Annual CityScope® Business Issue
By Evan Russell, Financial Advisor Round Table Advisors, RJFS
As investors, we might ask ourselves, “How will tariffs impact my investments?” Tariffs, which are taxes imposed on imported goods from outside countries, play a significant role in international trade policy which is a huge component of the U.S. economy. They can have various effects, influencing everything from consumer prices to job creation. Here, we explore the potential benefits and drawbacks of tariffs.
Evan Russell is a financial advisor for Raymond James Round Table Advisors. Holding a bachelor’s degree in business finance and a master’s in communications from the University of Tennessee, Evan’s academic achievements have complemented his tenure as a professional baseball player for the L.A. Angels and team captain at the University of Tennessee. Evan has recently passed Level 1 of the CFA while working alongside the team at Round Table Advisors.
Tariffs can help protect local industries from foreign competition by making imported goods more expensive. This can be particularly beneficial for emerging industries that need time to grow and become competitive.
By protecting domestic industries, tariffs can lead to job creation. Companies that are shielded from foreign competition may expand production and hire more workers.
Tariffs provide a source of revenue for governments. This additional income can be used to fund public services, infrastructure projects, or reduce budget deficits.
Tariffs can help improve a country’s trade balance by reducing imports. A lower volume of imports means less money flowing out of the country, which can help reduce trade deficits.
Tariffs often lead to higher consumer prices. The additional costs of imported goods are usually passed on to consumers, which can reduce purchasing power and affect household budgets.
Tariffs can disrupt global supply chains, making it more difficult and expensive for businesses to source materials and components. This can lead to production delays and increased costs.
Tariffs can provoke retaliatory measures from other countries, leading to trade wars. This can result in a cycle of escalating trade barriers that disrupt international trade and economic growth.
By protecting less efficient domestic industries, tariffs can lead to economic inefficiencies. Resources may be diverted from more productive uses to support industries that are not competitive globally.
Recent tariffs discussed by the United States on imports from Canada, Mexico, and China illustrate the complex effects of such measures. For instance, tariffs on Canadian and Mexican goods can potentially raise prices for American consumers and businesses, particularly in the automotive, energy, and food sectors. Similarly, tariffs on Chinese goods could disrupt supply chains and increase costs for manufacturers relying on Chinese imports.
So, the question is: when tariffs are imposed, will U.S. businesses experience growth, gain market share, and add jobs while maintaining current pricing? Or, will U.S. consumers be faced with higher prices and greater inflation due to international companies raising prices?
Tariffs have significantly influenced the economic landscape of many countries, particularly the United States. Here’s a concise look at their historical impacts:
Revenue Generation: From 1790 to 1860, tariffs were the primary source of federal revenue, accounting for about 90% of federal income. This revenue was crucial for funding the government before the establishment of the federal income tax in 1913.
Protection of Infant Industries: High tariffs protected emerging American industries from foreign competition, allowing them to grow and become competitive. This was particularly important during the 19th century as the U.S. industrialized.
The Smoot-Hawley Tariff Act raised U.S. tariffs on over 20,000 imported goods to record levels, intending to protect American farmers and manufacturers during the Great Depression. However, it had several unintended consequences:
Global Trade Retaliation: Many countries retaliated by imposing their own tariffs on American goods, leading to a significant decline in international trade.
Economic Downturn: The reduction in trade exacerbated the economic downturn of the Great Depression, worsening the global economic situation.
After World War II, the U.S. shifted towards promoting global free trade:
General Agreement on Tariffs and Trade (GATT): Established in 1947, GATT aimed to reduce tariffs and other trade barriers, promoting international trade and economic cooperation.
World Trade Organization (WTO): In 1995, GATT was replaced by the WTO, which continues to oversee international trade agreements and disputes, further reducing tariffs and promoting free trade globally.
In recent years, there has been a resurgence of protectionist policies:
U.S.-China Trade War: Starting in 2018, the U.S. imposed tariffs on Chinese goods to address trade imbalances and intellectual property theft. China retaliated with its own tariffs on American products, leading to increased costs for businesses and consumers in both countries.
Throughout history, tariffs have been used for revenue generation, protection of domestic industries, and trade policy. While they can provide short-term benefits, such as protecting local jobs and industries, they can also lead to higher consumer prices, trade retaliation, and economic inefficiencies. How will this impact your investments? Time will tell. Ultimately, it is best to mitigate the risks with a long-term approach and diversification.
The information contained in this article does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Evan Russell and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Round Table Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc. Investment advisory services offered through Raymond James Financial Services Advisors, Inc.
