Tariffs, Tariffs Everywhere

Tariffs are all over the news, both politically and financially.  What do they mean for your money?  Let’s break it down.

First, we must note that the amount, timing, and duration of tariffs are big unknowns.  In a negotiation, not everything that is threatened comes to fruition.  We’ve already seen several announcements walked back soon after.  And for tariffs that do get implemented, it’s impossible to predict how long they last.

The first noticeable impact is that things will probably get more expensive.  Technically, tariffs are paid by the companies that import goods subject to them.  But have you ever heard of a company completely absorbing an additional cost out of the goodness of their heart?  Market dynamics may limit their ability to pass along the entire cost to you, the end consumer, but some of that cost will find its way into what you pay.

If things are getting more expensive, that means inflation will be higher.  And if inflation is higher, it’s likely that interest rates will stay higher for longer.  One of the Federal Reserve’s (Fed’s) two mandates is price stability, which means keeping inflation in check.  When inflation increases, their primary tool to fix that is higher interest rates. With many other interest rates tied to what the Fed does, that means rates for things like mortgages, car loans, and credit cards may not come down very much or very quickly.  Fortunately, the inflation impact is short lived, since the second year of a tariff is no more expensive than the first year.

We’re also likely to see corporate profits drop (or at least rise more slowly).  If the entire cost of a tariff isn’t passed along to you, that means companies are absorbing some of the cost.  All else being equal, higher costs mean lower profits.  While US-based tariffs will disproportionately hurt foreign companies, US companies selling products overseas will not be immune if other countries retaliate with tariffs of their own, which is likely.

The longer-term impacts are harder to predict.  Will companies find it more appealing to move production back to the US, bringing more jobs home?  Will the Trump administration achieve their policy goals and drop most if not all tariffs? Will the economy take a turn toward recession, and make continuing tariffs politically unappealing?  Any of these scenarios is possible, though none can be anticipated with any certainty.  All we do know is that things will change, and we will continue to monitor these developments as they come.

Disclosures

Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Rope Financial are separate entities.  

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