Are Tariffs Really That Bad?

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Are Tariffs Really That Bad?

Tariff must be one of the most common words in the English language right now. President Trump says the word repeatedly, so now the rest of the world is not just becoming familiar with the word, but with the concept of tariffs. My aim today is to explain what tariffs are; the current tariffs are on the table; and then share how they might affect us. Let’s start with a definition. Tariffs are taxes on imported goods. It’s just that simple. In other words, tariffs are taxes on things that are made in other countries, but sold in the U.S. The importer pays the tariff on the goods when they arrive at the border. The revenue goes to the U.S. Treasury, just like any other taxes. So tariffs aren’t really that difficult to understand, as far as what they are. Now, let’s talk about the current tariffs on the table. There are four proposed tariffs on the table, although there are surely more to come. The first two are 25% tariffs on goods from Mexico and Canada. We don’t have a list of all the things that would be taxed at the border, but we can assume these would affect agricultural products, automotive parts, materials, and energy. Now these tariffs were about to go into effect, but were then paused. I’ll talk more about that in the section on the implications for tariffs. The third tariff is 10% on Chinese goods. This tariff is still in place and is an across the board tariff on anything that comes from China. The fourth tariff was proposed today – a 25% tariff on all steel an aluminum that comes into the U.S. regardless of its country of origin. I’ll also talk more about that one later. As I said, there are more coming, as a tariff on the EU is also likely. Now what are the implications of tariffs? The are many and they are multi-faceted. The first implication is increased prices. If tariffs remain in place for some time, the net result is normally higher prices on the things that are being taxed. Why is this? It is because the goods being sent to the U.S. now cost the manufacturer more to produce. Typically, those manufacturers will increase their prices, passing these costs along to consumers. A second implication is increased market share for U.S. based companies. If the cost of steel from China now costs 25% more, it makes U.S. made steel look more attractive. Tariffs give local manufacturers an edge. Thus it could lead to more jobs based in the U.S. That’s good – but a third implication is it stimulates less competition in the marketplace. Less competition keeps prices higher than they would normally be. So, we see higher prices as an almost inevitable result from tariffs. But higher prices on goods from these countries does not equal inflation on everything. Why is this? Because there is only so much money in the economy. If one items costs more, consumers will have to spend less in other areas. Although the cost of certain things may go up, the costs of other things may go down, because the demand for those things might be affected by the costs of other things. For example, you might not go out to eat as much if other things the price of other things that you buy begin to go up. If restaurants are seeing less spending, they are more likely to stop raising prices, or even offer specials to lure in consumers. As long as money is not being added to the money supply, higher prices in one area of the economy could potentially yield lower or at least flat prices in other parts of the economy. The inflation we experienced in recent years was due to tons and tons of money being poured into the U.S. economy. This caused the price of nearly everything to do up. Tariffs will cause more targeted price increase, if they are in place for some time. Notice that I included that caveat “for some time”. In order for these prices increases to take hold, the tariffs need to be in place long enough for them to work their way through the system. The 25% Mexico/Canada tariffs were in play for a matter of hours. President Trump suspended them in return for a greater troop presence at the border for both countries. Thus, it would appear that the President is using tariffs as a negotiation tactic more than an economic tool. He is forcing other countries to the negotiation table with this threat. Basically, it would appear that he is playing a game of chicken. Mexico and Canada know that these tariffs could be disastrous for their economies, so they are the ones who flinch first and offer concessions to avoid the tariffs. They also know that if they don’t come to the table, President Trump is not afraid of some short term pain in the form of higher prices to bring about what he considers long-term gain – control at our borders. China, on the other hand may not flinch. In my opinion, we are more likely to see a trade war with China that with Mexico and Canada. It is in both country’s best interest to negotiate a mutually beneficial agreement to end the tariffs. President Trump seems to be asking for more control over fentanyl coming from China. So far, their response has been that of imposing retaliatory tariffs. But there are some tariffs may remain in place longer term to address what the Administration considers to be unfair practices overseas. That is the case with the fourth tariff on all aluminum and steel. President Trump is trying to address a trade imbalance, and may leave this in effect longer than the others. The same implications that I shared earlier would apply – but they would be even more likely because this tariff is probably going to stay in place over a longer period of time. I’m concerned about these tariffs. Unless he uses them as another bargaining chip to exempt favored companies, I’m afraid it could do more harm than good in the form of higher prices on anything that includes aluminum or steel. So to answer the question, are Tariffs really that bad? My answer would be “only if they stay in place for an extended period of time. In a day when things just seem to cost more, every dollar matters. Did you know you can actually earn more dollars with our Foundation High Interest account? But in addition to a great interest rate, you also get benefits like cell phone protection and roadside assistance. You really should check it out. Start your financial conversation with us at foundationbank.org. We also hope you’ll subscribe this podcast to it in your favorite podcast app and share it on social media. Until our next episode, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of Foundation Bank/McKenzie Banking Company on February 11, 2025. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. Any rates mentioned are subject to change and are accurate as of the recording date. Foundation Bank/MBC is an Equal Housing Lender, Member FDIC.