The Threat of Tariffs

Why They’re Likely To Be Bad For Everyone

With the presidential election in the U.S. just a few weeks away, there’s one topic on the economic front that may deserve a little more attention - tariffs.

It’s tough to get an accurate picture of how they could impact consumers because it usually gets a political spin whenever it’s mentioned. The threat of a trade war escalation with China has been around for years, but it's Donald Trump’s warning that he supports levying huge tariffs not only on Chinese imports but on all other global imports that threatens to derail any potential global recovery cycle.

For the purposes of this piece, I’m not interested in putting any type of political spin on this. I do feel, however, that investors (and consumers in general) should be aware of how the implementation of tariffs on imported goods could impact their own household and the economy in general.

What Are Tariffs?

Tariffs are a tax imposed by a government on imported goods into that country. They are designed to make foreign goods more expensive for the acquiring company and encourage corporations to begin manufacturing more of their goods at home.

This has become a key component of Trump’s “America First” economic policy. By making foreign manufacturing less attractive, he argues that it will strengthen America’s economy, protect domestic industry and reshore jobs that may have transitioned overseas.

That protection, however, can come at a cost. Tariffs are rarely a one-way street and the nation that is on the receiving end of tariffs usually responds with tariffs of their own. This often results in the end prices of goods getting raised in both countries with consumers often the ones most negatively impacted.

Where Does The Money Go?

Tariffs are paid by the importing company at the time that foreign goods are received. Tariffs are collected by the U.S. Treasury and generally end up in the Treasury general account where it can be used on almost anything that the government spends money on.

One argument that often gets made is that tariffs collected can be used to pay down the federal debt. Yes, they certainly CAN be used for that, but when has the government ever been focused on that? In all likelihood, the government would use tariffs to just keep spending. Perhaps trade deficits get reduced in the process, but there’s really no indication that fiscal responsibility is a priority right now.

One of Trump’s talking points has been that tariffs can be used to pay for additional tax cuts. Again, anything is possible, but without any guidance as to what the tariff money is to be used for, it’s difficult to argue where it might ultimately end up.

Where Do Trump & Harris Stand On Tariffs?

Trump has been more vocal in his support of tariffs and has generally favored steeper levies. One of his proposals involved applying a 60% tariff on all Chinese imports and a potential 10-20% tariff on all other global imports. The numbers often change (he’s talked about 100% tariffs at one point), but the larger point is that he wishes to take aggressive steps to keep business in the United States.