeaway: Prepare for a New Playbook
Franzâs final message is clear:
âInterest rates are gonna be higher. Tariff rates are gonna be higher. Protectionism is going to be higher... and we just have to accept it.â
Investors must shift their mindset. The neoliberal orderâonce anchored in free trade, global labor arbitrage, and deregulationâis giving way to a more fragmented, politically charged framework. Volatility is the new constant. And for those who adapt, opportunity awaits.
Footnote:
1 "Are tariffs a threat to the U.S. economy? | Capital Group." 20 Mar. 2025, www.capitalgroup.com/advisor/insights/podcast.html.