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Have you heard the buzz about tariffs in the news lately? Specifically, tariffs on goods imported from China? The U.S. government just released a list of over 1,300 Chinese goods that could be subject to tariffs.
So, what is a tariff, exactly? How do tariffs lead to trade wars? How do tariffs and trade wars impact the economy? And how does any of this affect your wallet? Those are good questions. Here are your answers.
What Is a Tariff?
A tariff is a tax that a government places on a group of imported goods. Tariffs benefit domestic producers of those goods, because the tax essentially makes the imported version of the good more expensive. Any country can impose a tariff on goods from any other country.
There are generally two types of tariffs. An ad valorem tariff is a fixed percentage of the good’s value. So, the tax on that product will go up or down as the international price of that good changes.
A specific tariff is a fixed amount that does not change if the international price of the good goes up or down.
Goods can include anything from tennis shoes to computer chips. A country may import retail items—like TVs—or it may import raw materials like steel or corn.
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A Tariff Example
If a government thinks trade with another country is getting unbalanced, it might tax certain items from that country.
For example, the U.S. imports more goods from China than any other country in the world—to the tune of $505 billion in 2017. On the other hand, the U.S. exported just $130 billion in goods to China that same year. The gap between those two amounts—$375 billion—is called a trade deficit.(1)
In January, the U.S. government started to impose tariffs on a few items from China, like solar panels and washing machines.
In March, the U.S. announced a 25% tariff on steel coming into the U.S.(2) And in the beginning of April, the U.S. released a huge list of items it would tax—from cash registers to artificial teeth—if imported from China.(3) And those new tariffs could impact your budget. More about that later.
Who Benefits From Tariffs?
The theory behind a tariff is simple—at least on paper.
When taxes are imposed on an imported item, like steel, U.S. companies needing that item have to pay more for it. But as an alternative to buying imported (foreign) steel, a U.S. company could purchase it from a domestic supplier with a better price.
Why is the price better? Because it doesn’t include the import tax. Make sense? The goal is for the tariff to create a level playing field in the steel industry and help U.S. companies thrive. Again, in theory.
What Is a Trade War?
Here’s where it gets interesting. In response to the recent list of Chinese goods that could be subject to U.S. tariffs, China announced it would impose its own set of tariffs on U.S. goods sold in China, including fruits, wine, nuts and pork.(4)
When countries go back and forth with round after round of new tariffs on each other’s imports, the result is a trade war. Eventually, the two countries in question negotiate to make their trade partnership more balanced.
But in today’s global economy, a battle over tariffs doesn’t just impact the two countries involved. For example, the European Union has said that if they’re hit with U.S. tariffs, they’ll hit back—imposing tariffs on a range of things from jeans to motorcycles.(5)
And other countries that have had good trade relationships with the U.S. in the past, like Canada and Mexico, are getting jitters because they could be next. Everybody is nervous, including investors.
More on that later, too.
Are We in a Trade War With China?
It’s too soon to tell whether the U.S. is in a trade war with China. That’s because it takes time for the tariffs to go into effect.
The government will hold hearings with companies later this spring to negotiate the tariffs, so things aren’t set in stone yet.(6) As of now, think of the trade discussion with China as a heated dispute rather than an all-out fight.
How Do Tariffs Impact the Economy?
The goal of tariffs is to make marketplace competition fair. This helps economies grow as nations compete with each other to sell their resources. When the U.S. economy thrives, that trickles down to you and me in the form of more affordable goods. That’s one theory from economists. Others say tariffs could make the cost of goods go up because companies just increase their prices to cover the tariff.
For example, the U.S. government recently attached tariffs to imported Chinese aluminum. As a result, the cost of things like beer kegs and baseball bats (which contain aluminum) could go up in the U.S., and those higher costs affect the overall economy.
How Do the Tariffs Affect My Wallet?
That’s the big question on everyone’s mind. Once the tariffs take effect, you might see prices go up slightly on everyday items like peanut butter, orange juice, and even jeans. That means you need to keep an eye on your monthly budget so you don’t overspend.
Now you know why keeping track of your expenses throughout the month is so important!
You’ll really feel the tug on your wallet with big-ticket items affected by these tariffs.
For example, many televisions imported from China could cost 25% more—if companies increase their prices to cover the cost of the tariff.(7) So, a $560 television from China could cost you $140 more—making the final price $700. The same principle applies to other big items, like tractors, snowblowers, and boats.
If you’re in the market for a big item, you have four options: 1) Pay the higher cost; 2) Purchase the item from a company that’s not affected by the tariff; 3) Buy a used item; or 4) Wait to buy your item until the tariffs lessen again (and they usually do).
How Do Tariffs Affect Investing?
The people on Wall Street have been nervous about the tariffs, too. And if other countries jump in the ring to duke it out, that concern could increase.
On Tuesday, April 3, the Dow Jones Industrial Average dropped 510 points in response to the latest list of taxed goods. Ouch. But the next day, it bounced back and gained 230 points. That’s a 740-point swing in just two days.(8)
Now, if you panicked and sold investments that Tuesday because you were afraid of losing more money, you made a poor decision. You lost out on Wednesday’s gains. Plus, you will likely pay more for that same investment if you purchase it again. That’s not a smart investing strategy!
Instead of jumping out of the roller coaster while it’s still in motion, stay in your seat and keep your seatbelt fastened. Wait out the rocky ride of trades and tariffs. Keep investing every month. The market will go up and down, but if you ride it out, your investments will pay off. History has shown us that.
If you have extra cash on hand, you could even invest that money while mutual funds are on sale (when the market drops). So, if you play it smart, you could benefit from the dips in the market.
If these tariff and trade negotiations are making you anxious about your investments, or if you’re wondering if you should make some adjustments, talk with your financial advisor.
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About Chris Hogan
Chris Hogan is the #1 national best-selling author of Retire Inspired: It’s Not an Age; It’s a Financial Number and host of the Retire Inspired Podcast. A popular and dynamic speaker on the topics of personal finance, retirement and leadership, Hogan helps people across the country develop successful strategies to manage their money in both their personal lives and businesses. You can follow Hogan on Twitter and Instagram at @ChrisHogan360 and online at chrishogan360.com or facebook.com/chrishogan360.