Understanding Tariffs: Costs, Consequences, and the Bigger Picture

Perhaps you’ve seen the billboards around town—stark black with white text reading, “Tariffs are a tax on your grocery bill,” or something similar. The campaign paid for by the Canadian government has certainly sparked a discussion.

Many are asking, “What is a tariff, and why does it matter? Isn’t this just going to hurt consumers?” Tariffs are collected by U.S. Customs and Border Protection at U.S. ports of entry and are paid by the U.S. company or individual importing the goods. As the world’s largest importer, the United States can impose costs on foreign companies. And yes, tariffs will likely affect consumers. Even the Trump administration has acknowledged that tariffs may lead to price increases. However, tariffs are not typically a short-term policy; they are often used as a long-term strategy aimed at restructuring trade relationships.

Tariffs aim to boost domestic manufacturing, but infrastructure takes time to develop. Ideally, once domestic production increases, prices should become more competitive—perhaps even decrease. Additionally, inflationary pressures on goods could slow.

Let’s look at a simple example of how tariffs are designed to work. Imagine you’re buying a bottle of water. At the store, you have two options: one made and bottled in the United States and one imported from Fiji. The U.S. water costs $1 per bottle, while the Fiji water costs $1.50 because of a tariff on imported water. As a consumer, you can choose between a higher-priced imported product or a more affordable domestic option. For imports like coffee and tea, tariffs are unlikely since the U.S. lacks the ability to produce them.

While some goods may initially become more expensive because of our reliance on imports, the broader goal is to encourage companies to reshore manufacturing. This shift could create jobs and, over time, lead to lower prices for domestically produced goods. Long term, this approach appears to align with Trump’s income tax proposals, which reportedly include reducing corporate tax rates for U.S.-made products.

Admittedly, there are many moving parts to this plan, and not everything will materialize as intended. The strategy has logical elements, but its success may not be evident for years.

In the short term, the goal is to encourage companies to invest in U.S. manufacturing, including potential tariff waivers for companies committing to significant domestic investment, a concept that has been floated in policy discussions. Some automakers have already made such commitments, such as Hyundai’s $5.5 billion vehicle and battery plant near the Port of Savannah.

What remains challenging is the uncertainty. Information on tariffs—how much they will be and when they will take effect—changes daily. For example, after a 25% tariff on autos and auto parts was announced recently, auto stocks fell the next trading day. While shifting information is frustrating for individual investors, it poses even greater challenges for capital planners and CEOs who manage billion-dollar budgets and investment strategies.

Like the Federal Reserve’s attempt to engineer a soft landing for inflation, the success of Trump’s tariff policy hinges on balancing long-term goals with short-term economic stability. Current economic data suggests a slowdown ahead, accompanied by continued volatility. Businesses are more likely to invest, hire, and expand when they have a clear outlook and can make informed decisions.

If you have questions on how to invest through economic uncertainty, the experts at Henssler Financial will be glad to help: