As an investor, it's important to understand the short and long-term effects of tariffs. Educate yourself and protect your portfolio at Fifth Third Bank.
Businesses are grappling with the short- and long-term effects of tariffs, and how they’ll impact their ability to access goods, materials, and penetrate global markets. Commodities such as steel and aluminum are already seeing the results of domestic tariffs, which leads to higher prices for these raw materials for the average American company. Similarly, the Chinese market for U.S. soybeans and pork has taken a tumble due to Beijing's tariffs in turn. Talk of further tariffs between the United States and the European Union, as well as tariffs on Canadian goods, could create even more volatility for certain sectors.
Although the impact of tariffs on specific industries is somewhat easy to predict, it is much more challenging to figure out how investors may also bear the brunt of tariffs and protectionist economic policies. This is compounded by the ever-increasing nature of portfolios with a mix of domestic and international holdings. What may cause financial pain for a U.S. holding may be a boon to overseas businesses.
Why Tariffs Matter for Investors
Tariffs are designed to create protections for domestic industries against less expensive imports from the global market. Although this may nudge consumers and businesses to buy domestically made products, given the increased cost parity between domestic vendors and their overseas rivals, there are hidden costs to tariffs that can affect investors in a number of ways.
First, the true impact of tariffs are felt by the country that issues them. Washington's tariffs impact the American industry's ability to source goods from overseas, just as Beijing's tariffs make it harder for China to import American goods. The largest impediment tariffs create is a price increase above market rate. Chinese steel and aluminum currently comes with tariffs of 25% and 10% respectively, which increases the overall price of these goods versus U.S.-made sources. Although this helps protect the American steel and aluminum industries, it passes costs onto other businesses and, ultimately, consumers.
How Tariffs Impact Domestic Investments
Domestic economic policies may appear at first blush to always favor U.S. investors and businesses. With tariffs, however, this isn't always the case. Some protectionist measures may end up having unintended consequences, such as making the cost of raw materials increase. This can lead to missed financial objectives, lower profit margins, and higher retail costs for consumers. All of this can often result in doom and gloom for investors, even beyond the typical market turbulence that news about tariffs tends to cause.
This is the primary way that tariffs matter for domestic investments. The more businesses have to pay for goods that are subject to tariffs, the more the cost of their products. That creates higher prices for consumers, which can restrict consumer spending. Left in place long enough, tariffs can even impact consumer confidence as well. If your portfolio includes businesses that rely on tariff-subjected goods somewhere in their supply chain, you may be exposed to more volatility. Even if your portfolio doesn't include these companies, you may also feel the crunch due to lowered consumer spending and consumer confidence.
On the other hand, domestic investments in tariffed industries can also lead to portfolio insecurity. As the American market for soybeans and pork products faces strict sanctions in China, domestic suppliers have had to deal with restricted access to their once-largest market.
How Tariffs Impact International Investments
The global marketplace rarely responds positively to talks of tariffs, and it's easy to understand why. The international economic order thrives on free trade and frictionless markets between countries. Tariffs, by definition, create the exact opposite: they build financial walls between countries, limit free trade, and can drag down economic growth as a result. In this regard, almost every investor in any sector feels the effects of tariff—even if they do not have a direct position within the industries hit with tariffs.
Additionally, investors with shares in international or global businesses may end up on the wrong end of tariffs and trade wars. Investors in Eurozone-based businesses have greater exposure to tariff-related turbulence if proposed economic measures in the United States against certain EU goods come to pass. Likewise, global companies with markets in China could easily experience a financial downturn due to the ongoing restrictions on Beijing's international steel and aluminum exports.
Even if tariff talks ease in the coming months and years, there's still likely to be a lingering sense of uncertainty about long-term global growth. The international market for goods subjected to tariffs will need time to rebalance once (or if) tariffs are lifted. Prices will have to stabilize as markets open up, which can take a long time to return to normalcy. Plus, the specter of protectionist economics may put a pall on the general global economy, as it could signal a disruption to the neoliberal free-trade system that has been in place for decades. What Savvy Investors Can Do to Protect Themselves
Although tariffs might be getting much of the spotlight at the moment, global trade issues are more the norm than the exception. When the United States walked away from the negotiating table on the Trans-Pacific Partnership, there were similar concerns about how the lack of a deal could impact the world economy. Many of these concerns, however, were short-term (or didn't come to fruition on a grand scale). Wise investors should, as a result, always have an eye out for trade volatility.
The average investor may not be able to change financial policy in Washington D.C., but there are still a few measures most investors can consider in order to mitigate the risk of tariff-related disruptions within their portfolio. For starters, playing the long game is an ideal strategy with regard to tariffs. These economic measures are not designed to last forever, and a savvy investing strategy should look at the bigger picture and keep a steady hand. This is also a good opportunity to reevaluate your portfolio's balance between industries, sectors, and countries. If you lean heavily on tariff-eligible stocks, industries, or countries, you may want to see if there are alternative opportunities that might be a better strategic fit.
Tariff talks make investors nervous, even if they don't have direct exposure to the worst effects that these measures have on sectors and industries. That doesn't mean that you have to feel powerless in a tariff-laden economy, however. By understanding the ramifications of tariffs, both for the international economy as well as your own portfolio, you can take educated steps toward minimizing risk, reshuffling investments as needed, and balancing your portfolio to weather the storm.