Tariff Time

What is a tariff? The International Trade Administration defines a tariff as “a tariff or duty (the words are used interchangeably) is a tax levied by governments on the value including freight.”

This tariff, or tax, is “paid to the U.S. Customs and Border Protection Service at the border by a U.S. broker representing a U.S. importer, say, Costco,” according to The Tax Policy Center.

Using a simple example, if 20 toasters are entering the United States and each is valued at $50, including freight, the total value of the toasters is $1,000. If a tariff is 20%, the U.S. broker will pay a $200 tariff (tax) to the U.S. Customs and Border Protection Service.

In our example, Costco’s cost is $1,200, including the newly levied tariff. Prior to the imposition of the tariff (assuming the toasters entered the U.S. duty-free), Costco would have paid $1,000 to the importer.

So, ultimately, does the burden fall on Costco, the foreign manufacturer, or the U.S. consumer? Or, will the tariff be shared?

This question has enormous implications.

Let’s review the results of tariffs levied during the first Trump administration.

Who’s Paying for the U.S. Tariffs? A Longer-Term Perspective “found that in most sectors, U.S. tariffs have been completely passed on to U.S. firms and consumers.” Regarding steel tariffs, “foreign countries (bore) close to half the cost.”

A paper published by the National Bureau of Economic Research reflected comparable results. The study also noted “more mixed evidence regarding retail price increases, which suggests that many U.S. retailers reduced the profit margin on affected goods.”

If enacted, today’s tariffs are expected to be significantly broader than those imposed in 2018. Consequently, we might expect major retailers to aggressively negotiate concessions with foreign suppliers. But they may also attempt to pass along as much of the tariff as possible.

Several major retailers, including  Walmart, Target, and Best Buy have warned that consumers may face higher prices.

Perhaps they are laying the groundwork, preparing consumers for the inevitable—higher prices. If these are one-time price hikes, investors may simply look past them. If we see a secondary round of increases, the situation becomes more tenuous.

While retailers recognize that many have grown weary of higher prices, in today’s inflationary environment, it may be easier to pass along higher costs if falling consumer sentiment doesn’t deter buyers.

Tariff motivation

Are tariffs about rebuilding the U.S. industrial base, raising revenue, or using the threat of tariffs as a bargaining chip (although that seems less likely at this point)?

Since 2000, U.S. industrial production has increased by 14%, while manufacturing production, which excludes utilities and mining, has risen by about 4%, according to the St. Louis Federal Reserve. During the same period, Gross Domestic Product (GDP), which is the broadest measure of goods and services for the economy, is up 70%.

Given efficiencies and changes in the mix of products produced, manufacturing employment over the same period has declined by 26%, according to the U.S. Bureau of Labor Statistics.

Free trade has been a big benefit to consumers who have access to a broad array of products at lower prices.

However, free trade has also forced businesses at home to either relocate production overseas, where it’s cheaper to produce goods, or close altogether.

Bottom line

Investors have not welcomed the possibility of tariffs.

Source: Wall Street Journal, MSCI.com, Bloomberg, MarketWatch
MTD returns: February 28, 2025–March 31, 2025
YTD returns: December 31, 2024–March 31, 2025
**in US dollars

Investors are fretting that higher inflation may slow rate cuts by the Federal Reserve. Furthermore, consumer reluctance to purchase higher-priced goods could slow the economy and hinder profit growth.

Final thoughts

Market pullbacks aren’t unusual. They are to be expected.

Since 1980, the average intra-year pullback in the S&P 500 Index has been 14%, according to LPL Research. So far, the S&P 500 has shed 10.1% through the recent low on March 12th.

A diversified portfolio cannot completely shelter you from market pullback, but it helps reduce volatility while tapping into the wealth-creating potential that stocks have offered over the long term.

What has worked?

Historically, a disciplined approach helps strip the emotional component out of investing. You know, the urge to sell when the market is falling or the impulse to ramp up risk and dive headfirst into stocks when the market is summiting new highs.

What hasn’t worked?

Timing the market. No one can consistently exit stocks near a high and re-enter near a low.

I trust this review has been informative. If you have any questions or would like to discuss other matters, please feel free to contact me or any team member.

Thank you for choosing us as your financial advisor. We are honored and humbled by your trust.