Tarrifs and Their Economic Impact

Talk of trade disputes has dominated the headlines in 2018 as President Donald Trump has enacted tariffs on various countries. What are tariffs, and what is behind this fear?

Think of tariffs this way: a tariff is a tax on foreign imports and can be enacted on a specific good or country. Tariffs are primarily used to protect domestic industry, but also can be used to influence another country’s economic behavior.

The history of U.S. tariffs dates back to colonial times. The Tariff Act of 1789 — one of the first major statutes passed by U.S. Congress – was designed to raise revenue for the young nation’s federal government. They have been enacted by numerous presidents, leading to Trump and the current wave of tariffs.

Tariffs often are extremely complex. In fact, the automobile industry is a good example how complex and intricate tariffs can be. Recent stories have compared the European Union (EU) and U.S. tariffs on cars at 10% and 2.5%, respectively. However, due to the numerous tariffs related to automobiles, this is a bit of an oversimplification. There are different tariff rates based on vehicle type (cars, trucks, motorcycles) and even different rates for vehicles and auto parts. In addition, other countries have barriers to trade that impact the U.S. automobile industry. For example, Japan has no tariff on auto imports, but makes it very difficult for foreign automakers to establish dealership networks.

Because of the integrated nature of the global economy, tariffs can be extremely disruptive. If a tariff increases the cost of a good, the demand for that good could wane. Suddenly, corporations’ decisions on capital spending – also called capital expenditures – become less clear. Corporate initiatives like building new factories, investing in new technologies, or hiring additional employees are put on hold until market clarity returns. The longer-term concern on tariffs is export growth may eventually slow, which can hamper global economic growth.

President Trump has imposed several tariffs this year to address what he deems as unfair trade practices against the U.S. What impact will these tariffs ultimately have on the U.S. economy? That remains to be seen – many of the tariffs are still being negotiated. Until more is known about the tariffs the administration is proposing – and the counter-tariffs that other countries may propose in response – the markets will have to wait and see.

All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.

This information is provided for informational and educational purposes only. Waddell & Reed believes the information has been obtained from sources considered to be reliable, but does not guarantee the accuracy of the information provided. 

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