The “buzz” around global trade has skyrocketed thanks to U.S. tariffs imposed by the Trump administration and the retaliatory actions from other countries. But what exactly are these tariffs, how are they impacting our economy, and what do they mean for investors?
Simply put, tariffs are a tax on imports, and until the Trump administration, they had been losing steam as a national trade policy tool, with many experts viewing them as mutually harmful to all nations involved.1 The average U.S. tariff for all imported goods is between 1.4 to 1.6 percent, with 54 percent of all imported goods facing no tariff at all.2
However, President Donald Trump believes that the U.S. needs tariffs to encourage other countries to negotiate better trade deals. And in an effort to “rewrite trade agreements and crack down on China, Mexico and other countries,” the administration has so far imposed higher tariffs on solar panels, washing machines, steel, aluminum, electrical components and industrial products, chemicals and motorcycles.1,3 Additionally, the Trump administration, Mexico and Canada have reached a deal to replace NAFTA. The United States-Mexico-Canada Agreement will ensure that 75 percent of automotive content is produced in North America with 40-45 percent made by workers earning at least $16 an hour.4 The agreement must still be ratified by the legislative bodies of all three countries.
To put the impact of these tariffs into perspective, the U.S. raised $32 billion in tariffs in 2016, but these recent tariffs could result in an additional $145 billion in revenue, a massive increase compared to our prior trade policies.5
The effects on the U.S. economy
Overall, tariffs are deployed to raise government revenue and protect domestic industries from foreign competition. But they actually have a much larger effect on the economy. Recent tariffs have focused primarily on intermediate goods and parts. U.S. companies that use overseas parts to create finished products are seeing increased production costs, resulting in either cutting costs, mainly through layoffs, or increasing prices consumer prices.
And while the tariffs may provide a boost to certain industries, in the end, they may cost America jobs, slowdown US GDP and produce a drag on the U.S. economy, according to most economists.6
What tariffs mean for investors
History suggests that equity investors should be cautious. The Smoot-Hawley Tariff Act that passed in June 1930 was considered a factor in causing equities to plunge prior to the Great Depression. The Dow Jones Industrial Average rose from June to August 1930 as investors thought tariffs would provide a boost for American companies. However, in October of that same year, the market crashed.7
Similarly, President George W. Bush imposed tariffs ranging from eight percent to 30 percent on various steel products in March 2002. As a result, equities fell from March to October 2002 and did not regain their March 2002 levels until January 2004.7