Tariffs: Possible Impact on the Economy and Investing

President Donald Trump has been vocal about his new policies and views on the U.S. trade balance. He has emphasized tariffs on key trading partners such as Canada, Mexico, and China. The administration’s goal for these tariffs is to promote domestic manufacturing, strengthen the U.S. trade balance, and pressure foreign governments to make policy changes. However, these tariffs can contribute to rising prices, which could negatively impact consumers. So, what might be the impact of tariffs on consumer prices and the overall economy?

Under the new administration’s trade policies, a 25% tariff was imposed on imports from Mexico (16% of total U.S. imports) and Canada (13%) although they limited the ley to 10% on Canadian energy imports. The administration has also implemented a 20% tariff on a wide range of goods from China (14%). Canada and China have now announced retaliatory tariffs, while Mexico is expected to announce more tariffs on U.S. goods in the coming days. Trump has also floated the idea of “reciprocal” tariffs on countries like India, which have had an “unfair” 12% tax on imports of U.S. goods compared to the U.S. 2% tariff on imports of Indian goods.   

Tariffs function as an extra tax on imported goods, translating over to businesses that heavily rely on these imports, which typically pass the burden down to consumers, increasing prices. Key industries (Automotive, Technology, and Energy) that rely heavily on foreign components to help build finished products, such as crude petroleum, cars, and computers, are the first to experience these price pressures. When businesses pay more for imported materials, they often raise prices on everyday products like cars, electronics, and groceries, leading to higher consumer costs.

Consumers are known to have to bear the impact of these tariff-induced price increases. According to the Peterson Institute for International Economics, the first wave of tariffs could lead to an extra cost of $1,200 a year. Essential goods such as cars, electronics, and even food products can face price hikes as supply chains adjust to the new trade policies. Beyond these direct price increases, tariffs contribute to broader inflationary pressures as the increased costs are passed down to the consumer. When businesses must raise prices to offset higher input costs, this increases the overall price level in the economy. These inflationary pressures are known to reduce consumer spending power and affect the overall discretionary spending in the economy. This rise in inflation could determine a response by the FED to adjust interest rates once again, increasing borrowing costs for consumers and businesses alike.  

For investors, these changes emphasize the importance of portfolio diversification and reviews with advisors. Market sectors that rely heavily on imports, such as retail and manufacturing, could begin to see margin and price pressures. On the other hand, domestic-focused industries less reliant on imports could be advantageous if this environment persists. Also, trade tensions can influence volatility in bond and equity markets, as has recently been seen due to tariff announcements. While tariffs are meant to be used as a tool to strengthen U.S. domestic production, they may have unintended consequences that lead to price pressures, inflation, and economic uncertainty. Once again, to weather this storm, it is key that investors maintain a long-term perspective and diversify allocations across a broad range of assets.

The market is currently down about 6% (as of March 4th) from its February all-time high.  These types of pullbacks are completely normal, as we expect two or three pullbacks of 5-10% and one more significant correction of 10-20% per year. In fact, we only experienced two pullbacks in 2024 (the most significant was an 8.5% pullback last August) and zero corrections. You have to go all the way back to May of 2023 since we’ve experienced a 10%+ correction in the markets. It doesn’t make these periods easier to live through but expecting them should help to keep things in perspective.  

Lastly, one thing to note about these tariffs is that they can be removed as quickly as they were implemented. Trying to time the markets is a fool’s game. This is especially true now as the market could snap back quickly should tariff policy change in the coming days/weeks/months. U.S. companies are the most dynamic in the world and will find ways to continue growing regardless of these barriers.  Remember, investing is measured in years, not in days. Stick to your plan and try to block out the noise.

~ Steve Gormley

The information contained herein is based on current market conditions, which are subject to change without notice. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those expressed or implied.