At Planning Alternatives, we often talk with clients about the many forces that can affect financial markets, and tariffs are a perfect example. While they might sound like an abstract policy tool, tariffs have real and tangible effects on businesses, prices, and even individual consumers—sometimes in surprising ways. In this article, you’ll learn what tariffs are, how they work, and what you as an investor should keep in mind.
Imagine ordering a high-end guitar from Japan. Excitement builds as it ships—until U.S. Customs and Border Protection steps in. Before the guitar is released, you get a bill for an import tariff, also known as a customs duty. The agency inspects it, confirms the details match the invoice, and only then releases it—after you pay. This real-world example illustrates the core purpose of tariffs: to add cost to imported goods, which can make domestically produced options more attractive.
In essence, a tariff is a tax imposed by a government on imported goods.
The U.S. uses tariffs to increase the price of goods coming from abroad, aiming to encourage domestic manufacturing. If it's more expensive to import certain items, the theory goes, companies will shift production back home where tariffs don’t apply. In theory, this supports local industries, drives employment, and reduces reliance on foreign supply chains.
But theory and practice don’t always align so neatly.
One of the key issues today is that U.S. importers—not foreign exporters—are currently bearing 100% of these tariff costs. While it’s possible for exporters to offer discounts to keep their U.S. clients happy, recent data shows this isn’t happening. For example, April’s U.S. import price data showed a 22% year-over-year increase, mirroring the hike in tariffs.
Retailers like Walmart and Target, as well as automakers such as Ford and GM, are feeling the pinch. They’re grappling with higher costs that squeeze their profit margins. And even though inflation is already on the rise, many are hesitant—or unable—to pass on the full burden of those costs to consumers.
Tariffs are nothing new. The U.S. has seen waves of tariff increases going back over a century. But since the 1980s, we’ve enjoyed a trend of decreasing trade barriers—until recently. The sharp reversal has introduced new frictions into the system, especially because the U.S. can’t ramp up manufacturing capacity overnight. Sourcing labor, materials, and infrastructure domestically takes time—often years—not weeks or months.
Tariffs aren’t one-size-fits-all. There are two key types:
In many cases, they overlap. For instance, a country like Ireland might face tariffs on pharmaceuticals, while pharmaceuticals from other countries might be exempt. Auto tariffs might apply to European exports but not those from Canada or Japan.
The complexity is immense. With thousands of product codes and countless country combinations, customs and border patrol agents face an overwhelming task. This complexity also opens the door to "shenanigans" in classification. For instance, is a "belt bag" a "belt" or a "handbag"? Each category might carry a different tariff rate, leading to legal wrangling to qualify products at the lower rate.
Whether you’re a consumer, a business owner, or an investor, tariffs can have a real impact on your bottom line. They can affect inflation, corporate profits, and market performance—especially in globally connected sectors like retail, autos, and tech.
At Planning Alternatives, we help our clients understand how these forces can affect their financial plans—and how to stay resilient amid evolving global trade dynamics.
Have questions about how global economic policy might impact your investments? We’re here to help.