The Impact of Tariffs

Tariffs are making headlines as the Trump administration pushes forward with its promise to impose them on countries like China, Mexico, Canada and beyond. With retaliatory (aka, reciprocal) tariffs now in play, credit unions and their members are left asking…how will this trade war impact our financial standing?

While we don’t have any set-in-stone answers, we can speculate about these tariffs and the potential positive and negative impacts they bring. As a broad economic tool with wide-ranging outcomes, tariffs refer to a tax imposed by a country on imported goods from another country. This tax can be implemented for a multitude of reasons. In the situation we’re seeing today, those reasons include control over immigration and drug trafficking, among others.

The Pros vs. The Cons

Let’s first look at the  negative impacts of tariffs. Tariffs can often result in higher prices for consumers and potentially harm supply chains. These are two of the biggest fears brought about by the current tariff situation. A few other negative impacts of tariffs are reduced efficiency, job loss and harm to business, particularly in terms of reduced competitiveness and profits. As profits dry up, the incentive for innovation and efficiency begin to dwindle.  With the economy already on edge from inflation concerns and high interest rates, tariffs have sent the markets into a tizzy over the past few weeks, all of which would only be heightened should these effects from tariffs come to fruition.

There’s growing geopolitical tensions from reciprocal tariffs, leading to more and more uncertainty in the markets. To briefly explain the reciprocal tariffs, let’s imagine Country A imposes tariffs on goods from Country B, then Country B may respond by imposing similar tariffs on imports from Country A. For example, Canada recently put reciprocal tariffs in effect in response to the United States’ initial tariffs, thus imposing additional fees on our exports. Ultimately, the two main purposes of the reciprocal tariffs are to create a balance in trade between nations and protect local businesses.

On the flip side, however, tariffs can encourage local production, generate tax revenue for the government and support infant industries. Tarriff revenue from tax on imports can generate revenue for the government, which can be used to fund public services or reduce the national debt. Another area where tariffs may be considered useful is in raising the price on imported goods, which can make domestically produced goods more competitive, potentially boosting local industries and employment. In addition, tariffs can be used to protect industries deemed vital to national security, ensuring a country’s self-sufficiency in critical areas. Again, whether we see any “positive” impacts of these tariffs remains to be seen.

Brace for Impact

As credit unions continue to operate and provide services to members in an uncertain financial climate, the impact of tariffs have become a major source of concern. Could they cause major economic swings or potentially none at all? Even economists are finding it harder than normal to make future projections with all the uncertainty and unknown scenarios taking hold. We encourage all institutions to stay current on the news, monitor the markets and economy and be prepared for both the negatives and the positives.

John Katon is an investment analyst for Vizo Financial. In this role, he supports the investment team by analyzing and interpreting financial data to assist in the Corporate's investment decisions.