Have you heard the talk about tariffs in the news lately? Specifically about tariffs on goods imported from China? Well, if you have, you’re probably wondering why people are losing hair over this so-called trade war. What exactly is it? And will it affect your money and your investments?
Let’s break it all down.
What Is a Tariff?
First, a tariff is a tax that a government places on goods imported from another country. Tariffs benefit domestic producers of those goods because the tax essentially makes the imported version of the same product more expensive. Any country can impose a tariff on goods from any other country.
There are basically two types of tariffs. An ad valorem tariff is a fixed percentage of the good’s value. So the tax on that product will go up or down as the international price of that good changes. A specific tariff is a fixed amount that doesn’t change if the international price of the good goes up or down.
The term “goods” can include anything from tennis shoes to computer chips. A country may import retail items (like TVs) or it may import raw materials (like steel or corn).
Who Benefits From Tariffs?
The theory behind a tariff is simple—at least on paper. When taxes are imposed on an imported item like steel, U.S. companies that need the item have to pay more for it. But, as an alternative to buying imported (foreign) steel, a U.S. company could instead purchase it from a domestic supplier at a better price.
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Why is the price better? Because it doesn’t include the import tax. The goal is for the tariff to create a level playing field in the steel industry and help U.S. companies thrive. Again, this is in theory.
A Tariff Example
If a government thinks trade with another country is getting unbalanced, it might tax certain items from that country. For example, the U.S. imports more goods from China than any other country in the world—to the tune of $539 billion in 2018.1 On the other hand, the U.S. exported just $120 billion in goods to China that same year. The gap between those two amounts—$419 billion—is called a trade deficit.
What Is a Trade War?
Hang with me now because this is where it starts to get interesting. When countries go back and forth with round after round of new tariffs on each other’s imports, the result is a trade war. Eventually, the two countries negotiate to make their trade partnership more balanced.
But, in today’s global economy, a battle over tariffs doesn’t just impact the two countries involved. For example, countries in the European Union (EU) have said that if they’re hit with U.S. tariffs, they’ll hit back by imposing tariffs on a wide range of things—from jeans to motorcycles.2
And other countries that have had good trade relationships with the U.S. in the past (like Canada and Mexico) get the jitters because they could be next. Everybody is nervous, including investors.
Are We in a Trade War With China?
First off, what’s happening right now isn’t all that new. This so-called trade war started in 2017 when the U.S. saw a deficit between the number of Chinese goods coming into the country and the number of goods going to China.
Last year, the government decided to do something about it. They imposed new tariffs on Chinese goods including solar panels, washing machines, steel, cash registers and even artificial teeth.3 Well, as you can guess, China wasn’t happy about that. In return, the country imposed tariffs on American goods such as fruits, wine, nuts and pork.4
That was the start of the friction. Then, recently, the U.S. government announced plans to raise tariffs on $300 billion of Chinese products. In response, the Chinese government announced tariff hikes of $75 billion on U.S. products including cars and car parts made in the U.S.5
And that’s why people are watching the situation closely. It could have an impact on the economy, your budget and your investments.
How Do Tariffs Impact the Economy?
Well, the goal of tariffs is to make marketplace competition fair. This helps economies grow as nations compete with each other to sell their resources. When the U.S. economy is growing, that trickles down to you in the form of more affordable goods.
That’s one theory from economists. Others say tariffs could make the cost of goods go up because companies just increase their prices to cover the tariff.
For example, the U.S. government recently attached tariffs to imported Chinese aluminum. As a result, the cost of things like beer kegs and baseball bats (which contain aluminum) could go up in the U.S., and those higher costs affect the overall economy.
How Do the Tariffs Affect My Wallet?
That’s the big question on everyone’s mind. Once the tariffs take effect, you might see prices go up slightly on everyday items like peanut butter, orange juice and even jeans. That means you need to keep an eye on your monthly budget so you don’t overspend.
Now you know why keeping track of your expenses throughout the month is so important!
You’ll really feel the tug on your wallet with big-ticket items affected by these tariffs.
For example, many televisions imported from China could cost 25% more if companies increase their prices to cover the cost of the tariff.6 So a $560 television from China could cost you $140 more—making the final price $700. The same principle applies to other big items, like tractors, snowblowers and boats.
If you’re in the market for a big item, you have four options:
1. Pay the higher cost.
2. Purchase the item from a company that’s not affected by the tariff.
3. Buy a used item.
4. Wait to buy your item until the tariffs lessen again (and they usually do).
How Do Tariffs Affect Investing?
The people on Wall Street have been nervous about the tariffs, too. And if other countries jump into the ring to duke it out, that concern could increase.
On Aug. 5, 2018, the Dow Jones Industrial Average dropped 767 points in response to the heated discussions between China and the United States.7 (I know. Ouch.) But here’s the thing: Just a few days later, it bounced back and gained 500 points.8
Instead of jumping off the roller coaster while it’s still in motion, stay in your seat and keep your seatbelt fastened. Wait out the rocky ride of trades and tariffs. Keep investing every month. The market will go up and down. But if you ride it out, your investments will pay off. History has shown us that.
If you have extra cash on hand, you could even invest that money while mutual funds are on sale (when the market drops). So if you play it smart, you could benefit from the dips in the market.
If these tariff and trade negotiations are making you anxious about your investments or if you’re wondering if you should make some adjustments, talk with your financial advisor.
Worried About the Market? Talk to a Financial Advisor
If you’re concerned about how the brewing trade war could impact your finances, talk to someone who knows the ins and outs! Need help finding great financial advisors? Check out our SmartVestor program. We’ll connect you with a list of qualified professionals in your area who are committed to educating and empowering you to reach your goals. Find your SmartVestor Pros today!
These are general guidelines. Your situation may be unique. If you have questions, connect with a SmartVestor Pro.