In recent weeks, the U.S. economy has taken a decisive turn toward protectionism, with the Trump administration imposing a sweeping set of new tariffs. The average U.S. tariff rate has jumped from a modest 2.5% to a staggering 22.5%—levels not seen since the early 20th century. While these measures may appeal politically as attempts to “protect American jobs,” the economic implications are deeply concerning. The simple truth is this: tariffs are inflationary, and inflation of a certain magnitude can trigger a recession.
To understand the gravity of this shift, consider this: a $1,000 car part now costs $1,220 due to a 22% tariff. While exporters and manufacturers may absorb some of the cost, the end consumer still feels the pain. Realistically, tariffs of this scale could add 5% to 6% in price increases at the consumer level. With U.S. inflation currently sitting at 2.8%, that means the new tariffs could drive inflation as high as 8% or 9%—well above the Federal Reserve’s 2% target, and dangerously close to levels seen during previous economic crises.
Inflation Fears
History offers us clear lessons. The 1973–1975 recession was triggered by the OPEC oil embargo, which drove inflation up to 12%. A few years later, from 1980 to 1982, a combination of energy price hikes and wage pressures pushed inflation to 15%, leading to an aggressive tightening of monetary policy and a painful double-dip recession. In both instances, inflation at or above 10% created economic conditions that became untenable—forcing the Fed to raise interest rates dramatically, which choked off growth and tipped the economy into contraction.
We’ve seen a more recent version of this play out. In June 2022, U.S. inflation hit 9.1%, driven largely by post-pandemic consumerism and disrupted global supply chains. The Federal Reserve responded with a series of interest rate hikes, eventually lifting the federal funds rate to 4.5% in an attempt to cool the economy. And it worked—somewhat. Inflation cooled, but the pace of growth also slowed, and financial markets reacted with volatility.
This time, however, the inflationary impulse is not being driven by exuberant consumer demand. Instead, it’s coming from government policy in the form of tariffs, which act much like a sales tax on imports. The danger here is that while inflation rises, consumer sentiment may fall. Unlike the post-COVID period when people were eager to spend and travel, this tariff-driven inflation could discourage consumption altogether. People will feel poorer, not richer, and in the absence of government stimulus or wage growth, they may simply stay home and stop spending.
US Investments
This is a toxic mix. The Fed may be forced to raise interest rates again to keep inflation under control, but doing so would further suppress consumer demand and borrowing—potentially tipping the economy into a recession. That’s the classic cost-push inflation scenario: prices go up due to rising production costs (in this case, tariffs), not because of strong demand. The end result is stagnant growth or outright contraction, not expansion.
Unless President Trump’s tariff strategy is part of some broader and as-yet-unknown economic maneuver (which seems unlikely), the outlook for the U.S. economy is undeniably bleak. For investors, this poses a very practical dilemma: if inflation hits 8–9%, and the Federal Reserve tightens monetary policy in response, U.S. equity markets may suffer, and so too may the U.S. dollar.
This last point is key. Even if a U.S.-based investment manages to grow 10% in dollar terms, a 10% decline in the dollar’s value would wipe out any real gains for international investors. The strength of the U.S. dollar is closely tied to investor confidence in the U.S. economy. And in an environment of rising inflation, trade isolationism, and potential recession, that confidence may erode quickly.
Pivoting Your Investments
Given this backdrop, diversifying away from U.S. markets could be a prudent move. But shifting capital out of well-known American stocks into less familiar European equities isn’t always straightforward. For many investors, the solution lies in broad-based European ETFs that provide exposure to the region’s top-performing sectors and economies.
Consider SPDR EURO STOXX 50 ETF (FEZ), which tracks 50 of the largest companies in the Eurozone and offers a broad base of exposure to the continent’s economic engine. For more targeted plays, look at the Europe Aerospace & Defense ETF (EUAD), which has benefited from rising defense spending amid geopolitical tensions. Meanwhile, the iShares MSCI Poland ETF (EPOL) has shown strong returns thanks to Poland’s infrastructure expansion and energy diversification efforts. There are many broad ETFs to chose from that you can find on ETF screener sites but make sure you are researching UCITS type ETFs as these are the only ones you can buy in Europe. For more on ETFs see our ETF Course.
Moving into these ETFs doesn’t have to be done all at once. A dollar-cost averaging strategy—investing smaller amounts regularly—can help mitigate timing risks and smooth out volatility. Over time, this approach can build a well-diversified portfolio that is less exposed to U.S. inflation and economic downturns, and more aligned with markets that may be better positioned for growth.
In summary, the combination of steep tariffs, rising inflationary pressure, and the potential for Fed-induced recession makes the U.S. economic outlook increasingly precarious. Investors who wish to protect their portfolios would be wise to look beyond U.S. borders—because in the months ahead, diversification might not just be smart; it could be essential.
