Tariffs - essentially taxes on imported goods - are typically imposed to protect domestic industries or to gain leverage in trade negotiations. In recent months, we have seen a resurgence of tariffs, particularly targeting sectors like steel, aluminum, semi-conductors and electric vehicles. But what do these tariffs all mean to global economic stability?
- Inflation pressures may reignite. One of the most immediate effects of tariffs is higher prices for consumers. When companies are forced to pay higher costs to import their products, many times that cost is passed on to the consumer.
- Supply Chain Adjustments. Multinational companies are already shifting supply chains to minimize tariff exposure. In fact, Apple recently announced it is moving manufacturing of US iPhones to India, since the tariffs imposed on Indian imports is much lower than those on Chinese imports. At least that is for now anyways.
- GDP Growth may soften. Higher prices mean possibly lower consumption and could dampen trade volumes. Who wants to pull the trigger and buy that new car now that the sticker price just jumped 10% overnight? But conversely, domestic focused companies in protected industries may see a short-term boost now that their products may be more competitive.
- Equity Markets React with Volatility. Investors are hyper-sensitive to trade headlines these days. And of course, the talking heads on CNBC love it because it boosts ratings. We have seen recent wild swings in the markets with just a simple announcement of an increased tariff or delaying the implementation of a tariff. So, until these negotiations are resolved, don't expect we will be sailing on calm waters.
So, here is my two cents...
Unlike the systematic or pandemic global interruptions, we have seen in the past like the 2008 financial crisis or Covid-19, the threats of the United States imposing tariffs on our trading partners is completely self-inflicted. Having watched Trump's negotiating tactics in the past, he seems to initially go way past the goal line, almost to initially go way past the goal line, almost to instill a sense of shock and awe. And then ultimately takes baby steps back, to arrive at the point where his original goal would have been, to get to. It appears that the tit-for-tat reciprocal tariffs are just that. I certainly do not believe anyone, including the United States, wants to impose such restrictive "taxes" indefinitely, but instead it's a tool used to force other countries to the bargaining table and boy does it look like they are lining up to negotiate. So, hang tight and keep that long term perspective. Things will work themselves out and I do believe, in the not-too-distant future.