Liberation Day Hangover?
President Trump just announced his long-awaited plan for global tariffs. His new plan requires U.S. companies to pay a 10% tax on any goods imported from a foreign country. That’s just the baseline, though. The administration determined certain countries are using “unfair trading practices,” so anyone importing goods from those countries will pay a higher tax.
This plan is separate from the specific tariffs he’s already announced targeting China, Canada, and Mexico.
Let’s look at what that means, practically speaking.
President Trump had previously implemented 20% tariffs on any imports from China. Today, he announced 34% tariffs on imports from China tied to unfair trading practices. That brings the total tax on Chinese imports to 54%. The President says these tariffs will restore fairness to a U.S. economy that has been "looted, pillaged, raped, and plundered" by other countries.
Of course, the big question is: What does this mean to U.S. consumers and investors? Let’s walk through a few takeaways and historic examples.
- Tariffs are designed to boost domestic industries. The United States used tariffs to spur growth at the beginning of the 19th century. Those taxes focused on European imports and helped American manufacturing catch up to the advances of the industrial revolution. The government invested the tax revenue into infrastructure development. While the tariffs were initially intended to be temporary, they remained in place through the Civil War. Generally speaking, economists agree that this type of implementation—promoting domestic industry in developing countries—is one of the best use cases for tariffs.
- Tariffs can hurt companies and consumers in the home country. In 2002, President George W. Bush implemented tariffs designed to protect American steel producers from foreign competition. Unfortunately, the benefits to the U.S. steel industry were quickly offset by hits to the industries that rely on steel, like cars and appliances. Reports estimate the tariffs cost the U.S. economy somewhere between $30 and $100 million, as well as some 200,000 jobs. The Bush (43) Administration retroactively dubbed the taxes a mistake and the George W. Bush Presidential Center has become one of the most vocal critics of new tariff policies.
- There are numerous examples of tariff success and failure. We’ve covered two notable examples from the U.S., but in addition to that, you might consider:
- Germany implemented tariffs prior to both World Wars. They were considered largely successful prior to WWI (when they were largely considered a reaction to liberalized free trade in Europe). Tariffs issued by the Reichstag in 1925 were not considered successful, and they may have contributed to the economic crisis (along with rampant inflation) that preceded WWII.
- Japan used tariffs following WWII until the early 80s to encourage citizens to buy Japanese. However the practice may predate that, as Japan looked at trade agreements as a key to economic advancement as early as the 1860s.
- South Korea used tariffs to stimulate its technology industry in the second half of the 20th century, giving rise to powerhouses like Samsung and LG.
- President Ronald Reagan enacted tariffs on foreign motorcycles to aid Harley Davidson, specifically. The tax was intended to be temporary (five years) and was phased out after four.
- Argentina and India have both used tariffs in recent years to boost domestic industries, but they have struggled with repercussions including high inflation (in the case of Argentina) and uneven growth (in the case of India).
None of these examples accurately reflect what happened today, however. Not only are these tariffs extensive, but our economy is more globalized than ever before. While investors seem nervous (stocks fell in after-hours trading), those fears seem to be rooted in the potential for retaliatory tariffs. Those tariffs might be intended to discourage foreign buyers from importing American products, but they would also have the potential to raise prices for global consumers. It’s possible that, in the face of global price hikes and potential trade wars, we will see the situation deescalate.
When it comes to your personal finances, we’re focusing on what we can control, and that is managing risk and keeping your finances—from your investment portfolio to how you prioritize your savings—aligned to your family’s goals. In other words, we need to continue doing what we’re doing.
If you have questions in the meantime, feel free to reach out.
Best Regards,
California Retirement Advisors