Why Tariffs Hurt Your Portfolio (And Wallet)

Rising Tides

The markets are ever-changing on a day-to-day basis, influenced by factors both micro and macro, domestically and abroad. Over the past hundred years, we have seen the markets in the United States surge dramatically, generating considerable wealth for individuals and companies as a whole. One factor that helped markets expand considerably during this time was the introduction of free trade agreements and the removal of trade barriers.

However, we are now living in an uncertain period due to the emergence of trade barriers in our current socio-political climate. While many Americans are rightfully frustrated by the outsourcing of jobs overseas and the replacement of others by artificial intelligence, we want to discuss why tariffs and trade barriers hurt your wallet and portfolio to encourage the broader societal discussion around the topic.

Tariffs = Taxes

Tariffs are a form of soft power exerted by nations as a means of acquiring economic influence. These diplomatic instruments can penalize the exporting nation by making its products more expensive in the U.S. market, thereby dampening demand and affecting the livelihoods of those in the manufacturing country. However, tariffs raise prices in the imposing nation in the long term by adding an additional fixed cost to products, which is an indirect tax on domestic consumers.

The result of this increased tax is that consumers have less purchasing power to acquire goods and services, as prices either rise gradually or dramatically, leading to a decrease in economic activity. As economic activity decreases due to less consumer demand, companies have to reduce the number of workers domestically, hurting the original nation that imposed tariffs.

Trade Wars & Economic Slowdowns

Furthermore, many countries that have tariffs imposed on their manufactured goods target the implementing nation with reciprocal tariffs, which reduces the original implementing nation's economic production in other parts of the economy, since demand for its goods decreases. For example, if Canada imposes tariffs on Mexico, Mexico will likely retaliate with reciprocal tariffs. When this happens, Canada experiences a decline in demand for its exports, which further weighs on its already struggling economy, already burdened by rising import prices. Resultingly, the initiator of tariffs often experiences economic slowdowns across its economy.

The end result in such scenarios is increased unemployment, a loss of purchasing power, and declining company earnings. Such situations may lead to temporary recessions or just increased financial hardship on workers, unemployed individuals, and retirees alike.

The Present

While the United States currently has many unfair trade agreements with other nations and has seen many jobs relocated overseas, increased tariffs and trade barriers cause real economic pain to the average American. While there are many competing indicators for where the economy may head, we should strive for our elected officials to find other ways to stimulate domestic production and fairer trade arrangements with other nations.

If you are concerned about how your portfolio may perform in a recession or during periods of rising prices, we are here to help. At Lundeen Abrams Advisors, we regularly help clients navigate uncertain times and assist them in structuring their portfolios to better account for such circumstances. Please reach out to us today to schedule a consultation, and we will help you navigate the ever-changing future.