Understanding Tariffs: How They Impact Inflation, Investments, and Market Risk

We have been receiving the same set of recurring questions from clients, so we thought we would address them in this blog update. Here it is.

What Are Tariffs?

What are tariffs? And how do they affect my investments? This has been a popular topic because President Trump is threatening to increase tariffs on some of our largest national trade partners.

According to the White House, this includes: “a 25% additional tariff on imports from Canada and Mexico and a 10% additional tariff on imports from China.”

A tariff is a tax that is imposed by one country on imported goods, which can be applied to:

All goods
Specific goods
Specific countries

In this case, the tariffs are being applied to specific countries.

What Is the Purpose of Tariffs?

Tariffs have been used for a long time and tend to vary over time depending on the specific needs and relationships of the issuing country.

The typical goals of tariffs are to raise revenues for the government, create demand for domestic goods instead of imports, or use them as leverage for political negotiations.

Why Are These Tariffs Being Implemented?

In this case, all three of these reasons could be the cause behind the newly announced tariffs.

We believe President Trump has been adamant about resolving the nation’s budgeting issues, republicans tend to be passionate about creating jobs and keeping demand for domestic goods, but Trump has also specifically provided political reasons for these tariffs.

According to the White House, “President Trump is taking bold action to hold Mexico, Canada, and China accountable to their promises of halting illegal immigration and stopping poisonous fentanyl and other drugs from flowing into our country.”

His goal is that these additional taxes may reduce the demand for imported goods and that the targeted countries would prefer to help with his demands rather than be hit with the increased tariffs.

How Could Tariffs Affect Inflation?

One of the main concerns is that this tax is often passed to the end consumer in the form of higher prices, which may cause overall inflation to increase.

According to the Boston Federal Reserve, “A 25% tariff on Canada and Mexico combined with a 10% tariff on China could add 0.5 to 0.8 percentage point to core PCE inflation.”

The increased tax is not paid directly from the pockets of the targeted countries but instead may be passed down to the end consumer via higher prices. These higher prices may reduce the demand for imported goods, which could reduce the export revenue of the targeted countries, which may cause them to succumb to President Trump’s demands.

That is what we believe is the thought process behind applying tariffs and using them as leverage during negotiations.

What Should Investors Consider?

However, we think our clients are concerned because we are still currently dealing with a higher inflation rate than we have seen in recent years.

The Federal Reserve is still doing their best to control interest rates to help bring inflation lower without hurting economic growth. You can read more about this in our blog at: Federal Reserve Interest Rate Policy.

These tariffs could potentially undo the progress the FED and the nation have made toward achieving a lower inflation rate. We believe this is concerning to the US Citizens because they could potentially feel like they are the end victim of the tariffs, but it could be worth it if President Trump’s negotiations work and the targeted countries provide assistance towards his goals.

How Are We Managing Market Risk?

We always assure our clients that we manage our in-house portfolios actively. If our independent indicators start to flash red and forecast future volatility in the market, we have the ability to reduce risk or possibly move to cash for a period of time.

We even have the ability to bet against the market via inverse equity funds if a severe downturn is forecasted in stock prices. However, at this time, our indicators are still green, and we are closely watching the situation unfold.

We will contact our clients in our actively managed portfolios and in our 401(k) advice program if we do think urgent actions are prudent.

Key Takeaways: Understanding Tariffs and Their Impact

A tariff is a tax that is imposed by one country on imported goods, which can be applied to all goods, specific goods, or specific countries.
The typical goals of tariffs are to raise revenues for the government, create demand for domestic goods instead of imports, or to use as leverage for political negotiations.
One of the main concerns is that this tax is often passed to the end consumer in the form of higher prices, which may cause overall inflation to increase.

Speak With a Trusted Advisor

If you have any questions about your investment portfolio, retirement planning, tax strategies, our 401(k) recommendation service, or other general questions, please give our office a call at (586) 226-2100. Please feel free to forward this commentary to a friend, family member, or co-worker. If you have had any changes to your income, job, family, health insurance, risk tolerance, or your overall financial situation, please give us a call so we can discuss it.

We hope you learned something today. If you have any feedback or suggestions, we would love to hear them.

Sincerely,

Zachary A. Bachner, CFP®

with contributions from Robert Wink, Kenneth Wink, James Wink, and James Baldwin

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