You've probably been hearing a ton about this thing called "tariffs" and that we are facing a "trade war." So what exactly is a tariff? How does it impact you and your wallet? Is it the best way to grow the economy? And is it worth it?
Let's Start With Global Trade
Global trade is more prevalent today than it has ever been before. Modern technology allows companies to communicate instantly with trading partners around the globe, and goods international goods flow into the U.S. at an incredible rate.
Free trade is usually considered to be a good thing for global economies but sometimes excessive importing can cause a lot of harm to domestic businesses. To help these businesses compete against cheaper foreign suppliers, countries need a way to get consumers to buy more domestic goods.
What Is A Tariff?
A country that imports more goods than it exports has a trade deficit. While many countries carry a trade deficit without issues, it could be problematic if it becomes too extreme. One way to address a trade deficit is by placing a tax on imported goods, known as a tariff.
When tariffs are in place, a company or person who wants to import products has to pay the tariff to get the goods through customs. This extra cost gives the purchaser a reason to buy domestic products. Tariffs can be placed on all imports, or they can be placed on imports from a specific country.
But tariffs don’t just impact companies, they affect you too! Increased import costs often trickle down to the consumer level so they could end up costing you money too. Here are three ways that import tariffs can impact your wallet.
TARIFF IMPACT ONE: HIGHER PRICES
Companies that import goods often have important supply chains assets in other countries. They can’t just switch to a domestic supplier, they have factories, offices, and other costly resources that are locked in place. Abandoning and replacing these resources is impossibly expensive, so these companies are forced to pay the tariffs and continue importing their goods.
The cost of paying tariffs on top of a company’s regular operating expenses causes an increase in costs. More often than not, it passes the increased costs onto consumers by raising the prices of their products.
You end up paying more for your favorite products because the manufacturer is paying more to produce them!
In extreme cases, an overall increase in costs can even have an effect on the value of your money! Wide-scale price increases can accelerate inflation; decreasing the value of the cash you’re holding.
TARIFF IMPACT TWO: ECONOMIC DAMAGE
The state of the economy has an impact on almost everyone in the country. When businesses do well, we all tend to do better. Tariffs take money out of the private sector and put it into the government's pocketbook. Instead of being used to make investments or buy goods, the money goes into the Treasury and disappears into the Federal government’s massive balance sheet.
Despite popular perception, tariffs don’t cost the importer anything directly. Domestic companies are responsible for paying the tariff on the goods they import. Tariffs hurt importers because they lower the demand for their goods, but domestic companies are the ones footing the initial bill.
Limiting trade and raising costs for domestic companies inhibits the economy and reduces the number of goods being produced overall. Some companies even downsize to limit the damage of increased costs. Others postpone their big investments until after tariffs are lifted, or abandon the projects altogether.
When the economy is doing bad it can impact your bank account in several ways. Depending on where you work, corporate downsizing can cost you your job. If you run your own business, you may find yourself lowering your rates to keep up with demand. Some of your clients may reduce their orders or drop off entirely.
It’s in everyone's interest to keep the economy strong. Tariffs can be extremely harmful to the economies of both importers and exporters if they are not deployed strategically.
TARIFF IMPACT THREE: MARKETS
Large scale tariffs can have a devastating impact on investment markets, and just because you’re not trading stocks doesn’t mean the market won’t impact your wallet. If you are enrolled in a 401(k) or pension plan at work, you’ve got skin in the game. Tariff headlines have been the biggest movers of U.S. markets for the past year, and the resultant uncertainty has dragged down markets.
The decline isn’t universal. Many companies aren’t directly impacted by tariffs because of the way their businesses work, but the overall market definitely feels the pain of the increased costs.
Unless you’re trading individual stocks, your retirement account has significant exposure to the overall market so tariffs are probably gonna impact your savings. Even if tariffs have zero impact on a company’s operations, its stock can still be dragged down by the direction of the overall market and the downtrend wave.
Now, I'm not trying to make you panic. I'm just trying to give you information. These impacts can be short-term and in the long run, you should be okay. Panic selling is never a good investment strategy. In fact, when the markets are down, it can be an excellent buying opportunity. If you’re closer to retirement and you are worried about the impact of tariffs on your portfolio, make sure you check out my Make Your Money Work For Your MasterClass to determine the best strategy for your unique circumstances.
Tariffs don’t just affect the suits on Wall Street, they can cost everyday investors - like me and you - a lot of money when they cause the market to take a dive. That's why you need to study your investments and be aware of the impact tariffs can have on the companies your holding. I've been analyzing the markets throughout the headlines and share my strategies with our Premium Investing Group members aka the PIG so make sure you check that out.
CONCLUSION
Whether or not tariffs are an effective way of managing a nation’s trade deficit is still up for debate, but we know for certain that tariffs can end up costing us more money.
Whether or not the extra costs are for the greater good of the country is unclear, but - for now - be aware of tariff policy and how it affects your day-to-day life. It will help you manage your investments, make better financial decisions, and stay more informed about the direction of the economy.
*This article was originally published on Invest Diva: