I was in the 8th grade when I learned about tariffs. Given that this would have been nearly 45 years ago, what I recall was that tariffs were a defensive strategy a country could employe to help one of its own industries recover/ retool/ become more competitive. In the 8th grade example, I was learned that by raising the price that US consumers paid for foreign cars, US consumers might consider buying US-made vehicles. Further, the infusion of cash might help the US auto industry get back on its feet.
I also learned about tariffs being used as a deterrent. In this case, the US felt that foreign steel was being sold at far-below market prices and this unfair advantage was hurting the US steel industry. These two examples made sense to my 8th grade brain.
As I think about the pending tariffs against Canada, China, and Mexico and given the increasingly global nature of the economy, it seems to me that tariffs may not be as effective as my 8th grade brain led to believe. In fact, with those three countries pledging retaliatory tariffs, this might become a case of two people slapping/ punching each other at the same time and both winding up with sore faces.
Tariffs are also a concern from a financial market (and thus a 401k point of view). They generally have a negative impact on the stock market, but the severity depends on various factors such as the scale, duration, and geopolitical context of the trade restrictions. Here are the key effects:
Market Volatility – Tariff announcements often cause uncertainty, leading to increased market fluctuations as investors react to potential economic disruptions.
Sector-Specific Impact – Industries reliant on international trade, such as manufacturing, technology, and agriculture, often suffer due to higher input costs and potential retaliatory tariffs from other countries.
Earnings Pressure – Companies facing higher costs from tariffs may experience margin compression, reducing profitability and potentially leading to lower stock valuations.
Consumer Impact – Higher import costs can lead to inflation, reducing consumer purchasing power and affecting sectors like retail and consumer goods.
Potential for Stimulus – In some cases, governments may implement monetary or fiscal stimulus to counteract tariff-related slowdowns, which can temporarily boost markets.
Long-Term Effects – Persistent tariffs can lead to shifts in supply chains, benefiting some domestic industries while hurting companies that rely on global production efficiencies.
While short-term market reactions to tariffs are often negative, the long-term impact depends on how companies and economies adapt.
I was chatting with Lisa, a Toronto-based entrepreneur. Her speciality is intricately-sewn home furnishings with expert installation. She is currently working on a project for a Canadian hotel installing 40 custom sewn curtains. With the retaliatory tariffs, her concern is that the materials she imports from the US is going to be more expensive. There is not a good local Canadian substitute product for her projects.
Accordingly, Lisa's raw material costs will increase and in order to be profitable as a business, she would need to raise her prices. It is plausible that her business will suffer as hotels, consumers, and interior designers defer their design and sewing projects. Lisa could go out of business. Magnify her predicament across all of Canada and you can see a severe recession in Canada.
And what does a severe Canadian recession mean for the US? Canada imported US$330 billion of goods in 2023. Decreased Canadian consumption of US goods means lower revenue for US companies. This in turn could lead to US layoffs. And I think we can all see what lower revenue means for stock prices and thus the 401k world.
The Parting Glass
Might this be a case of "You slap me. I will slap you. We now both have sore faces"?
Might it better to try to understand the underlying reason for the proposed tariffs and see if there is a diplomatic and/ or business solution? While Al Capone famously said, "You can get further with a kind word and a gun than just a kind word", it is possible that having cooler heads prevail might be better for all concerned? I certainly am not a fan of a sore face.