The bottom line about Trump's tariffs

Concerns are mounting over the worldwide economic consequences of US President Donald Trump's tariff policies, and many investors will currently be grappling with the question of how concerned they should be about the impact of tariffs, and whether they should be adjusting their portfolios.

With this in mind, it is useful to understand how tariffs work in practice

Tariffs, or duties, are essentially taxes imposed on imported goods, generating revenue for the governments that implement them. When goods from countries targeted by tariffs arrive at ports of entry, the importing firms pay the duties.

Who ultimately pays for the cost of tariffs is more complicated.

The importer initially pays this tax directly. Then, the importer may increase customer prices to cover some or all of the tariff's costs. Exporters don't pay tariffs directly. If tariffs make their goods more expensive for prospective import buyers, exporters might lower their prices or cut production costs to compensate.

There is also an argument that tariffs can help protect jobs, although this is open to debate.

Trump appears to have several reasons for introducing tariffs, including protecting domestic producers from foreign competition, and also to advance policy goals such as interrupting the drug trade. Whether he will achieve these goals is unknown.

What is clear, however, is that tariffs have implications for economic stability and growth, which are a cause for concern.

Almost all economists agree that tariffs tend to limit economic growth. And while most countries already had some tariffs in place, there is no doubt that the extent of those being introduced by Trump - and the reciprocal tariffs by other countries - is unprecedented in recent times. It is impossible to predict the implications.

One thing that seems likely is that consumers and businesses will be hurt by higher prices and a trade war could arise if countries retaliate against Trump's tariffs. We have already seen that after President Trump's global tariffs on steel and aluminum took effect, the European Union and Canada in March announced billions of dollars in levies on American goods.

By limiting competition, tariffs tend to reduce the quantities of goods and services available for US businesses and consumers. They can also limit the variety and quality of products, reducing consumers' options.

Trump's proposals have included a universal tariff applied to all goods from targeted countries and this has significant implications for the broader economy. As a result, investors' long-term expectations for broader inflation have increased since Trump's election victory in November 2024.

Of course, consumers can seek cheaper alternatives to avoid paying higher prices for imported goods subject to tariffs. However, by limiting competition, tariffs also mean that prices for these alternative goods will also likely rise.

The US has used tariffs since 1789.

Before the Civil War, tariffs comprised 90% of the US government's revenue. This percentage dropped to less than a third by 1915 after the US instituted a federal income tax and by 2016, tariffs accounted for less than 1% of revenue. Now, that figure is set to rise under the new tariffs being imposed by President Trump.

Nor are American jobs likely to be protected. A 2024 working paper by economists at the Massachusetts Institute of Technology, University of Zurich, Harvard University and the World Bank concluded that Trump's first-term tariffs "neither raised nor lowered US employment".

Despite Trump's 2018 tariffs on imported steel, for example, the number of jobs at US steel plants hardly changed. Meanwhile, the retaliatory tariffs China and other nations imposed on US goods had overall 'negative employment impacts', notably for farmers, according to that study.

Most recently, the nonpartisan Tax Foundation estimated that Trump's latest tariffs would reduce US employment by the equivalent of 142,000 full-time jobs.

So, tariffs are by no means a good thing for the American or indeed the global economy. Investors would be wise to carefully monitor the situation and seek to understand the potential impact on their particular investments.

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