Tariffs, Currencies, and the Coming Storm: Why US Consumers Are on Borrowed Time

The US government's aggressive use of tariffs to counteract trade imbalances has long been a contentious issue. But as the Council of Economic Advisers (CEA) doubles down on its strategy of relying on exchange rate dynamics to offset tariff-induced inflation, critical flaws in its assumptions are coming into sharp focus. Recent economic data and geopolitical realities reveal that this approach is far riskier than policymakers admit. For investors, this means a looming reckoning for sectors like consumer staples and tech—particularly Apple—while opportunities to hedge against a dollar collapse emerge.

The CEA's Flawed Assumptions: When Theory Collides with Reality

The CEA's model hinges on two key assumptions: first, that exchange rates will depreciate exactly in line with tariffs to neutralize their inflationary impact, and second, that cost passthrough from tariffs to consumers will be incomplete or delayed. Historical data from the 2018–2019 U.S.-China trade war seemed to support this—then, a 13.7% yuan depreciation offset over 75% of the inflationary impact of tariffs. But today's environment is vastly different.

1. Incomplete Passthrough Is No Longer a Safeguard
The CEA assumes that exporters will absorb tariff costs rather than pass them to U.S. consumers. But with tariffs now averaging 30% on Chinese goods (including tech components) and global supply chains stretched to the breaking point, this is no longer viable. reveals a troubling trend: COGS rose from 62% to 68% in Q1 2025, with little sign of abating. Retailers like Walmart can't offset these costs through markdowns indefinitely.

2. Retaliatory Devaluations and Currency Wars
The CEA's model also ignores retaliatory measures. China's yuan is already at historic lows (7.2 to the dollar), but further devaluation risks capital flight and financial instability. Meanwhile, countries like Japan and the Eurozone are letting their currencies strengthen to offset U.S. tariffs—a move that will hurt U.S. exporters and deepen trade imbalances. shows the dollar down 5% since tariffs spiked, but this is far from the “perfect offset” the CEA imagines.

3. Nonlinear Risks in a Fragile System
The CEA's partial equilibrium models assume a linear relationship between tariffs and inflation. But today's economy is anything but linear. Supply chain bottlenecks, labor shortages, and energy price volatility mean even a small tariff-induced shock could trigger cascading inflation. The Fed's recent admission that inflation expectations have hit 7%—a 15-year high—underscores this risk.

Sector Vulnerabilities: Staples and Tech Bear the Brunt

The flaws in the CEA's strategy hit hardest in two sectors: consumer staples and technology.

Consumer Staples: A Margin-Squeeze Nightmare

Companies like Coca-Cola and Procter & Gamble rely on imported raw materials (e.g., aluminum, palm oil) and components. With tariffs adding 10–20% to input costs, they face a grim choice: raise prices (risking lost market share) or eat the costs (eroding margins). shows its stock down 15% this year as inventory bloat and margin pressure mount.

Tech: Supply Chains and Semiconductor Woes

Apple, which sources 40% of its components from China, is particularly exposed. A weaker yuan won't offset 25% tariffs on semiconductors—instead, Apple's shows it's down 12% as it grapples with rising costs and delayed production. Worse, the company's “China plus one” strategy (diversifying suppliers) is proving expensive, with new factories in India and Vietnam driving up capital expenditures.

Investment Strategy: Short Tariff-Exposed Equities, Hedge with Inverse USD ETFs

The CEA's flawed assumptions create a clear playbook for investors:

1. Short Sectors with Tariff-Exposed Supply Chains
2. Consumer Staples: Coca-Cola (KO), Procter & Gamble (PG), and Unilever (UL) are prime candidates. Their inability to pass through costs will pressure margins and stock prices.

3. Tech: Apple (AAPL) and Intel (INTC) face rising input costs and delayed innovation timelines.

4. Hedge Against Dollar Decline with Inverse USD ETFs

5. The PowerShares U.S. Dollar Bearish ETF (UDOW) or ProShares UltraShort Dollar Bullish ETF (USDJ) offer leverage against a weakening dollar. A 10% drop in the DXY could boost these ETFs by 20%, offsetting equity losses.

6. Consider Safe Havens for Long-Term Capital

7. Gold (GLD) and Treasury inflation-protected securities (TIPS) provide ballast against inflation and currency instability.

Conclusion: The Clock Is Ticking

The CEA's faith in exchange rate offsets is a house of cards. As inflation ticks upward and global currencies lurch unpredictably, investors must prepare for a storm. Shorting tariff-exposed equities and hedging with inverse USD plays aren't just tactical moves—they're survival strategies in a world where the rules of trade are rewriting themselves daily.

Stay nimble. Stay short. And brace for impact.