With all the noise in the press, figuring out how tariffs will actually affect you personally is quite a challenge. But let’s take a look.
What is a tariff?
In simple terms, a tariff is a tax on imported goods, goods coming into the US from another country, or more uncommonly on exported goods, goods from the US going to another country. We’ll focus on imports, since that’s the current buzz and far more common.
Why do we have tariffs?
Governments typically use tariffs for a few reasons.
Regulate trade flows.
When the US imports more goods and services from a country than it exports to that country, we have a trade deficit. We’ll discuss that in another blog, but trade deficits can create numerous problems for the US. The US has the most open of markets with historically the lowest tariffs, which has resulted in the highest trade deficit. One reason for proposed higher tariffs on China, Mexico and Canada is based on those nations’ lack of cooperation in assisting the US in curbing illegal alien and drug flows. This in turn has a negative effect on our economy. Through the use of tariffs, the goal is to adversely impact those nations’ economies in order to motivate them to assist us.
Protect industries and jobs.
If goods imported from another country are more expensive than comparable products made in the US, consumers will buy “Made in America” goods helping US companies grow and keeping jobs at home.
Revenue.
Tariffs are a tax, and taxes are income for government. The good news is you can completely avoid this tax by buying American. There are four different ways tariffs are calculated, but the overall effect is the same.
How do tariffs affect me?
The effects will be varied, so some will feel them more than others. But the effects on the economy at large will not be known in the short term. Even economic models cannot always accurately predict what will happen. Ingenuity can bring about a positive economic growth cycle. As the saying goes, necessity is the mother of invention. Invention stimulates growth. Apart from that, here are some possible outcomes–
Increase in prices of goods imported with a tariff.
The primary short-term effect may be higher prices on goods with new tariffs if the tariff is passed on to consumers.
Lower profits.
If consumers are unwilling to pay the increase in price for imports, then profits will go down. Businesses will have to absorb the tariff or share the cost with consumers.
Decreased supply of goods.
Tariffs can lead to fewer imported goods which may also cause an increase in prices. For example, if the tariffs cause an increase in the price of cars manufactured in Mexico and sold in the US, then Americans may purchase fewer cars made in Mexico. Mexico may choose to reduce the number of cars made in Mexico and sent to the US. If the demand for new cars in the US is high but this causes the supply of available cars in the US to go down, car prices should rise. But US companies will then increase production to drive down the costs once again.
Reduced or lost employment.
If your job is tied to the imports affected by new tariffs, then you may experience a reduction or loss of a job. This would happen if demand for the goods and services with the new tariffs is cut significantly.
New jobs and companies created.
If supplies of imported goods and services with the new tariffs go down and yet demand for those goods and services remains high, US companies will begin to produce more goods in the US. This would cause an increase in jobs in the US.
Lower trade deficit.
If the US imports fewer goods, but continues to export the same, the trade deficit goes down. This can lead to a lower US debt and a stronger dollar.
Other markets open up.
Tariffs can be a negotiating tool to increase exports. If other nations negotiate to reduce their tariffs, for a US reduction, then more US goods can be exported. By leveling the tariff playing field, the US can begin to reduce the trade deficit. Again, this can lead to lower US debt and a stronger US dollar.
Tariff battles.
If other nations retaliate and place a higher tariff on US goods, then exports may decrease. While trade accounts for only 24% of U.S. Gross Domestic Product (GDP), it accounts for 67% of Canada’s GDP, 73% of Mexico’s GDP, and 37% of China’s GDP.
How can I eliminate or reduce the impact?
Stay the course.
The stock market has and may continue to make some adjustments along the way. If you’re investing in stocks for the long-term, keep investing. Adjustments are a normal part of the market. No one can know the effects of tariffs in a day or even a month. The stock market doesn’t like uncertainty– that’s what is causing the adjustments more than actual knowledge of the impact.
Educated shopping.
Purchase goods made in the USA or from a nation with a low tariff.
Delay buying.
This almost feels un-American to say. We’re not always great at delayed gratification. But this could be a perfect time to slow down buying, pay down debt and start saving.
Stick to necessities.
Most necessities are not subject to the new tariffs, especially in the short run. Food, shelter, medical and fuel don’t have to be affected.
Look for new opportunities.
If you’re employed in an industry affected by the tariffs, you probably have a skill set that will be valuable to companies in the US. You may even see opportunities to start a company in the affected industry.
One step at a time
As you can see, tariffs are not by definition a cause of inflation. This is far more nuanced than the press would have you believe. The situation is upsetting, but we’re in this together, and let’s just take this one step at a time.
