In the late 1920s, America was on the brink of economic collapse. This was fuelled by numerous factors, such as an agricultural crisis, excessive debt, increased speculation in the stock market, and overall economic instability. All of these factors converged to create a fragile economy, which caused policymakers to make a bold move: raise tariffs on foreign goods, hoping to protect local industries to prevent the economy from spiraling out of control. However, instead of stabilizing the economy, this sparked retaliation and sent international trade into a downward spin. Today, this is what we call The Great Depression.
Image Source: Britannica
Nearly a century later, talk of tariffs is once again in the air as we approach 2025. But this time, the stakes and strategies look remarkably different. In a matter of weeks, we may see a wave of policy shifts -- a new Department of Government Efficiency poised to eliminate bureaucratic red tape, a crypto-friendly SEC chairman, and a range of business deregulations all lining up behind a familiar but contentious weapon: tariffs.
While some are hailing these tariffs as the key to eliminating the federal income tax (imagine never owing a cent of that again!), others fear we’re about to invite a perfect storm of higher prices, global retaliation, and economic turmoil.
So, are these tariffs about to usher in a financial windfall? Or will they set us on a collision course with international partners, leading to price hikes, economic stagnation, and the next major downturn?
What is a tariff – The good, bad & the ugly
At its core, a tariff is a ‘tax’ imposed on imported goods. The idea is simple: If products from other countries become more expensive, consumers will be encouraged to buy locally made alternatives. For example, let’s say toilet paper made in Mexico costs $1 a roll, while American-made toilet paper costs $2. If a 100% tariff is imposed on imports, the price of Mexican toilet paper doubles to $2. American products look far more appealing at this point, boosting domestic manufacturing and government revenue.
But here’s where the misconception starts. The foreign country doesn’t pay a tariff; it’s paid by the company importing the product to the U.S. And guess what? Those extra costs don’t just disappear – they’re passed on to you, the consumer, in the form of higher prices. However, some argue that they can be useful for four main reasons –
- Protecting Local Businesses: Tariffs make foreign goods less competitive, allowing U.S. companies to sell more products and grow.
- Increasing Job Growth: As demand for locally made goods rises, businesses hire more workers to meet that demand.
- Boosting Government Revenue: Local demand boosts jobs, but even if jobs aren’t created, the government still collects money through these tariffs, and finally
- Negotiating Trade Deals: Other countries may want to avoid tariffs on their products. So, they may agree to buy more American goods and negotiate to avoid tariffs.
In an ideal world, tariffs can promote domestic industry, strengthen trade agreements, and increase employment. But there’s a flip side to this, and this is where things get tricky. Imposing or increasing tariffs could also mean –
- Higher Prices for Consumers: Importers pass the cost of tariffs onto you. That $1 roll of toilet paper mentioned earlier could now cost at least $2 if a 100% tariff is imposed.
- Retaliation from Other Countries: If the U.S. imposes tariffs on imports, trading partners might respond by imposing their own tariffs on American goods, which could hurt industries like agriculture, manufacturing, and even tech.
- Economic Decline: Tariffs can create a ripple effect, reducing trade, slowing economic growth, and increasing unemployment.
- Reduced Innovation: Less competition from foreign companies could remove the incentive to improve local products and lower prices.
Trump’s proposed tariff plan
On November 25th, Trump announced that he would enact an executive order to create an additional 10% tariff on Chinese Imports and a 25% tariff on Mexico and Canada. These tariffs would continue until China, Mexico, and Canada addressed the movement of legal substances and undocumented immigrants across the US border, and here’s why this matters:
Currently, we import more than $448 billion worth of products from China, $429 billion from Canada, and $480 billion from Mexico. This means there's $1.3 trillion in goods that can cost more than they do now. After all, in response to these announcements, Canada and Mexico said that they would retaliate with tariffs on our products if tariffs were imposed on their US exports. Any additional tariff would raise the price of those goods, costing Americans more for everyday items like cars, electronics, and clothing. If it plays out this way, it could only be a lose-lose situation for all parties involved, as the prices of goods and services would increase. This will only lead to – you guessed it – more inflation!
To make matters worse, existing US Tariffs in 2022 generated a measly $80 billion for the US government. This might sound like a lot, but it was enough to keep the country running for only around 15 days. This suggests that it's pretty much impossible to fund the government on tariffs alone, and any attempt to eliminate the federal income tax is just wishful thinking.
Historically, using tariffs to fund the government has been tried before, but it has failed spectacularly. The Smoot-Hawley Tariff Act of the 1930s is a prime example. It was introduced during the Great Depression to boost U.S. businesses, but other countries retaliated with their own tariffs, leading to collapsed trade and inflated prices.
Why would Trump propose more tariffs?
Today, tariffs are still in place for many goods. So, why does Trump want tariffs in the first place if there's so much information out there that says it's bad for the consumer? Unfortunately, the answer isn't as easy as saying everyone is wrong, the data is bad, and this time is different. Instead, the truth probably lies somewhere in that our upcoming administration believes that our reliance on China is bad both politically and economically, and Trump could threaten tariffs to negotiate a more favorable trade deal without actually going forward with them. Currently, thousands of Chinese imports are subject to tariffs. Most of these costs are hidden from consumers, but they’re there – and they add up.
What does this mean for you?
If the proposed tariffs are imposed, you can expect higher prices on everyday items like clothing, electronics, cars, and food as companies pass the added costs onto consumers. Retaliation from trading partners could further reduce exports, slowing economic growth and impacting American businesses and jobs. The effects won’t be felt equally either – lower-income households may bear the brunt of rising prices, while industries protected by the tariffs could experience short-term gains. However, only time will tell as to how it may play out in the long run.
While tariffs may sound like a good idea to protect American businesses and workers, they often have unintended consequences. Higher prices, slower economic growth, and trade retaliation are very real risks. Historically, tariffs haven’t been able to fund the government, and replacing income taxes entirely with tariffs is economically unrealistic.
Instead, addressing wasteful government spending would likely yield far better results. Whether or not this proposal goes into effect, it’s clear that the debate around tariffs will continue, and the impacts will ripple across the economy. The takeaway? Focus on what you can control –managing your finances, investing wisely, and preparing for any economic changes ahead.
That's it for this week. I hope you enjoyed this article. Let me know your thoughts by responding to this email - I read every single comment :)
Stay safe, stay invested and I will see you next week – Graham Stephan.
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