A Closer Look at Tariffs
Many of us first encountered the word “tariff” in a high school history class, maybe during a lesson on the Great Depression and the infamous Smoot-Hawley Tariff Act of 1930. Back then, tariffs were associated with economic protectionism and financial turmoil.
Fast forward to today, and tariffs are once again front and center in U.S. economic policy. They're contributing to market volatility and sparking debate among economists, policymakers, and investors alike. Whether viewed as a path to a more balanced trade system or the start of a modern trade war, tariffs are shaping the economic landscape in a significant way.
In this article, we break down what tariffs are, why they’re being used, and how they could impact the markets and your long-term investment strategy.
What Are Tariffs and How Are They Used?
Tariffs are taxes imposed on imported goods, and they’re designed primarily to protect domestic industries from foreign competition. They also serve four key strategic purposes:
Decoupling: Reducing dependence on foreign supply chains.
Rebalancing: Addressing trade imbalances.
Negotiating: Leveraging tariffs to influence other nations’ trade policies.
Funding: Generating government revenue.
Some tariffs are short-lived, used as bargaining chips in trade talks. Others may signal a longer-term restructuring of global trade dynamics. While higher tariffs can dampen economic activity and increase the price of imported goods, the U.S. is relatively well-positioned due to the strength of its consumer base and the appeal of its economy to global businesses. However, uncertainty around shifting trade policies can weigh on business confidence and slow investment decisions.
Tariff-related risks also extent to countries with heavy trade dependence on the U.S., such as Mexico and Canada, where exports to the U.S. make up over 20% of their GDP. In response, countries like Germany are shifting policy, increasing domestic spending to reduce reliance on exports.
Why Is the U.S. Trade Deficit So High?
In 2024, the U.S. trade deficit in goods reached $1.1 trillion, a figure that’s been growing since the 1970s. Several factors drive this trend:
High consumer demand for imports
A strong U.S. dollar, which makes American exports more expensive abroad
Structural economic differences (the U.S. is more services-focused)
While some view the deficit as a sign of U.S. consumer strength, others see it as a signal that the playing field is uneven. For example, U.S. policy has shifted to use tariffs as leverage to address these imbalances, especially with trading partners that rely heavily on access to American markets.
One important note: tariffs implemented under emergency orders, without the longer review process typical of past administrations, can introduce sudden changes that rattle markets. This uncertainty makes it harder for businesses to plan and adapt.
Do Tariffs Cause Inflation?
Yes, at least in the short term. Tariffs raise the cost of imported goods, and a portion of that cost is passed on to consumers. Estimates suggest consumers bear 30%–50% of tariff-related price increases, with companies either absorbing the rest or adjusting their pricing strategies.
A famous case, that we referred to in last month’s newsletter, involved 2018 tariffs on imported washing machines (but not dryers). U.S. manufacturers raised prices across the board, even for dryers, showing that tariffs can create ripple effects in pricing behavior beyond just the taxed goods.
Tariffs can also affect currency strength. When tariffs reduce demand for foreign goods, the U.S. dollar often strengthens. While a strong dollar helps reduce some of the cost burden from imports, it can also make U.S. exports less competitive abroad.
If tariffs escalate into a trade war, the inflationary effects could become more pronounced, with sustained pressure on consumer prices and potentially higher interest rates.
What Is Trade Reciprocity?
Trade reciprocity is the idea that countries should mirror each other’s tariffs. For example, if one country charges a 10% tariff on U.S. goods, the U.S. would impose an equal 10% tariff in return.
This approach marks a significant shift from decades of multilateral trade policy, which aimed to lower global barriers through collective agreements (like those brokered under the World Trade Organization). Under the Trump administration, the focus shifted toward bilateral deals and more assertive trade actions.
Examples of uneven tariff structures include the European Union’s 10% tariff on U.S. automobiles, compared to the 2.5% U.S. tariff on European autos. Trade reciprocity seeks to address those gaps.
However, this strategy can lead to retaliation. Canada, for instance, has pulled U.S. liquor off shelves. China could respond by reducing purchases of U.S. goods, restricting access to critical materials, or tightening regulations on U.S. firms operating in China.
How Do Tariffs Affect the Stock Market?
Tariffs tend to increase market volatility, as investors respond to uncertainty about trade flows, supply chains, and corporate earnings. We saw this play out during the 2018 U.S.–China trade war, when tariffs sparked sharp market swings.
In 2018, the S&P 500 declined 4.4% amid escalating trade tensions.
By 2019, the market rebounded 31.1% as trade negotiations progressed and consumer spending held strong.
Tariffs can have uneven effects across sectors. For instance, companies heavily reliant on global supply chains or foreign sales may be more vulnerable, while domestic-focused industries could benefit from a shift toward U.S.-made goods.
Today’s economic context is different from five years ago. With lingering effects from the pandemic, global conflicts, and inflation shocks, the impact of tariffs may be more complex and less predictable than before.
Key Takeaways:
Tariffs are taxes on imports that serve strategic economic and political goals.
The U.S. trade deficit remains near historic highs, making trade reform a key issue for policymakers.
Tariffs can contribute to inflation, particularly in the short run.
The push for trade reciprocity may lead to retaliation and reshape international business relationships.
Market volatility tends to increase in response to tariff headlines, but long-term investors have historically been rewarded for staying the course.
Final Thoughts for Investors
Tariffs are one of many factors influencing today’s markets, and their effects can be wide-ranging. While they may offer short-term protection for some industries, they also create uncertainty and could weigh on global growth and consumer prices.
As always, our advice is to focus on what you can control: maintaining a diversified portfolio, aligning your strategy with your time horizon and risk tolerance, and not letting short-term noise disrupt long-term goals. The speed and sharpness of recent movements, in both directions, drive home the difficulty of attempting to time the markets. This is especially true when the moves are driven by rapidly changing trade policies, political discourse, and news headlines.
If you’d like to discuss how tariff developments could impact your financial plan or portfolio, don’t hesitate to reach out. We're here to help you navigate the uncertainty with confidence and perspective.
Facts in this article sourced from: https://www.capitalgroup.com/advisor/insights/articles/understanding-tariffs-5-charts.html
Investment advice is offered through Belpointe Asset Management, LLC. 500 Damonte Ranch Parkway, Building 700, Unit 700, Reno, NV 89521
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed.