What to Know About Tariffs: From a Financial Advisor

What Are Tariffs?

Tariffs are taxes imposed by governments on goods and services imported from other nations. Historically, countries have employed tariffs for various purposes: shielding domestic industries, penalizing foreign policies they disagree with, or bolstering national security.

After World War II, major economies signed the General Agreement on Tariffs and Trade (GATT). This agreement aimed to lower tariffs and boost international trade.

However, in recent years, governments have reexamined the effects of free trade. Many have implemented tariffs to support domestic industries by raising the cost of competing imports. According to the International Monetary Fund (IMF), new tariffs globally rose from 239 in 2012 to 2,845 in 2023.

How Tariffs Function

Tariffs help local industries by raising the prices of imported goods. This makes products made at home more attractive to buyers.

Another form of tariff, known as a countervailing or anti-dumping tariff, addresses unfair trade practices. For example, if a government perceives that another country is exporting subsidized goods at artificially low prices, it may impose a tariff to level the playing field and foster fair competition.

The Role of Tariffs in the US

The United States has a long history of using tariffs to protect domestic industries. As early as 1789, a tariff on foreign sugar was introduced.

In 2018, the US imposed tariffs on $360 billion of Chinese imports. This was a response to policies that forced US companies to give up their intellectual property rights. Additional tariffs targeting Chinese products like steel, semiconductors, and electric vehicles have since raised rates on some imports to as high as 100%.

Who Bears the Cost of Tariffs?

Tariffs are paid to governments by companies importing goods or services. These costs are often passed on to consumers in the form of higher prices.

Advantages of Tariffs

Supporters argue that tariffs protect jobs and local economies. The US has kept a 25% tariff on imported light trucks since 1964. This helps protect its local truck industry.

Tariffs can also nurture emerging industries, allowing them to grow until they can compete internationally. Recent US tariffs on medical supplies and semiconductors reflect this approach, aiming to reduce reliance on foreign sources for essential goods.

Disadvantages of Tariffs

Critics contend that tariffs increase consumer costs and can disrupt economic growth. However, the US tariffs imposed over the last decade have not led to sustained inflation spikes. For example, when tariffs on China began in 2018, inflation remained relatively stable.

On the downside, higher costs for raw materials due to tariffs can lead to layoffs in downstream industries. Additionally, organizations like the Tax Foundation argue that tariffs can shrink the economy. They estimate that US tariffs since 2018 could reduce GDP by 0.2%, with further proposed tariffs potentially causing an additional 0.8% decline.

Will US Tariffs Continue to Rise?

Despite their drawbacks, tariffs remain a popular policy tool. Future increases are likely as governments address trade imbalances and economic concerns.

Implications for Markets

Historically, tariffs have had mixed impacts on markets. For example, during the initial US-China trade tensions in 2018, the S&P 500 experienced a 15% decline. However, today’s market conditions differ, with wider valuation spreads and unique economic factors.

Navigating Investment Uncertainty

In uncertain times, a long-term investment strategy is crucial. Regularly reviewing your portfolio to ensure alignment with your goals, risk tolerance, and financial situation is key. Consider working with a financial advisor to develop a diversified investment mix that helps you achieve your objectives while maintaining peace of mind.

Sources:

https://www.fidelity.com/learning-center/trading-investing/what-is-a-tariff

Disclosures:

This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.

This material is provided as a courtesy and for educational purposes only.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.