Tariffs: The Good, The Bad, and Your Portfolio

Tariffs have become a lightning rod for political and economic debate. From trade negotiations to campaign promises, tariffs represent a policy tool with passionate advocates and critics. Let’s examine both sides of this issue and, more importantly, what it means for your investments.

What Are Tariffs Really?

At their most basic, tariffs are taxes levied on imported goods. When the United States imposes a 25% tariff on foreign steel, US importers must pay the government 25% of the value of the steel they bring into the country. This cost typically gets passed on to consumers through higher prices.

Tariffs have existed nearly as long as nations have traded with one another. They’ve been used to protect domestic industries, raise government revenue, and apply pressure in international relations. But, like most economic policies, their effects are complex and often unpredictable.

The Case For Tariffs

Proponents argue that tariffs serve several important functions:

They protect domestic industries. When American manufacturers face competition from countries with lower labor costs or fewer regulations, tariffs can level the playing field. This protection potentially preserves American jobs and manufacturing capacity.
They reduce national security risks. Some industries, like steel, semiconductors, and energy, are critical to national security. Maintaining domestic production capacity in these sectors, even at higher costs, provides resilience during international conflicts.
They can address unfair practices. When other nations subsidize their industries, manipulate their currencies, or engage in intellectual property theft, tariffs counterbalance these market distortions.

The Case Against Tariffs

Critics point to significant economic downsides from tariffs:

We will see higher consumer prices. This is the most immediate and visible effect. When tariffs make imported goods more expensive, consumers pay more for everything from washing machines to automobiles. Inflation expectations ticked up soon after the president’s announcement.
Countries will retaliate. Trade partners rarely accept tariffs without responding in kind. When China faced US tariffs on its exports, it imposed reciprocal tariffs on American agricultural products, hurting US farmers.
Supply chains will be disrupted. Modern manufacturing relies on complex global supply chains. Tariffs can force costly reorganizations of these networks, adding “frictions” to the economy.
US manufacturing job boom is unlikely. Despite promises of revitalizing American factories, tariffs alone won’t shift manufacturing patterns significantly, especially if there is uncertainty about long-term tariff policies. Most Americans, as Dave Chappelle pointedly observed, “want to wear Nikes, not make them.” Additionally, US factories are widely automated, and this has been as big a factor as any leading to the decline in US manufacturing jobs. For example, one individual US steel factory produced six million tons of steel with 30,000 workers in 1950. In 2010, that same factory produced seven and a half million tons of steel with 5,000 workers.
Global growth will slow. By protecting less competitive industries, tariffs can prevent resources from flowing to their most productive uses, reducing overall economic output. Leading economists have lowered their expectations for GDP for this year, so much so that many are seeing good chances for a recession this year.

Unintended Consequences

The tariff debate often falls victim to oversimplification. Proponents paint tariffs as job saviors, while opponents label them pure economic harm. The reality is more nuanced.

Take steel tariffs. They might indeed help preserve jobs in American steel mills, providing stability for those communities. However, industries that use steel, from automobile manufacturing to construction, face higher input costs, potentially leading to job losses that exceed the gains in steel production.

The effectiveness of tariffs depends greatly on specific circumstances: which products are targeted, how trading partners respond, and how adaptable affected industries are. Like most economic policies, context matters enormously.

What This Means For Your Portfolio

When tariff announcements made headlines, market volatility immediately followed. This raises an important question: should your investment strategy adjust in response to tariff policies?

Here are three principles that are guiding my thinking:

We’ve been through far worse. Market history includes world wars, oil embargoes, financial crises, and pandemics. Through it all, disciplined long-term investors have been rewarded for their patience. Current trade tensions, while meaningful, pale in comparison to historical challenges markets have overcome.
Diversification remains our best defense. Client portfolios are intentionally built with resilience in mind and well before negative events. Equities are diversified globally; this has been particularly helpful as developed international stocks have outperformed, as the US has struggled. Fixed income and “Alts” have provided stability during volatile times.
Reactive trading rarely pays off. By the time tariff news hits the headlines, markets have already priced in the anticipated effects. The data on market timing is clear: investors who stay the course through policy-induced volatility historically outperform those who attempt to dodge the turbulence through frequent trading. Remember Warren Buffett's wisdom: “The stock market is designed to transfer money from the active to the patient.” Regarding tariffs and trade policies, patience may be our most valuable investment strategy.

I find myself more convinced by the arguments against tariffs than those favoring them. There is a good chance we will see higher inflation and slower economic growth with these policies in place. However, we have only seen soft data (anecdotes and dropping CEO/Consumer confidence numbers) at this point. As the hard numbers start to roll in (CPI, unemployment, GDP growth, etc.), we’ll see if these expectations come to pass. I can assure you that I’ll be watching things carefully.