Tariff Series Part 2: How Tariffs Impact the Economy
In Part 1 of our Tariff Series, we covered what tariffs are and why they exist. Now, let’s take things a step further and explore how they affect the economy as a whole. Tariffs aren’t just taxes on imported goods—they send shockwaves through businesses, industries, and even your investments, kind of like dropping a rock into a pond and watching the ripples spread. But here’s the thing: tariffs don’t automatically spell disaster. Yes, they can increase costs, but they can also create opportunities, strengthen domestic industries, and drive investment. The real impact depends on a mix of factors—like the strength of the U.S. dollar, global demand, and how businesses adapt. Let’s dive in.
The Ripple Effect of Tariffs
Tariffs set off a chain reaction that touches just about every part of the economy. Here’s how:
1. Prices for Consumers: Higher or Balanced?
When tariffs are placed on imported goods, companies often pass those costs onto consumers. But that’s not the full picture. Other economic factors—like the strength of the U.S. dollar—can offset these increases. When there’s global economic uncertainty, the U.S. dollar typically rises in value as investors seek safer assets. Trade wars, like those sparked by tariffs, can create uncertainty, which in turn may strengthen the dollar. A great example is during the first Trump administration. The U.S. dollar strengthened, absorbing much of the price impact from tariffs and keeping inflation in check. Whether we see this same effect again remains to be seen, but past trends can offer valuable insights.
2. The Importance of Diversified Supply Chains
Most industries today rely on global supply chains, meaning parts and materials come from all over the world. When tariffs make certain imports more expensive, companies have a choice: pay more, find new suppliers, or move production elsewhere. In some cases, this causes short-term disruptions, but in the long run, it can lead to more stable, diversified supply chains.
This is exactly what happened with rare earth materials—essential for everything from smartphones to fighter jets. The U.S. once depended almost entirely on China for these materials. But when tariffs and trade restrictions hit, companies looked for alternatives. Enter MP Materials, which revived the Mountain Pass mine in California. This move reduced reliance on foreign suppliers and strengthened domestic production. But MP Materials didn’t stop there—they’re also building a processing facility in Fort Worth, Texas. This plant will refine rare earth materials mined in California, producing essential components for high-tech manufacturing. By investing in both mining and processing, MP Materials is helping to restore a full domestic supply chain for these critical materials.
One notable example is MP Materials, which revived the Mountain Pass mine in California—one of the only rare earth mining operations in the U.S. By restoring domestic production, MP Materials has helped reduce reliance on foreign suppliers while fostering investment in U.S.-based manufacturing. This strategic move highlights the broader shift toward securing supply chains and ensuring stable access to vital materials.
The pharmaceutical industry is another example—COVID-19 highlighted vulnerabilities in global medical supply chains, leading to calls for more domestic production of essential drugs and active pharmaceutical ingredients (APIs). Tariffs and trade policies have played a role in pushing companies to diversify their manufacturing operations, ensuring a more secure and stable supply of essential goods.
3. Job Gains vs. Job Losses
One of the biggest arguments for tariffs is that they protect American jobs by making foreign competitors less attractive. For example, if tariffs drive up the price of foreign-made cars, people may opt for U.S.-made vehicles, helping American auto workers. But on the flip side, industries that depend on imports—like tech and retail—could face job losses due to rising costs.
There’s another side to this, too: foreign manufacturers may decide to build factories in the U.S. to avoid tariffs. This has already happened with companies like Toyota, which expanded its U.S. manufacturing footprint, and Taiwan Semiconductor (TSMC), which is building a massive chip plant in Arizona. By investing in domestic production, these companies sidestep trade barriers, create jobs, and contribute to local economies. This trend highlights how tariffs can sometimes lead to increased domestic employment and infrastructure investment.
4. Economic Growth: It’s Complicated
Trade is a major driver of economic growth, and any disruptions can shake things up—kind of like slamming the brakes on a fast-moving car. Sometimes it’s necessary, but it definitely changes the ride. But it’s not always a simple equation. While some businesses struggle with higher costs, others—especially domestic manufacturers—can see growth as they gain a competitive edge. Some industries even thrive under tariffs, as they provide a buffer against foreign competition and encourage domestic investment. For example, companies in steel, aluminum, and semiconductors have seen growth when protected by tariffs, as they allow them to expand production without being undercut by cheaper foreign imports.
At the same time, businesses that rely heavily on global supply chains, such as automakers and electronics manufacturers, often face a difficult choice: shift sourcing to different suppliers, absorb increased costs, or pass those costs on to consumers. This adjustment period can be challenging, but over time, companies often find new ways to optimize their supply chains and remain competitive. Even though the stock market was volatile during the U.S.-China trade dispute in 2018, it rebounded quickly as businesses and investors adapted to the new trade landscape. This resilience highlights how, while tariffs can create short-term disruptions, markets tend to do what they always do—adjust, adapt, and keep moving forward.
The Role of Trade Policies and Unfair Competition
Let’s look at two cases—one where tariffs helped, and one where they had mixed results.
The Steel Tariffs of 2002
To protect U.S. steelmakers, the government imposed tariffs on imported steel. This gave American steel producers a boost, but it also made things harder for automakers and construction companies that relied on steel. After 21 months, the tariffs were lifted due to economic pressure and pushback from trade partners.
The U.S.-China Trade War (2018-Present) and Subsidized Manufacturing
The U.S. placed tariffs on hundreds of billions of dollars’ worth of Chinese goods, and China responded with tariffs on American agricultural exports. This was tough for U.S. farmers who lost access to key markets. At the same time, American companies started looking for alternative suppliers, reducing dependence on China and strengthening domestic production. A key concern in trade negotiations has been China’s use of state subsidies to support industries like technology and renewable energy. By heavily subsidizing domestic manufacturers, China has made it difficult for U.S. and European companies to compete on a level playing field. These subsidies have led to global trade disputes, with tariffs serving as one way to counteract artificial price advantages and protect domestic industries. Meanwhile, despite early volatility, the stock market recovered quickly and remained strong, even with tariffs still in place.
How This Affects Investors
For investors, tariffs mean market shifts, volatility, and opportunities. Here’s what to keep an eye on:
- Market Volatility – When tariffs are announced, the market reacts. But as history shows, it tends to stabilize as businesses adapt and negotiations are settled.
- Industry Shifts – Some industries—like domestic manufacturing—benefit from tariffs, while others—like certain tech and retail industries—may face challenges. The key is understanding which sectors are best positioned for change.
- Diversification is Key – Since tariffs can shake things up, a well-diversified portfolio may help manage risk and capture opportunities.
Final Thoughts
Tariffs aren’t inherently good or bad—they’re like adding spice to a dish. The right amount can enhance the flavor, but too much can ruin the meal. It all depends on how they’re used and where they’re applied. Whether they hurt or help depends on the industry, the global economic climate, and how businesses adjust. What’s important is staying informed, looking at the bigger picture, and knowing how to position yourself financially.
Next up in our Tariff Series, we’ll explore how tariffs impact your investments. We’ll break down what happens to stocks, bonds, and international investments when tariffs rise, how different industries react, and how global diversification can help mitigate tariff risks. We’ll also take a look at past market reactions—do tariffs cause panic, or do they create opportunities? Most importantly, we’ll discuss what investors should consider doing now to prepare for potential policy changes. Stay tuned!
Got questions about how trade policies impact your investments? Give us a call at Paragon Wealth Management at 215-348-3176, or email us at info@paragon-wealth.com.
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.