Tariffs Explained: The Good, Bad, and What’s Next

If you’ve been following recent economic news, you have questions and no doubt concerns over the recent tariff turf war and for good reason! What are they? How do they work? And more importantly, how do they impact you and the broader economy?

Markets have reacted poorly to the news and with that comes an onslaught of people chiming in on the news, social media, and otherwise. Many are hyper ventilating about something that most have very little knowledge of.

Does that mean the concerns are not there? Of course not.

It does mean we need to step back from our emotions and understand the basis for the tariffs, the current and future impacts, and how they relate to your financial accounts. So, let’s take a quick dive into the events leading up to today and what may be ahead.

What Are Tariffs?

Tariffs are taxes or duties imposed on goods imported from another country. They can target specific industries, products, or even entire nations. Occasionally, tariffs are also imposed on exports, although it’s not as common. For instance, an oil-exporting country might impose a tariff on its oil, regardless of where it’s being sent.

By raising the cost of importing certain goods, tariffs are often used by governments to encourage domestic production, reduce reliance on foreign goods, and generate revenue.

What Is the Intention of Tariffs?

Tariffs are a government tool to achieve two basic outcomes:

1. Protect Domestic Industries
   • They safeguard U.S. industries from cheaper foreign goods by making imported products more expensive. This gives local companies a competitive edge.
2. Generating Revenue
   • The taxes collected from tariffs provide funding for government programs and obligations.

However, tariffs are often about more than just taxes or business protection. They’re part of a broader strategy to reshape trade policies and rebuild industries domestically.

Why Are We Talking About Tariffs Now?

Most countries have tariffs ranging from minor to significant on U.S. exports of goods and services to their countries. In return, the U.S. has traditionally had a low or zero tariff policy on imports. This is what is loosely coined as free trade. Not that it’s entirely free but traditionally foreign countries bring goods and services to the U.S. at little to no cost. Meanwhile, U.S companies, especially agriculture (farmers) and manufacturing, have been hit with massive tariffs for decades.

The result?

• A significant number of U.S. jobs and manufacturing moved offshore to countries with cheaper labor (China, Taiwan, Vietnam, etc.).
• The U.S. saw a $1 trillion trade deficit in 2024 alone, with goods being imported far more than exported.

Multiply that over the last 40 years. Is it right or wrong? Well, it depends. Do you value cheaper goods for consumers or the protection of U.S. jobs and industries? Simply put, you can’t have both.

Agree with it or not, the current administration’s position is to build back U.S. manufacturing by encouraging companies manufacture, employ, and invest in the U.S. directly. Since January, there has been ongoing “onshoring” of manufacturing in the U.S. This process is easier said than done and often takes years to accomplish.

As with anything, there are upsides and downsides. Let’s break that down a bit.

The Bad News About Tariffs

A new set of global tariffs disrupts the decades-long economic reality of trade to the U.S. and causes a hard reset. To put it bluntly, this is one of the largest global economic upheavals in 80 years and possibly of all time. Here are some of the key concerns tied to this policy shift:

1. Higher Prices for Consumers

When goods become more expensive to import, companies often pass those costs onto consumers. This means higher prices for everyday items, from clothing to electronics. For some products, there may be limited alternative sources, forcing consumers to bear the brunt of these price increases.

2. Retaliatory Tariffs

Tariffs don’t exist in a vacuum. Other countries have responded by imposing their own tariffs on U.S. goods, making it harder for U.S. exporters to compete in global markets. This could hurt industries like agriculture, where farmers already face tight profit margins.

3. Global Economic Tension

Free trade has been the norm for decades, and sudden changes can disrupt the economic stability of nations that rely on U.S. markets. For example:

• China exports 15% of its total goods to the U.S.
• The European Union sends about 20% of its exports to American consumers.
• Canada relies on the U.S. for a whopping 65% of its total exports.

Some countries may experience regional recessions as their reliance on U.S. trade is disrupted, creating tension between nations. Regional recessions should be expected, some even severe in the case of Canada, Japan and others.

4. Economic Uncertainty

Businesses thrive on stability. Unpredictable changes in trade policies can create hesitation for companies looking to make long-term investments. This uncertainty could slow economic growth, at least temporarily.

The Silver Lining

While tariffs undeniably come with risks, there are also significant potential benefits, especially for the U.S. economy.

1. Lower Interest Rates

Interest rates have begun and will continue to decline. This will create relief for both consumers and corporations, as it reduces the cost of debt and lowers mortgage rates.

For the U.S. government, this also means lower interest payments on the national debt, which will have a larger impact. The U.S. is about $36 trillion in national debt with over $9.2 trillion needing to be refinanced in 2025. At the time of this writing, the 10-year treasury is down over 0.75% on the year saving the U.S. almost $1 trillion in annual interest on this debt.

Further, an inflation drop may trigger allowing a reprieve in consumer spending. Which could in turn give the Federal Reserve room to reduce rates even further.

2. Strategic Negotiation Power

The U.S. consumer market is one of the largest in the world, and tariffs give the U.S. leverage to renegotiate trade agreements and level the playing field. The ultimate goal? Secure better trade terms and reduce dependency on foreign manufacturing by “onshoring”.

3. Revitalizing Domestic Jobs

Encouraging businesses to produce goods in the U.S. could bring thousands of manufacturing jobs back home. While this won’t happen overnight, the long-term prospects for a stronger domestic workforce are promising.

4. Improved National Security

The COVID-19 pandemic exposed vulnerabilities in global supply chains and it’s risk to the U.S. By incentivizing domestic production, tariffs help reduce those risks and bolster national security.

What’s Next?

Only time will tell how these policies will shape the future. Here are two possible outcomes moving forward:

1. Success
   • If successful in the large-scale outcome we will see better U.S. debt scenario, lower interest rates, a boom in U.S. jobs, and a stronger balance in global trade.
2. Setback
   • If unsuccessful we will see higher inflation, economic instability, and strained relationships with current trade partners and nations.

The current tariff policy represents a high-risk, high-reward strategy aimed at reshaping the global economic landscape. Only time will tell what direction plays out. For now, the key is to stay informed, patient, and proactive in understanding this evolving reality.

Resources

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