by Laurie Haelen | lhaelen@cnbank.com
It has been a few years since tariffs have been a daily presence in the headlines. This year certainly has brought them to the forefront. As a result, many investors may be confused about the purpose and effectiveness of tariffs.
As of this writing in early April, markets are experiencing volatility as a result of higher-than-expected tariffs being imposed by the U. S. on many trading partners, creating fears of inflation and even recession.
Here is a brief primer on tariffs and the possible effects on the global economy.
A tariff is a tax on a particular class of imported goods or services that is typically designed to help protect domestic industries from foreign competition. However, the Trump administration is also using tariffs as leverage for other goals.
Although the U.S. Constitution specifically grants Congress the power to levy tariffs (also called duties), Congress has delegated much of that authority to the president over the last 90 years. This has led to numerous trade agreements that have created a low-tariff, rules-based global trading structure, with tariffs applied on selected products. Over the past 70 years, tariffs have seldom accounted for more than 2% of federal revenue and were just 1.57% in fiscal year 2024. Prior to the recent actions, about 70% of all foreign goods entered the United States duty-free, according to Congressional Research Service on Jan. 31.
Tariffs are collected by U.S. Customs and Border Protection at U.S. ports of entry. The tariff is paid by the U.S. company or individual who imports the goods. Put simply, if a U.S. company imports $1 million of foreign steel with a 25% tariff, that steel costs the company an additional $250,000 for a total of $1.25 million.
The U.S. company might then absorb all or part of the additional cost or pass it to consumers who buy products made from the steel. Alternately, the foreign steel exporter might lower its prices in order to maintain access to the U.S. market, in which case the U.S. company would still pay the 25% tariff, but the total price would not rise by the full 25% over the pre-tariff price.
The other factor in this equation, which is the traditional purpose of tariffs, is that the U.S. importer might buy steel from a U.S. manufacturer, thus avoiding the extra tax. The questions then are: 1) Will the U.S. manufacturer raise its price because it no longer has to compete with cheaper foreign imports? 2) Will there be enough U.S.-manufactured steel to meet demand?
There have been numerous studies of the 2018-19 tariffs, which were not as restrictive as the new program but offer some possible answers to these questions.
Almost all of the steel and aluminum tariff costs in 2018-19 were passed directly to U.S. companies in the form of prices that rose by about 22% and 8% respectively. However, many foreign producers received exemptions from the tariffs and U.S. steel and aluminum production — which represented more than two-thirds of the U.S. market before the tariffs — grew moderately to meet demand, rising by an annual average of $2.8 billion over the period from 2018 to 2021. Even so, companies that had depended on cheaper imported metal struggled and overall production of goods that use steel and aluminum decreased by an annual average of $3.4 billion, according to U.S. International Trade Commission in May 2023.
U.S. importers also bore near the full cost of the broader tariffs on Chinese goods but generally passed only part of the costs to consumers, according to National Bureau of Economic Research in October 2019. However, a separate tariff on washing machines added $86 to the retail price of a washing machine and $92 to the price of a dryer, ultimately costing consumers over $1.5 billion, according to a study in 2019 by the University of Chicago.
Broadly, a 2024 analysis found that the 2018–19 tariffs (many continued by the Biden administration), combined with retaliatory tariffs by other countries, reduced U.S. gross domestic product by a little more than 0.2% and cost about 169,000 full-time jobs, according to the Tax Foundation on Feb. 13.
Trump has also ordered a study of reciprocal tariffs, which would set tariffs based dollar-for-dollar on the tariffs each country charges on U.S. goods, as well as nontariff trade barriers. As with most issues related to tariffs, there are differing opinions on this. At best, reciprocal tariffs could lead to negotiating lower tariffs and removing barriers that prevent U.S. businesses from operating in a foreign country. At worst, they could lead to a global trade war, with ever-increasing tariffs and barriers, according to a Feb 13 report in The Wall Street Journal.
Along with the 10% tariff on Chinese goods, Trump excluded China from the de minimis provision of U.S. customs law that exempts goods valued at less than $800. This would make cheap goods from Chinese online retailers, which are often shipped directly to consumers, subject to existing tariffs plus the new 10% tariff. The exclusion was suspended recently to give the U.S. Postal Service and Customs and Border Protection time to develop a plan to collect the tariffs. It’s unclear how this change will affect consumer prices, but processing could slow delivery times, according to a Feb. 5 AP News report.
Inflation
Most economists believe that tariffs cause inflation and President Trump admitted there might be short-term price increases. The potential for tariff-driven inflation is of particular concern in the current economy; two recent surveys show a significant decline in consumer confidence due to inflation fears, according to news report. The full economic impact will depend on how the tariff program plays out — how much is intended as a negotiating tool and how much turns into long-term policy.
For now, it would be wise to maintain a steady course and keep an eye on further developments.
Laurie Haelen, AIF (accredited investment fiduciary), is senior vice president, manager of investment and financial planning solutions, CNB Wealth Management, Canandaigua National Bank & Trust Company. She can be reached at 585-419-0670, ext. 41970 or by email at lhaelen@cnbank.com.
