Manufacturing

Tariffs: What They Are and How They Impact Your Finances

Tim Lemke — Fri, 16 Mar 2018 09:30:20 +0000

President Trump recently announced new tariffs on imports of steel and aluminum, in a move that got mixed reviews from business and political leaders. The new tariffs would increase levies on aluminum by 10 percent and steel by 25 percent.

There is much debate about the sensibility of these tariffs, but rather than wade into that morass, let's examine what tariffs are and how they impact the economy and your investments.

What is a tariff?

A tariff is essentially a tax that the government places on imported items. For example, the government may choose to place a tax on foreign cars or imported cotton. There are tariffs placed on an eye-popping number of products, from building materials and vegetables, to chemicals and even live animals. Tariffs can be imposed on a per-item basis, by weight or size, or by percentage of value.

Tariffs can even vary depending on the country. For example, the U.S. may impose a tariff on shirts made in China, but not in Vietnam. The United States imposes tariffs on imports from many countries, but also has free trade agreements with many nations that allow both parties to import goods without tariffs.

Why do tariffs exist?

The first tariffs in the United States came shortly after the nation ratified the Constitution, and were motivated largely by the government's need for revenue. Tariffs played a big role in funding the government in the days before income taxes.

Tariffs today still produce billions in revenue for the government, but they are also designed to help protect U.S.-based industries and companies. In essence, tariffs imposed on imported goods make those goods more expensive, thus giving a competitive advantage to American firms. But opponents of tariffs say they can hurt international trade and ultimately lead to lower economic growth worldwide.

How does a tariff impact prices?

Tariffs impact the cost of many of the products we buy. Just look at the label on the shirt you're wearing or your child's toy. Even if a product is manufactured or assembled in the United States, it may be made with materials that were produced overseas. Given that there are levies placed on thousands of imported goods, it's almost impossible to hold a product that isn't made more expensive by tariffs.

The specific impact on price varies, however. Some tariffs are relatively small and are barely noticed by consumers. Even significant tariffs may not impact the cost of an individual item by very much. (One analysis said the cost of a can of Campbell's soup may go up less than one cent as a result of Trump's higher tariff on steel.) At various times in history, however, tariffs have led to problematic increases in prices. For example, tariffs on agricultural imports during the Great Depression, which were designed to support American farmers, led to higher food prices at a time when people were struggling financially.

What industries are impacted by tariffs?

Nearly every business is impacted by tariffs to some extent, either directly or indirectly. A tariff on steel, for example, will impact the steel industry overseas but in turn could make costs higher for American construction companies that use steel. Similarly, a tariff on aluminum could mean higher costs for the beer industry because its beverages are sold in aluminum cans.

The U.S. has placed relatively high tariffs on clothing manufactured overseas, while electronics have tariffs that are much lower.

How does this impact my investments?

While tariffs are designed to protect and bolster U.S. industries, the actual impact on a company's bottom line — and investors — is not easy to predict. Consider the auto industry. There have long been tariffs on imported cars and automotive parts, but foreign car companies including Toyota and Honda have still recorded high sales while the U.S. auto industry has gone through struggles.

After President Trump's announcement regarding steel and aluminum tariffs, the S&P 500 dropped more than 1.3 percent. But analysts have downplayed any fear of a broader economic downturn, suggesting that companies and the national economy are too large for it to be impacted by any one tariff. Moreover, since many investors have diverse portfolios, the impacts may even out, as some companies may benefit from tariffs while others might see negative impacts.

"It usually takes more than cost pressures in one or two sectors to cause a recession," Fisher Investments wrote regarding the recent tariff order. "We don't mean to dismiss the personal impact any of this can have on workers and small business owners, but markets are callous, and at times like this, we think investors are best off thinking like markets."

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This article is from Tim Lemke of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Retirement: Not Just for People?

Philip Brewer — Tue, 18 Sep 2012 10:00:43 +0000

This has always been true — almost all the economic value of a typical household is the future value of its members' labor.

With a little foresight, this will change over time. As your career progresses, you build up savings and investments, with the goal of replacing your income from labor with income from financial assets, preparing for some future time when you can no longer work. You accumulate other assets as well. Household goods, once purchased, continue to provide value for years or decades. If you pay off your mortgage (rather than doing a series of cash-out refinances), you eventually own a house you can live in. (See also: What It Really Costs to Own a Home)

A lot of what I've written here at Wise Bread has been to advocate for this shift. To advocate for making it early. To advocate for making it consciously.

One thing that I hadn't really thought about until recently, is that corporations have been making much the same shift.

Until around 1980, the economic value of a corporation was almost entirely the value of its productive capacity. Over the next decade or two, that changed. Instead of investing in plant and equipment, corporations found it more profitable to set up financing arms, to lend their customers the money to buy their products. During the 1990s and early 2000s, companies like General Electric and General Motors found that their money-lending businesses made much more money than their manufacturing businesses.

This had a lot of negative side effects. It led to the elimination of good manufacturing jobs, only partially offset by the creation of finance jobs. This shift, as much as off-shoring, was what eliminated six million manufacturing jobs over the past 20 years.

