Despite significant opposition, even from within his own party, President Trump recently imposed new tariffs on steel and aluminum. If you were watching your investment portfolio last week, you may have wondered what was happening as the markets endured some big swings in response to the president’s proposals. Here’s what you should know about the tariffs from an economic perspective.
REMIND ME AGAIN, WHAT’S A TARIFF?
A tariff is basically a tax on something that’s imported. In this case, if steel or aluminum that’s produced in another country (like China) is brought into the U.S., whoever imports it will have to pay a tax to get it into the country (10 percent for aluminum and 25 percent for steel). Supporters of the president’s tariffs believe that China has been selling products like steel and aluminum for less than the cost of production. They believe that charging the tariffs will level the playing field.
WHAT’S REALLY GOING ON HERE?
“Ultimately, I think what you’re seeing here is a move to protectionism, similar to the Brexit vote, that is a popular undercurrent in today’s world,” says expert Brent Schutte, Northwestern Mutual’s chief investment strategist. Protectionism is the opposite of a long trend toward economic globalization, a shift that’s credited with keeping prices and inflation low since the 1980s. But that has also led to jobs being shifted oversees. Just since the announcement of the tariffs, a recently shuddered steel plant in Illinois announced that it will reopen a line, hiring 500 workers. Another plant in Ohio says it’s planning to hire 1,000 workers. That kind of news is popular with people.
DOES THIS MEAN COSTS WILL GO UP?
Probably, says Schutte. The goal of the tariffs is to raise the price of aluminum and steel, which are used to make a lot of things, from canned beer to new cars. That’s a concern for investors, who fear the tariffs will raise the cost of doing business. Those increased costs could cut into profits, or could be passed on to consumers, who would not be able to buy as many things. But the economy is on a solid footing and wages are rising, which could make up for rising prices. “Ultimately, these tariffs are just one piece of a larger economic picture that will include moderately rising inflation,” says Schutte.
SOME ARE TALKING ABOUT THE TARIFFS AND THE GREAT DEPRESSION. SHOULD I BE WORRIED?
No, says Schutte. “The economy is in a very different place than it was during the Great Depression,” he says. The Smoot-Hawley tariff, which raised tariffs on 20,000 goods in 1930 is widely believed to have worsened the effects of the Great Depression. But today’s economy is different. “There is still a big fiscal stimulus occurring, monetary policy is incredibly accommodative and the economy is expanding and by all accounts is on a very solid footing,” Schutte says.
WHAT WILL THE TARIFFS REALLY MEAN FOR THE ECONOMY?
“Bottom line, tariffs raise prices,” Schutte says. Exactly how much these tariffs will raise prices remains to be seen, because the president has left some room for negotiation. Canada and Mexico are exempt from the tariffs, and the president left the door open to exempting other countries. While the tariffs could lead to inflation, Schutte points out, “nearly all economic data suggest the economy has more room to run.”