What Impact Will Tariffs Have on Your Wallet?

Posted: Updated:

If you've tuned into the news recently, you've probably been inundated with countless stories about tariffs and trade wars. What's the impact on consumers and American businesses? Will our economy grow stronger or suffer from the consequences?

All the talk and hype can make it difficult to understand what's actually happening. Let's cut through the political talking points and focus on what tariffs actually are and their potential impact on the economy - and your pocketbook!

What Are Tariffs?

First, let’s take a theoretical look at tariffs. Simply put, a "tariff" or "import tax" is the cost added to a product purchased from another country that effectively raises its price. The logic behind imposing tariffs is that the higher price on these imports will make them less attractive to American consumers, who will then buy fewer of them. American businesses benefit because they are in a better position to compete with their foreign counterparts. This could potentially lead to a decrease in future imports and help bring a trade deficit closer to balance.

Today’s Talk

So why is everyone talking about tariffs? Over the past several months, President Donald Trump has revealed plans to impose tariffs on a number of imported goods. These goods range from market-ready products, such as solar panels and washing machines, to manufacturing inputs such as steel and aluminum. Most recently Trump signed an executive order imposing retaliatory tariffs specifically targeted at up to $60 billion of Chinese goods.

These tariffs are designed to penalize China for claims of unfair trade practices, i.e. the U.S. believes that China is manipulating a lower cost for goods imported to the U.S. A U.S. tariff is meant to counter and basically level the playing field for U.S. manufacturers. While the White House hasn't released the exact targets of the tariff plan, it's expected to cover nearly 1,300 different products. There's speculation the technology sector will be hit the hardest.

In 2017, the United States had a trade deficit with China of over $375 billion -- the highest on record. While the decision to impose tariffs was not a surprise given Trump's comments during the campaign, it produced a whiplash effect to the U.S. equity markets. The DOW Jones dropped nearly 1,500 points over the following two days before rallying nearly 700 points the next. Why? Investors were weighing the likelihood of an impending trade war with a large U.S. trading partner.

Winners and Losers

It’s easy to recognize the positive impact tariffs have on the U.S. companies producing the protected items. But you also need to consider the adverse and less obvious effects such policies could have on other segments of the economy.

American consumers purchase many foreign-made goods mainly because they are cheaper. If these goods are taxed, they'll now pay more for these same items. This means there will be less money in their wallets at the end of the day.

Another sector that stands to lose is companies that use the items that are targeted by tariffs. They may use them to manufacture their own products or sell them directly to consumers. Either way, consumers are going to pay more.

For example, a company like Wal-Mart, which purchases many items made overseas, will be hit with higher costs. Wal-Mart will then likely pass the increase on to you and you'll pay more. Here's where it could all go downhill. Some consumers won’t be able to afford the item or they'll decide it isn't worth the money. This may potentially cause Wal-Mart's sales to decrease. Lack of sales means loss of jobs for Americans. It's a snowball effect.

Simmering Trade War?

One final consideration is how countries will react to the U.S. taxing goods their companies sell.  It’s common for countries to retaliate and slap tariffs on U.S. products to fight back. This scenario could undo some of the intended domestic benefits -- not to mention lead to increased tensions between major global economic and military powers.

The expansion of international trade has been a major contributor to global peace. Anything that destabilizes that is a cause for concern. There's a lot of truth to the saying: "When goods cross borders, armies don't."

Summary

Economic theory teaches us that free and open trade produces the best results for everyone involved. However, when one country tries to manipulate one side of the equation, an imbalance occurs.

The U.S. and China continue to negotiate, so the details of Trump's tariff plan remain uncertain. What is certain is that any action will undoubtedly benefit some at the expense of others. The impact on the stock markets, though... well, that's less obvious.

Jonathan Koop is a Portfolio Manager with Bedel Financial Consulting, Inc., a wealth management firm located in Indianapolis. For more information, visit their website at bedelfinancial.com or email Jonathan.

  • Perspectives

    • Richardson is a senior manager with Centric Consulting.

      Marketing and Sales Alignment – Easier Than You Think

      There was a time, and perhaps you’re still living in it, where marketing is expected to drive sales leads, conversations, magically help close deals, and all sorts of expectations a marketing team can never meet. This period exists because there is a misalignment in those expectations of what marketing should do and what sales should do. I like to start with the basics. Is your company providing a product or service? Is it easy to sell? Is it cheap? Do your customers buy once?

    More

Subscribe

Name:
Company Name:
Email:
Confirm Email:
HTML
INside Edge
Morning Briefing
BigWigs & New Gigs
Life Sciences Indiana
Indiana Connections
INPower
Subscribe
Unsubscribe

Events



  • Most Popular Stories

    • Wesemann Hall at the Valparaiso University Law School (photo courtesy Tony V. Martin/The Times of Northwest Indiana)

      Valpo School of Law Transfer Denied

      A proposal to transfer Valparaiso University's law school to another university has been shot down. The Tennessee Higher Education Commission has denied the transfer to Middle Tennessee State University, which would have led to the creation of a College of Law at the school. 

    • Daniels Envisions Purdue, Region as 'Cooler Place'

      Purdue University President Mitch Daniels says a more than $1 billion live, work, play development on the West Lafayette campus will be a magnet for attracting and keeping top talent in the region. The Discovery Park District is part of a 30-year vision to transform the west side of the Purdue campus and create a "preeminent environment" for educational, economic, cultural and community activities in the region.

    • Manufacturer to Close in Muncie

      Illinois-based JD Norman Industries is planning to close its facility in Muncie. In a notice to the state, the company says the decision will result in the layoffs of 130 employees. JD Norman did not provide a reason for the closure.

    • Mega-Merger Involves Fort Wayne Operation

      A defense industry contractor with a significant presence in Fort Wayne has announced a merger agreement. Florida-based Harris Corp. (NYSE: HRS) and L3 Technologies Inc. (NYSE: LLL) in New York say the combination will create the sixth-largest defense company in the country. In early-2015, Harris completed the $4.75 billion acquisition of Exelis, a long-time manufacturer of military radio technology in Fort Wayne. Shortly after the acquisition, Harris consolidated...

    • High Alpha Spawns Tenth Tech Startup

      The first company has launched from Indianapolis-based High Alpha since the venture studio received a $100 million infusion in July, and the tenth overall. Anvl develops software designed to reduce and prevent maintenance service industry injuries. The company is led by Hoosier tech scene veteran Robin Fleming, who previously served as vice president of technology for Angie's List before its acquisition by New York-based IAC (Nasdaq: IAC). Anvl was born out of a first-of-its-kind...