Breaking Down the Pros and Cons of Tariffs: What You Need to Know
By Brian Famigletti, Managing Director & Head of Marketing
What Are Tariffs?
Lately, economists, politicians, and foreign policy experts have highlighted the pros and cons of tariffs. Tariffs seem to be all anyone can talk about right now. And for good reason. President Donald Trump has threatened or imposed tariffs on nearly all of the United States’ trading partners. His on-again, off-again policies have impacted global financial markets and spotlighted this trading mechanism, which describes government-imposed taxes on imported goods.
Here’s a birds-eye-view of the possible positive and negative implications of what’s become of the country’s hottest trade topic.
Pros of Tariffs
Let’s start with the positives. Tariffs have the potential to encourage domestic business, generate government revenue, and solidify political strength.
1. Bolstering Domestic Industries
Tariffs drive up prices on imported goods. Proponents argue that this encourages consumers to purchase items from domestic producers, potentially helping to shield local businesses from foreign competition. Additionally, companies are more enticed to manufacture products in their own country, thereby creating more jobs and shoring up supply chains.
2. Generating Government Revenue
The U.S. has used tariffs since the 18th century. Prior to income taxes, tariffs were the federal government’s primary means of generating revenue.
3. Defending National Interests
Politicians can also use tariffs as a foreign policy tool. For instance, they might leverage them as a bargaining chip in trade negotiations. In this case, tariffs could help a country achieve broader diplomatic goals, like sanctions or influencing labor and environmental standards. Consider President Biden’s actions in 2022, when he suspended normal trade with Russia and raised tariffs on imported Russian goods following its invasion of Ukraine.
Tariffs can also help strengthen national security when applied to certain industries. For example, when a country imposes extra taxes on defense-related goods, it encourages domestic production, leading to less reliance on foreign supplier relationships that could potentially turn hostile.
Cons of Tariffs
On the other hand, tariffs can potentially create higher prices for consumers, incite retaliation, or even reduce economic growth.
1. Higher Prices for Consumers
Increased taxes on foreign goods will drive up the prices of those items, and consumers bear the brunt of these policy decisions. Everything from cars, electronics, clothing, and food can become more expensive. This can pose a particular challenge for lower-income households.
2. Retaliatory Tariffs and Trade Wars
When a country imposes tariffs on a trading partner, the latter may respond with its own retaliatory taxes. This can devolve into a trade war. For example, after President Trump raised tariffs on Chinese imports to 145%, China responded with a 125% retaliatory tax on American goods. U.S. farmers say they’re already feeling the effects. There has been a decline in agricultural exports to China, leading to canceled orders and layoffs, per CNBC.
3. Reduced Economic Efficiency and Growth
New tariffs drive up inflation, which generally leads consumers to buy less. As a result, many experts say long-term tariffs can slow economic growth.
Tariff increases drum up economic uncertainty, too. Stock markets slumped globally in the wake of President Trump’s major tariff announcement in early April. In March, J.P. Morgan Research projected a 40% risk of a global recession this year, attributing the high figure in part to the Trump administration’s shifting tariff policies.
Amid the uncertainty, one thing seems likely: tariffs will remain relevant to countries and their citizens for the foreseeable future. Staying informed on the pros and cons of this tool can help you plan your financial decisions accordingly.
If you have questions about how the broader economy affects your financial situation, reach out to the advisors at Griffin Asset Management.
Sources:
Council on Foreign Relations: What Are Tariffs?
Investopedia: What Is a Tariff and Why Are They Important?
The Week: Pros and cons of tariffs
CNBC: Bessent says he expects ‘de-escalation’ in U.S.-China tariff fight in the ‘very near future’
Deloitte: Tariffs will impact the economy … and so will uncertainty
JPMorgan: US tariffs: What’s the impact on global trade and the economy?
NPR: Sell USA? Why Trump’s tariffs may be sparking a historic storm on Wall Street
NPR: Trump unveils sweeping 10% tariff and ‘reciprocal’ tariffs on dozens of nations
