Tariffs And Your Investments
The confusion surrounding the impact of tariffs has created unprecedented economic uncertainty that has confounded both the capital markets and the global economy. The overall effect of tariffs is trade restrictions placed upon the otherwise “free market.”
As investors, we rely on the market to compensate us for assuming the risk of using our capital to invest in the various markets (stocks, bonds, real estate, commodities, etc.). The historical evidence and straightforward common sense illustrate that the longer the time horizon for a particular investment, the greater the chances of earning positive returns. To combat the uncertainty of future performance, we use strategies that reduce the risk of losing money – disciplined philosophy, diversification, control over costs, taxes, types of investments, and how much risk we will accept. The tariff scenario we are experiencing now is a real threat to economic growth and, ultimately, your investments.
The U.S. has used tariffs in the past, but they were intended to accomplish a specific goal – increase revenue or provide protection for our domestic producers; they’re not the same. Before the Civil War, the United States government derived 90% of its revenue from tariffs since there were no income or excise taxes then. Foreign goods (mainly from Europe) would be delivered to a limited number of seaports (six) on the Eastern Coast, so it was efficient to identify and collect the taxes. From the Civil War to World War II, tariffs were primarily used to protect domestic manufacturers during America’s industrial revolution and two world wars. Today, tariffs are sparingly used. Tariffs were imposed in the 1990s to protect American automobile manufacturers, and during President Trump’s first term, he placed tariffs on certain Chinese exports, including steel.
The objective of President Trump's current tariffs is not as straightforward as in the past. He claims that the revenue generated by the tariffs would help pay for the tax cuts he promised. However, he has also claimed that protecting US manufacturers is an objective. Since government revenue can only be generated by paying the tariff, the choice of the US importer not to pay the tariff may help the US exporter, but it doesn’t provide the U.S. Government revenue. The U.S. suppliers will profit by the higher prices paid by other suppliers and consumers, but whether the profits will “trickle down” to the economy is open to debate.
Assume a U.S. Steel Importer normally buys its steel from a foreign country that the US has levied a 25% Tariff on. The price to the US importer of $100 will be increased to $125. The next best option is to purchase from US steel producer at $110. See diagrams below to highlight the main difference between purchasing product with and without tariff.
Another leg of the tariff issue is “Reciprocity,” which differs from “Retaliation.” What we’re witnessing today on March 6 is immediate retaliation from Canada, Mexico, and China. Canada and Mexico are our #1 and #2 trading partners and allies.
Reciprocity is an action President Trump is scheduled to implement on April 2, 2025. Several countries already impose tariffs on American goods and services (to protect foreign producers). On April 2, if the tariff rate placed on American goods and services is higher than the U.S. tariff on that country’s goods, the U.S. will automatically increase the tariff rate to equal the foreign country's rate. I cannot even imagine the level of chaos that would ensue.
While all this is going on, our interest rates remain relatively high. They are still a hindrance to home construction and sales, which is still the economy’s “ace in the hole” in that many potential home buyers remain on the sidelines waiting for interest rates to fall. Since home construction creates demand for workers in many trade areas, many are waiting for this “multiplier” effect. However, the tariff situation will only increase prices for construction materials, and the Fed will be reluctant to reduce interest rates in an inflationary environment.
Reviewing your current portfolio and financial objectives can help you decide if any adjustments are necessary to your holdings, especially in the conservative, low-risk side of your investments. Because interest rates remain relatively high, the returns on shorter-term investments—CDs, Money Market Funds, and Short-Term Treasuries—remain attractive (and outpace inflation). The equity picture is unclear, but I don’t feel the near term and possibly intermediate future look promising for stock valuations considering the future of probable higher costs, slower demand, and eventual lay-offs, lower GDP, and potentially a prolonged recession.
Please contact me for a no-charge consultation and portfolio review at (925) 484-1671, or email me at anthony@carrwealth.com
