September 2019

How Tariffs Affect You!

Author: Kent Thune

If you pay even the slightest attention to the news, you’ve likely heard about tariffs and the greater trade war with China. But how does this macro-economic, geo-political confrontation impact the micro-economic bottom line?

In different words, how do tariffs affect you financially? Does the American consumer have anything to lose in this dispute? And if so, how much? But before we dig into your pocketbook, let’s sift through the basics.

A tariff is a tax on an imported good at the border. For example, a 25 percent tariff on $1 million of goods would mean that the foreign country importing the goods must pay $250,000 at the border or port of entry of the domestic country. Why impose tariffs? There are three primary reasons a country, specifically the U.S., may impose tariffs on an importing country: (1) to protect domestic industry and products, (2) to produce revenues, and (3) to create negotiation power for a fair balance of trade.

Although many countries have been targets of U.S. tariffs in the past year, including Canada, Mexico, and several European nations, the primary target has been China, with current tariffs of 25 percent on $250 billion in Chinese goods. The U.S. has a $55 billion trade deficit with China, which means that we buy many more goods from China than they buy from us. The goal, in simple terms, is to negotiate a better trade deal to reduce the deficit.

Historically, especially in today’s free economy, tariffs have not had a positive reputation. Going back more than 80 years, economists still place partial blame on The Smoot-Hawley Tariffs for worsening the Great Depression in the 1930s. These tariffs were placed on farm products and manufactured goods imported from foreign countries. But in response, other nations placed tariffs on American goods, bringing international trade to a standstill, thereby worsening the economic effects of the depression.

Fast-forward to today, and tariffs have seen similar results. For example, in March of 2018, the U.S. imposed 25 percent tariffs on steel coming from most importing countries. The intention here was to increase the cost of foreign steel, which would presumably make U.S. steel more attractive to buyers, thereby increasing sales of domestic steel and decrease the sales revenue of foreign steel. However, other countries responded in kind by imposing similar tariffs on the U.S., which resulted in higher steel prices worldwide and domestically. A large nail manufacturer in Missouri saw declining revenues and laid off workers. In November, President Trump gave them an exemption from the tariff, which helped return the manufacturer back to normal growth.

As for the U.S. economy as a whole, growth is near its historical average with a measure of 3.1 percent on gross domestic product (GDP) year-to-date 2019. Forward-looking estimates range from 2.0 to 3.0 percent GDP, which is moderately healthy, although below President Trump’s goal of 4.0 percent. The reason the U.S. economic growth is not stronger is relatively simple.

Tariffs act as taxes on goods coming into the U.S., making items hit with the restrictions more expensive here. While this can make U.S. goods cheaper by comparison, it also drives up costs for American businesses and consumers.

Although tariffs have not yet made a significantly negative impact on the U.S. economy, economists still warn of an economic slowdown later in 2019 and into 2020 if tariffs remain in place. According to a Business Insider economic forecast, businesses and consumers could buy fewer goods in response to higher prices, resulting in a slower pace of job growth, less capital investment, and, eventually, slower economic activity. While the researchers’ estimates don’t suggest the U.S. would be plunged into a recession any time soon, they say the slowdown would be substantial.

Furthermore, retaliatory measures from China and other countries will not only raise prices on goods that Americans purchase, they may stop buying goods from U.S. manufacturers, hurting the bottom line for corporations and forcing layoffs. For example, China hit U.S. soybean farmers with a 25 percent retaliatory tariff and started importing soybeans from suppliers in other countries. According to Fox Business News, U.S. soybean exports have been cut in half thus far in 2019. Higher inventories would lead to lower prices, which can dramatically hurt soybean farmers by reducing their revenues. In extreme cases, soybean imports would be permanently reduced, forcing some farm closures.

But exactly how might tariffs directly impact you and me, the American consumer? Let’s say you want to buy some furniture for your porch and you’re shopping on the popular internet retailer, Wayfair. If you’re looking for a deal, chances are the furniture you buy is manufactured in China. If you buy before fall, you may get a good deal because Wayfair’s summer inventory is likely from pre-tariff prices. However, later this year and into 2020, the new inventory will be priced to compensate for today’s tariffs, making prices higher on this and many of the other goods imported from China.

The bottom line is that tariffs and an ongoing trade war with China and other countries will eventually have the effect of rising costs on many of the goods that we consumers buy on a daily basis. A Business Insider report estimated that the cost of tariffs per person in 2019 would be $915, assuming all tariffs remain in place for the entire year. If all trade actions hit concurrently, up to 2.75 million more workers would be unemployed compared with current projections, as companies slow their hiring plans and lay off workers. If current tariffs remain in place for another 10 years, it would cost each American over $17,000 by 2030.

The rising costs may lead to either lower consumer activity, lower corporate profits, or both in 2019 and beyond. A slower U.S. economy would also mean a weaker (or negative) stock market in the short term. However, if the U.S. can find a way out of the trade war, with deals that are more favorable than before tariffs were implemented, the economy and stock market can rebound and be as strong or stronger than before. With a presidential election looming in 2020, a trade deal would be politically expedient, increasing the odds of minimal impact on the pocketbook of Americans.

In summary, tariffs are not good for Americans or the U.S. economy, especially in the long run. However, if there were ever an optimal time to fight a trade war, now is the time because the U.S. economy is strong enough to withstand the downside, at least, for now. 

Kent Thune is a Certified Financial Planner® and is the owner of a Hilton Head Island investment advisory firm, Atlantic Capital Investments, LLC. He also provides financial counseling to Marines and other service members on Parris Island. Thune’s financial guidance has been published at The Motley Fool, Yahoo Finance, Kiplinger.com, MarketWatch.com, Nasdaq.com, InvestorPlace.com, and his own blog, TheFinancialPhilosopher.com.

Let Us Know what You Think ...

commenting closed for this article


Social Bookmarks