So what is the deal with tariffs? If you haven't been living under the proverbial rock, you have probably heard more about tariffs in the last couple of months than you did in the previous couple of decades. So what are tariffs, how do they work, and what is the goal here?
If you watch mainstream media, you may have heard that other countries will pay for it or that the American consumer will pay for them. Both are technically true.
Let's say that the Trump administration places a 20% tariff on imported wine from Canada. XYZ beer distributors then orders $100k of wine from Canada. XYZ then pays the 20% tariff directly (so their total cost is now $120k), and the increased cost would theoretically be passed onto the consumer in the form of higher prices for those goods. On its face, that is a tax borne by the consumer, and there are some cases where this is true in the micro. So now let's expand to the global marketplace and look at some of the downstream effects.
Let's say that a comparable vintage of wine is available in California that would cost XYZ distributors $110k for the same quantity of wine. Before tariffs, that was not competitive. After tariffs, American wine becomes a more competitive option for XYZ distributors. Now the Canadian wine company has a choice: Do we lower prices and remain competitive, or do we keep prices the same and lose sales to a competitor?
The United States has a long history of extremely low tariffs. This was largely initiated by the Marshall Plan, with the goal of rebuilding a post-war Europe. Where it has led us is to outsourcing a lot of our manufacturing overseas and then buying those cheaper goods. This is also the main reason that we consistently operate at a trade deficit. We are the largest, most important market as the purchaser of the world's goods.
So what is the goal here? The stated goal has been best illustrated by Trump's Secretary of Commerce, Howard Lutnick. According to Lutnick, their goal is to raise $1 trillion a year in revenue from tariffs and external sources while DOGE works to cut $1 trillion of expenses annually. In theory, that would balance the United States' budget, something we haven't seen since the Clinton administration. Is it an ambitious goal? Absolutely.
Now, how could this go wrong? There are a couple of obvious ways that this could cause some pain along the way.
- Tariffs are short-term price-inflationary. It will raise the cost of certain goods that are the targets of tariffs. This also can create difficulties for U.S. companies who rely on foreign inputs as a part of their business. How are you supposed to plan if tariffs are in flux?
- Trade-war. As we have already seen with Canada and Mexico, it could lead to further de-globalization of trade and retaliatory tariffs from other countries.
If you want to talk further about how this could impact you or your goals, you know where to find me.