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

    • Ahh…Yes! Turning a Hot Mess into a Cool Breeze

      "Problems cannot be solved by the level of thinking that created them," is attributed to Einstein over 75 years ago. This still holds true, particularly in challenging communications. Many people address conflict at the level it was created by rehashing and building more evidence for their ‘side’ of an argument. Repeating a position tends to intensify the separation of people.

    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

    • The IU School of Informatics, Computing and Engineering will now be named for Fred Luddy for his $60M gift. (photo courtesy James Brosher/IU)

      $60M Gift to IU, Second Largest in School History

      An Indiana University alumnus who founded the information technology firm, ServiceNow, has given his alma mater $60 million to establish an artificial intelligence center. The university says the gift from cloud-computing pioneer Fred Luddy is the second largest in the history of the IU.

    • POET ethanol co. announced in Aug 2019 it was closing the plant in Cloverdale. (photo courtesy: POET)

      Cloverdale Ethanol Plant Closes

      South Dakota-based POET LLC, the nation’s largest biofuels producer, is moving forward with a plan to shut down its biorefining plant in Cloverdale, leaving 50 Hoosiers without jobs effective Friday. The company tells Inside INdiana Business that it is not making any changes to the plans announced two months ago. 

    • Chrissy Vasquez and Adam Ramsey

      Indy Reads Adds Staff

      Indy Reads Books has hired Chrissy Vasquez (pictured) as chief development officer to oversee marketing, development and the store. Also, Adam Ramsey (pictured) has been named manager of engagement, specializing in story telling through video and social media. Vasquez previously served as executive director and vice president of operations for Back on My Feet.  

    • The multi-year road project stretched from Bloomington to Indianapolis.

      I-69 Road Project Update

      The Indiana Department of Transportation has scheduled three public meetings for next week to update the community on the I-69 Section 6 road project.    Section 6 is an approximately $1.5 billion new interstate project stretching from Martinsville to I-465 in Indianapolis.

    • Bob Stutz

      New Role For Salesforce Exec

      After three years on the job, Salesforce Marketing Cloud Chief Executive Officer Bob Stutz is moving into a new role. Stutz, who will remain in Indianapolis, is now executive vice president of strategic partners at Salesforce (NYSE: CRM).  Since arriving in Indianapolis, Stutz has overseen the establishment of the company’s regional headquarters in downtown Indianapolis, which included the Salesforce name being placed atop the state’s tallest building.