There is a lot of talk in the news recently about tariffs, which was initiated by President Trump last week when he said that we will impose a 25% tariff on imported steel and a 10% tariff on imported aluminum. Tariffs are basically a tax imposed by a country on imports from other countries as a way to make their domestic industries more competitive with the rest of the world. Here’s is a simplistic illustration of how tariffs work:
So, for example, this would make Nucor, an American steel company, prices more in line with prices charged by steel companies from, say China. You can see that this would help our domestic companies that produce the raw materials needed to manufacture finished goods for consumers. Their prices would be more competitive and, therefore, should be able to sell more product.
But, you’ll probably also realize that the prices for those finished goods will now go up. So, a car made here will now cost more than a car made in Mexico. All else being equal, consumers usually will buy the same car for the cheapest price. This would hurt US car makers, including foreign ones that have plants here. Less demand means less production means less jobs. And there are a lot more jobs in the finished goods sector than the raw materials sector. So, overall tariffs typically end up being a bad thing for the US economy.
Many economists are afraid that tariffs will cause trade wars with our trading partners. This is certainly a possibility. The good thing is that most countries need us more than we need them. This means that tariffs can be a good negotiating tool as we try to reverse our trade deficits with so many countries.
In fact, the tariffs might convince more foreign companies to build plants in the US. We already have much lower fuel costs than in most parts of the world and shipping costs will be much lower as well.
It will be interesting to see how this plays out. I can’t imagine that we will have a blanket tariff for every country. If the tariffs do get approved, expect to see some countries exempted or with a reduced tariff before everything gets finalized.
Please feel free to contact me with any questions.
Joe Baker, CFP®
Baker Asset Management, LLC
joebaker@bakerassetmanagement.com
