Recently, we provided commentary on President Trump’s proposed tariffs. For starters, a tariff is a tax imposed by a government on goods imported into a country. Governments often use tariffs to influence trade flows and protect domestic industries. By increasing the prices of imported goods, tariffs can shift demand towards domestic products instead of products made abroad. For example, suppose the United States imposes a tariff on imported cars. In that case, it will make foreign vehicles more expensive, potentially boosting sales of domestically produced cars such as Fords and Jeeps.
President Trump is currently proposing tariffs of 10% across the board, along with tariffs of 60% on goods from China. Roughly 38% of goods imported into the U.S. are from countries with whom the U.S. has a free trade agreement, most notably Canada and Mexico, which bar unilateral tariff increases. If we exclude these countries, the average tariff rate on imported goods would rise from roughly 3.0% today to 11.8%. Dr. David Kelly of JP Morgan assumes that because of negotiations with trade partners, business pressures, and foreign suppliers and importers eating some of the costs, the average price of imported goods would rise around 4.5% in the second quarter of 2025.
Possible Upsides of Tariffs
- Protection of U.S. Industries: Make imported goods more expensive, protect domestic industries from foreign competition, allow them to grow and develop, and encourage consumers to buy domestically produced goods.
- Job Creation: Protecting domestic industries may lead to job creation and economic growth in certain sectors. When domestic industries are shielded from foreign competition, they may expand their operations, hire more workers, and invest in new technologies.
- National Security: Limiting imports of certain goods protects industries deemed critical to national security, by reducing reliance on foreign suppliers.
- Government Revenue: Tariffs may generate revenue for the government, which can fund public services like education, healthcare, infrastructure, and other public programs.
Potential Drawbacks of Tariffs
- Higher Prices for Consumers: Increasing the cost of imported goods leads to higher consumer prices, which reduces people’s purchasing power and standard of living.
- Reduced Consumer Choice: Reduced availability of foreign products makes imported goods more expensive and discourages consumers from purchasing foreign products.
- Trade Wars: Retaliatory tariffs from other countries may be triggered, leading to a trade war that harms economies and global trade.
- Reduced Economic Efficiency: Distort natural market forces, leading to slower economic growth and reduced productivity due to inefficient allocations of resources.
- Reduced Global Trade: Hinder international business and limit economic growth.
Tariffs are a double-edged sword. While they protect certain industries, they risk hurting consumers and slowing global trade. Policymakers must continually address the challenge of striking the right balance between protecting domestic industries and promoting free trade.
What We’re Doing
Voisard Asset Management Group prioritizes strategic diversification amidst policy uncertainty. Diversifying our portfolio among multiple asset classes and geographic regions with a long-term outlook can help mitigate the risks associated with market fluctuations.
