If there is one word we can’t escape these days, it must be “tariff.” And that’s no surprise, as President Trump has said, “To me, the most beautiful word in the dictionary is tariff. And it’s my favorite word.” With tariffs at the forefront of almost every daily economic story, it’s important to ensure everyone has a basic understanding of tariffs so you can make your own conclusions on their merit (or impress your friends at your next get-together). Without further ado, let’s get started.
First, what is the definition of a tariff? The most basic explanation from the Congressional Research Service is that a tariff (also called a duty) is a tax levied by one country on the goods and services imported from another. The key takeaway here is that a tariff is a tax.
Now that we know that, who pays this tax? Is it the foreign country that is sending their goods to the U.S.? No, it is not. The duties are paid by the company that is importing the foreign goods. Therefore, if a company imports raw materials or finished products subject to a tariff, it must remit payment to U.S. Customs and Border Protection.
However, while in a literal sense, companies pay the tariff at the port of entry, there is more to it than that (obviously). As economic policy and tariffs shift, there are implications beyond the money exchanged at the border. Companies exist to make money, so if costs rise, they typically protect their margins. According to the Bureau of Labor Statistics (BLS), this indirectly raises domestic prices on goods as supply-and-demand forces often push the burden onto consumers in the importing country.
Given that these transaction costs can (and do many times) get passed to the consumer, this is where the concern about accelerating inflation comes from with higher tariffs. But when you boil it down, there are three primary possibilities:
- Prices could stay the same. How? Importers could negotiate with their suppliers and offset tariff increases. Companies squeeze their suppliers daily to lower the cost of products for their benefit. If they reduce the import cost by the tariff amount, then there should be no impact on the end consumer.
- Prices could go up, but less than the tariff amount. This could happen with a combination of cost reductions on the import side, which would allow the company to increase prices less while still maintaining its margin.
- Prices could go up, similar to the tariff amount. In a scenario where the company can’t reduce the input cost and has enough pricing power, it could attempt to pass on all of the increase.
While the uncertainty around tariffs is at an all-time high, history has shown that number two above is the most likely scenario. Large companies are usually very powerful at the negotiating table, however, it is typically very tough to offset all cost increases. Therefore, some price increases are likely if the tariffs remain in place.
Although tariffs aim to support domestic production by making imports more expensive, history shows they don’t consistently achieve this goal. Many times, domestic producers use the opportunity of higher-priced competitors to raise their own prices, thereby increasing margins. As is usually the case, nothing is ever as simple as it seems at first glance.
But where is this administration coming from? If you would like to try to understand what they’re trying to accomplish, I would recommend watching this one-minute video of Donald Trump at the Economic Club of Chicago while he was campaigning back in October 2024. It seems like a long shot, but I guess we’ll see.
Only time will tell how these policies evolve and their final impact. Hopefully, cooler heads will prevail, leading to a more stable and consistent approach. See below for two charts that quickly highlight the impact of tariffs on federal revenue.
Markets / Economy
- Equity markets continue to struggle as escalating tariff threats are causing concerns. The S&P was down -2.3%, the Nasdaq was down -2.4%, and the small-cap Russell 2000 was down -1.5%.
- Core CPI rose 0.2% MoM, coming off the 10-month high of 0.4% in January, below market expectations of a 0.3% increase.
- Core PPI unexpectedly declined by 0.1% MoM in February, coming in well below market expectations of a 0.3% increase.
- The University of Michigan consumer sentiment for the U.S. plunged to 57.9 in March, the lowest since November 2022, from 64.7 in February and well below forecasts of 63.1.
Stocks
- U.S. equities were in negative territory. Consumer Discretionary and Consumer Staples led the decline, while Energy and Utilities outperformed. Growth stocks led value stocks, and small caps beat large caps.
- International equities closed lower for the week. Emerging markets fared better than developed markets.
Bonds
- The 10-year Treasury bond yield decreased one basis point to 4.31% during the week.
- Global bond markets were in negative territory this week.
- Government bonds led for the week, followed by corporate bonds and high-yield bonds.
