As long-promised (and widely-signaled) tariffs kick in, you might notice prices creeping up on everything from tech gadgets to jeans, depending on where items are made. But what exactly are tariffs, and how can better understanding them help you make smarter investment moves? Let’s explore their promised upsides, weigh the potential downsides, and see what it all means for your portfolio.
So, What’s a Tariff for?
At their core, tariffs are taxes governments impose on imported goods. First, they bring in money for things like roads and schools—classic tax stuff. Second, they partially shield domestic businesses from foreign competition by increasing the cost of imported goods to incentivize consumers to buy American-made instead. Third, tariffs provide leverage in negotiation talks between countries for better trade deals. Simple enough, but whether or not they deliver on these intentions is hotly contested.
The Carrot
Tariffs can dangle some tempting benefits; after all, if it were clearly all downside, there wouldn’t be much fire to the debate. New industries, such as a fledgling U.S. carmaker, may find some shelter under a tariff system, giving the company economic space to grow and motivation to hire employees locally. Government coffers also get a boost from this alternative source, which could ease the pressure on your income taxes down the road.
Additionally, tariffs can keep key industries, such as steel for defense, humming along at home rather than transferring overseas. And if a competing country is tough on trade, tariffs provide leverage for pushing back. Promises of increased innovation, economic growth, and jobs make for a pretty appealing bunch of carrots when trying to lure companies into manufacturing domestically.
The Stick
The rub comes when the stick starts swinging and manages to hit not only the intended target of foreign importers but also the implementing country on the backswing. Tariffs on imported goods mean that consumers will pay more when out shopping—anything from cars to groceries is fair game—as companies pass along the import costs to you at checkout. Muffling competition from abroad may also breed complacency among domestic producers, reducing drive for innovation or artificially inflating prices to pad their margins. Then there’s the tit-for-tat problem: other countries may respond with their own tariffs, attacking U.S. exporters and fueling trade disputes. Finally, they could be killer for efficiency, or even promote corruption, as companies allocate resources to dodging the intended effects.
Impact on Your Investments
So, how are tariffs shaking up your portfolio, and what can you do about it?
- Sector Shake-Ups: Trade-heavy industries, like tech or manufacturing, may be the first hit by higher costs. Review your portfolio for potential overweighting in sectors likely to bear the brunt of tariffs and adjust if needed.
- Diffuse the Risk: Check to ensure your assets include a healthy spread of investments across industries and countries. A balanced mix may help avoid tariff turbulence having an outsized impact on your bottom line.
- Market Rollercoaster: The 24-hour news cycle, currently flooded with tariff updates, can drive rapid changes in stock prices (both positive and negative). Stay informed, but don’t let the noise derail you—ride it out.
There’s no clear winner with tariffs, as the US economy strives to nibble the carrot without choking on the consequences while simultaneously dodging the stick. As an educated investor, view tariffs as a signal for you to stay alert with regards to your investments. Diversify, attend to the headlines, and don’t let daily market fluctuations dictate your broader strategy.
As always, reach out to your financial advisor if you have questions specific to your situation – we’re here to guide you through whatever comes next.
Presented by Ryan Fleming, CFP®, AIF® & Emilia White
