Tariffs – Costs and Benefits

By Eric Krueger, Synovus Trust Senior Portfolio Manager

Tariffs have long been employed as an economic and political strategy by nations, influencing international trade and domestic economies. In the U.S., the usage of tariffs has sparked intense debates, particularly in recent years. Grasping the significance of tariffs is essential for making informed investment choices. This article explores the advantages and disadvantages of tariffs for the U.S. economy.

Benefits of Tariffs

1. Protection of Domestic Industries
   Tariffs can protect domestic industries from foreign competition, facilitating their growth and development. Imposing duties on imported goods allows U.S. manufacturers to compete more effectively against inexpensive foreign products. This can be particularly beneficial for emerging industries or those facing unfair trade practices from overseas.


2. Job Creation
   The protection of domestic industries often translates into job preservation and creation. With decreased competition from foreign manufacturers, domestic companies may see a surge in demand for their products, leading to growth and new employment opportunities.


3. Revenue Generation
   Tariffs serve as a revenue source for the federal government. The funds generated can be used to finance public goods and services, reducing dependence on other forms of taxation.


4. Leverage in Trade Negotiations
   Tariffs can also function as a bargaining tool in international trade negotiations. By imposing tariffs, the U.S. can pressure trading partners to participate in more favorable trade agreements or address unfair trade practices.

Costs of Tariffs

1. Increased Consumer Prices
   One of the most immediate effects of tariffs is higher consumer prices. Tariffs imposed on imported goods often lead to increased costs for consumers. Importantly, tariffs are not paid by the target countries, but by domestic companies importing products, such as retailers or tech companies. This can prompt inflationary pressures and diminish consumer purchasing power, particularly for low-income Americans, according to Peterson Institute for International Economics.1


2. Retaliation and Trade Wars
   Tariffs can trigger retaliation from other countries, leading to trade wars. These back-and-forth measures can escalate, damaging global trade and economic stability. For example, the U.S. agricultural sector has been significantly affected by retaliatory tariffs from trading partners. In response to new tariffs on steel and other products in 2017, China levied some American food exports (soybeans and pork).


3. Supply Chain Disruptions
   Many U.S. industries rely on global supply chains. Tariffs can increase the cost of imported components and raw materials, disrupting supply chains and driving up production costs for domestic manufacturers. This can diminish the competitiveness of U.S. products both domestically and internationally.


4. Negative Impact on Exports
   Retaliatory tariffs imposed by other countries can adversely affect U.S. exports. Industries that depend on foreign markets for a significant portion of their sales may experience reduced demand, leading to layoffs and economic downturn in those sectors.

The application of tariffs is a delicate balancing act for policymakers. While they can offer short-term protection and benefits to certain sectors, the broader economic impact must be thoroughly evaluated. For investors, understanding the nuanced effects of tariffs on different industries and the overall economy is vital. Tariffs can create both opportunities and risks, shaping market dynamics and investment strategies.

In conclusion, tariffs are a double-edged sword for the U.S. They provide protection and leverage but also come with substantial costs that can reverberate throughout the economy. As money managers, rest assured that we will stay informed on U.S. trade policies and their implications to navigate the intricate landscape of global trade and market dynamics, making sound decisions for client portfolios.