Tariff Series Part 1: Tariffs 101 – What They Are and Why They Exist
Introduction: Why Are We Talking About Tariffs?
At Paragon Wealth, we know that tariffs can seem like just another piece of financial jargon thrown around on the news. But they have a real impact on everything from the cost of your groceries to the strength of your investment portfolio. Our goal is to break down this complex topic into something clear, actionable, and (dare we say) interesting.
This multi-part series may help you understand what tariffs are, why they matter, and how they could affect your financial future. Whether you’re deeply invested in the market or just want to know why your new car suddenly costs more, we’ve got you covered.
What Are Tariffs, and Why Do They Exist?
If you’ve ever ordered something online and been hit with an unexpected shipping fee, you’ve already experienced a mini version of what tariffs do. Tariffs are essentially taxes on imported goods, making them more expensive. Governments impose them for various reasons—some good, some debatable—but they always send ripples through the economy, impacting businesses, consumers, and investors alike.
Let’s break it down so you can see exactly what’s happening behind the headlines.
A tariff is a tax placed on goods imported from another country. Governments use tariffs for a few key reasons:
- To Protect Domestic Industries – If foreign products are significantly cheaper than locally made ones, tariffs can level the playing field by making imports more expensive. This gives local businesses a fighting chance. Think of a small Pennsylvania furniture maker struggling against cheaper overseas competitors—a tariff could make their locally crafted goods more competitive and keep jobs in the community.
- To Generate Revenue – Before income taxes were a thing, tariffs were how the U.S. government made its money. In fact, in the early days of the country, tariffs accounted for nearly 90% of federal revenue, helping fund infrastructure projects and military expenses. Eventually, President Woodrow Wilson championed the 16th Amendment, bringing in income taxes as a more stable way to fund the government.
- To Retaliate in Trade Disputes – One country slaps tariffs on another, and that country retaliates. This can quickly spiral into a full-blown trade war. A great example is the Anglo-American Trade War (1838-1842), a back-and-forth tariff battle between the U.S. and Britain, that began with the passing of the British Corn Laws in 1838 and ended up hurting businesses, restricting exports, and causing a decline in economic growth.
- To Address Trade Imbalances – Some countries export way more to the U.S. than they import, leading to trade deficits. Over time, they accumulate large amounts of U.S. dollars, often reinvesting them into American assets like real estate or government debt. China, for example, has bought large quantities of U.S. debt, raising concerns about foreign influence. Tariffs can serve as a tool to counteract these imbalances by discouraging excessive imports and encouraging domestic production.
A Brief History of Tariffs: Hits and Misses
When Tariffs Worked:
- Early U.S. Industrialization (1800s) – Protective tariffs helped American industries like textiles, iron, and steel flourish by shielding them from European competition. These tariffs helped drive job creation and set the foundation for America’s rise as an industrial powerhouse.
When Tariffs Backfired:
- The Smoot-Hawley Tariff Act (1930) – Meant to protect American businesses during the Great Depression, this tariff ended up doing the exact opposite. By imposing a 40-50% tax on over 20,000 imports, it triggered global retaliation. U.S. exports fell by over 60%, deepening the economic downturn and worsening the Depression.
How Tariffs Affect Consumers and Businesses
Consumers Pay More – Tariffs don’t just affect corporations; they hit your wallet too. Companies pass these extra costs onto customers. For example, Volkswagen, which imports many of its vehicles and parts, may have to raise prices if tariffs are placed on foreign-made automobiles.
Some Domestic Industries Benefit – Companies like John Deere, which manufactures agricultural equipment in the U.S., benefit from tariffs on foreign machinery. This can give them a competitive advantage and help sustain American jobs.
Other Industries Struggle – Businesses that rely on imported components (looking at you, Apple) can get squeezed. If tariffs make parts more expensive, they either pass those costs onto customers or take the hit themselves, affecting profitability.
Supply Chain Disruptions – Companies may scramble to find new suppliers, causing delays, shortages, and higher prices for consumers.
Why Should Investors Care?
Market Volatility – When tariffs are announced, markets often react—sometimes dramatically. For example, when the U.S. imposed tariffs on Chinese goods in 2018, the stock market went on a rollercoaster ride.
Winners and Losers – Some companies thrive under tariffs (like U.S. steel producers), while others, particularly those reliant on imports (think auto manufacturers and electronics companies), may see profits shrink.
Smart Investing Strategies – Keeping an eye on trade policies can help investors make informed decisions. Diversification, understanding sector shifts, and finding domestic companies poised to benefit from trade restrictions can strive to help manage and preserve your portfolio.
Final Thoughts: What’s Next?
What This Means for You – If you’ve noticed prices going up or stocks acting strangely, tariffs might be part of the story. Understanding how they work can help you make smarter financial decisions.
At Paragon Wealth Management, our mission is to be your go-to resource for clear, practical financial insights. We know that navigating economic changes can feel overwhelming, but we’re here to help.
Next week, we’ll take a deeper dive into how tariffs influence inflation, economic growth, and global supply chains. Stay tuned!
Have questions? Give us a call at 215-348-3176 or email us at info@paragon-wealth.com.
About Ricardo
Ricardo J. Ferreira is the Portfolio Manager at Paragon Wealth, a firm he co-founded with Charlie McNamara, III, and Phil Rosenau. With a passion for finance and a talent for solving complex financial challenges, Ricardo leads the firm’s investment strategies, ensuring clients receive personalized and forward-thinking solutions.
A decorated U.S. Navy Veteran, Ricardo served at N.A.E.S. Lakehurst and aboard the USS George Washington, where he worked in aviation support. After his military service, he studied economics at Liberty University and began his financial career at Prudential Financial, where he met his future partners, Charlie and Phil.
Outside of work, Ricardo enjoys spending time with his family. He is married to Tina, owner of Main Street Accounting & Tax, and they have two children. Active in his community, Ricardo participates in various local events and serves on the finance council at St. Jude Parish in Chalfont. A passionate runner, he can often be found competing in local 5k and trail races on the weekends. To learn more about Ricardo, connect with him on LinkedIn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Great Valley Advisor Group, a registered investment advisor. Great Valley Group and Paragon Wealth Management are separate entities from LPL.