It also made corporations much less answerable to their customers. Before, companies either produced what people wanted to buy, or else their profits suffered. After this shift, it scarcely mattered what corporations produced, because so much of their income was investment income.

Basically, the corporations could retire.

This shift only benefits the management — they can now report reliable profits without having to actually do any work.

It might be nice if the harmful effects on workers would be enough to promote change, but I don't think that's going to happen. Fortunately, this whole thing is also a negative for shareholders — the corporate structure doesn't provide any value-add for the shareholders. (Really, it's of negative value — another layer of expense and another layer of taxation.) The shareholders would be much better off simply getting their money back and investing it themselves.

So, although the negative side effects are large, I don't think they're permanent. I foresee an end to the days of retired corporations. If you own stock in such a corporation, you might consider whether your money would be better off in a company that actually does or makes something.

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Recession Journal Part III: How Low Can We Go and When Will We Get There?

Jabulani Leffall — Fri, 31 Jul 2009 12:00:11 +0000

As a business blogger, high-finance business journalist, business man and one who minds his business – who pretends to know what he's talking about – I pretty much always answer "stay in bonds," when called upon for investment advice.

I hate giving it so I don't. I tend to just pose more questions, as I do in all discourse, objectively presenting many sides of the equation. So people can make up their own minds

After all there are two sides to every story and then there's the truth.

So I thought I'd utilize the ever-changing world of telecommunications, in a figurative sense of course, to try to get at the most pressing question these days: when will this crappy economy turn up?

The answer is, well, when it bottoms out.

But when is that?

Hold on let me check (ring ring).

Hello economic bottom? Economists and forecasters called and left a message, again.

They said they’re still looking for you and you’re still hard to find.

Therefore indicators for recovery from and continued length of the current recession remain inconclusive.

They also said, "We hope to see you soon because you’re neither here nor there."

Indeed, the more economic information that comes out, the more guesswork there is. As of July 17, jobless claims are up to 554,000 – a sum that is less than June numbers but still up versus 524,000 in the previous week, according to FactSet Economics.

Also as of June, the national civilian unemployment rate rose to 9.5%, the highest it’s been year-to-date and average hourly wages are also down compared to last year and last month. Additionally Federal government debt is up to $11.5 trillion as of the end of June opposed to $11.3 trillion at the end of May.

Yet there are a few bright spots. Home sales, building permits and monetary supply, through historically low interest rates, are all up.

So now we can breathe a little bit right?

Well, not so much. Those figures are up while consumer confidence and industrial production output, as of the end of last month, are still down.

Why the disparity among all the leading indicators? And what does a stoppage of declining figures mean vis-à-vis inclining figures in the future?

Enter the Federal Reserve, which this week released its Beige Book survey to arrive at forecasts based on statistical and anecdotal economic evidence. In the report, the Fed said that most of its 12 regional bank districts are seeing a slower pace of economic decline for the months of June and July but didn’t go so far as to predict a turn around.

To the glass-half-full soothsayers, this comes as an early sign that the worst of the worst economic doldrums since the Great Depression is closer to coming to a halt and that thereafter an ascent of the proverbial bar graph of growth will emerge once again.

Such are the sentiments Fed chairman Ben Bernanke, who, despite seeing personal his assets take a 30% decline in 2008, is bullish on the broader economy.

Bernanke recently told Congress that the economy’s contraction “appears to have slowed significantly,” with demand and production showing “tentative signs of stabilization.”

He echoes other policy makers such as New York Fed Chief William Dudley, who predicted that a modest recovery in housing activity and car sales coupled with fiscal stimuli from the government would give the U.S. economy moderate growth in the second half of this year.

Then in the same speech this week, Dudley turned around and said "the balance of risks is still tilted toward weakness in growth and employment and not toward higher inflation."

The only grain of certainty to be gleaned from cautiously optimistic policy makers and from the Beige Book is that neither provides any tangible signs of outright growth.

For instance the Beige Book found that retail demand was “sluggish” in most areas, and that auto sales were “mixed.” Manufacturing was “subdued, yet slightly more positive.” Meanwhile, according to the survey, non-financial services businesses are “largely negative with a few bright spots.”

Yeah that's clearly the sign of recovery right? (Pshhaw!)

Lastly, the most telling indicator, bank lending, “was stable or weakened further” in most loan categories across all 12 Fed districts, with tightened credit standards in at least seven districts. It looks like finding that elusive V-shaped recovery as it relates to the current economic downturn is going to take a bit longer, despite some sporadic cheerleading and sparsely positive numbers.

Plus one must take into consideration that financial firms are still digging out of holes, which means credit will remain tight and in Dudley’s words, for the near-term still “limit the pace of the recovery."

Suffice it to say, policymakers, analysts, investment managers and consumers will all be calling again next week, next month and perhaps even next year, looking for you, economic bottom.

Are you still there?

Well folks it's not there right now, act accordingly.

This article is from Jabulani Leffall of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: