By Jason LaBarge, Financial Advisor and President of LaBarge Financial
Whatever side of the political aisle you favor, you have to admit: President Trump is making waves. Since taking office on January 20, news outlets large and small have struggled to keep up with the flurry of executive orders and policy changes flying from the Resolute Desk. One large category of these changes is tariffs.
In just the first week of February, the president imposed a 10% tariff on China, a 25% tariff on Mexico and Canada, paused the Mexico and Canada tariffs, and then imposed a 25% tariff on all imports of steel and aluminum from any foreign country. It is inarguable that Trump is in favor of tariffs. But, many ask, why?
How Tariffs Work
A tariff is a tax imposed on imports, paid by the importer. If you buy a smartphone made in China, the business you buy it from will pay a 10% tariff on the price they pay for the phone.
In many cases, they will pass the cost of that tax on to you, meaning the price you pay for the phone will be higher than it otherwise would have been without a tariff. This doesn’t mean a $1,000 smartphone will now cost $1,100 – the tariff is paid on the declared value of the imported product before profit and other add-on expenses are applied.
Tariffs tend to lower demand for imported goods because fewer people are willing to pay more money to acquire them. In some cases, that can boost domestic businesses but in others, it simply costs us more or causes sales to decline. For example, a tariff on computer parts from China may not shift business to United States-based manufacturers because, for many computer parts, there are no factories within our borders capable of producing them.
Why Tariffs are so Popular
The reason Trump is using tariffs so heavily depends on the political leanings of the person you ask! Trump supporters are convinced he is using them as bargaining chips. By threatening countries with policies that reduce demand for their exports, he hopes they will be more willing to negotiate with Trump on his international agenda.
If that interpretation is correct, it’s one of the biggest games of economic “chicken” we’ve ever seen. Trump would be betting on the idea that these countries have to capitulate to his demands because they’re so reliant on income from exports to our country and the early responses from Canada and Mexico have shown that to be true.
On the other hand, those who do not support Trump generally believe he is imposing these tariffs because he doesn’t understand how tariffs work. They often cite as evidence his frequent comments that the countries subject to the tariffs will have to pay for them, when it’s the importer, not the exporter, who pays the tariff.
Regardless of the real reasoning behind the president’s tariff kick, it’s indisputable that, should tariffs be deployed on a significant scale, it’s likely to drive up prices for much of what we buy, from groceries to electronics and even to cars.
It’s therefore important to review your spending plan and make sure there’s room in it to absorb the higher cost of living that could be on the horizon. Determine your budget and stick to it: If prices rise, find budget items you can cut, and be willing to make hard choices if necessary to keep your finances healthy. If prices don’t increase, then you have found additional money to save and that is always a great thing.
Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results. This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.
Jason LaBarge, Financial Advisor and President of LaBarge Financial
7 Riggs Avenue, Severna Park, MD 21146 443-647-4321
www.LaBargeFinancial.com
Securities offered only by duly registered individuals through Madison Avenue Securities, LLC (MAS), member FINRA/SIPC. Investment advisory products and services made available through AE Wealth Management, LLC (AEWM), a Registered Investment Advisor. MAS and LaBarge Financial are not affiliated entities. 2891498-02-25