Understanding trade tariffs
Trade tariffs are taxes on imported goods imposed by a government. They’re typically a percentage of the product's value, paid by the importing company.
The primary purpose of tariffs is to protect domestic industries from foreign competition by making imported goods more expensive. Tariffs can also be used as a tool for negotiating trade agreements or retaliating against unfair trade practices by other countries.
For investors, tariffs can significantly impact the profitability of companies that rely on imported goods, either as finished products or as components in their manufacturing processes.
Higher tariffs lead to increased costs. These extra costs can either be absorbed by the company (reducing profit) or passed on to customers by raising prices (reducing demand).
Recent US trade tariffs
Recently, the United States has introduced tariffs targeting China and other major trading partners. Specifically, these include a 125% tariff on Chinese goods and a 25% tariff on steel and aluminium imports.
These tariffs are part of a broader strategy to address trade imbalances and protect American industries, but they’ve also led to retaliatory tariffs from some countries which have been affected. This has made international trade dynamics more complicated.
As of April 2025, these tariffs have caused significant volatility in global financial markets. This is in no small part to them being implemented, paused, escalated (in the case of China), and then exemptions applied. Stock markets don’t like uncertainty, as it makes it much harder to predict the future.
Who pays the tariffs?
Contrary to popular belief, US importing companies pay the tariffs imposed by the US Government, not foreign exporters. For example, if an item valued at $100 is subject to a 25% tariff, the importer would pay $25 to the US Government. Tariffs are a form of taxation.
These costs are often passed on to consumers in the form of higher prices. This can reduce consumer spending and impact overall economic activity. Businesses that rely heavily on imported goods may see their profit margins shrink, leading to potential layoffs or reduced investment in growth. If companies wish to maintain their profit margins, they could pass on their extra tariff-related costs on to consumers.
Impact on global economic growth and inflation
Tariffs can have far-reaching effects on global economic growth and inflation.
In the US, tariffs act as a ‘stagflationary’ shock, pushing up prices and constraining spending and real GDP growth. Estimates suggest that tariffs could increase US consumer price inflation by 1-2 percentage points over the next year, while reducing GDP growth by a similar amount.
For the rest of the world, US tariffs represent an adverse demand shock, reducing demand for foreign products and putting downward pressure on real GDP abroad. If other countries retaliate with their own tariffs, the global economy could face a series of supply and demand shocks, further exacerbating economic instability.
Companies with significant exposure to international trade may face increased costs and reduced demand, affecting their profitability and stock performance. Conversely, domestic companies that compete with imported goods may benefit from reduced competition and increased market share.
The best way to navigate markets during uncertain times like these is to maintain a diversified investment portfolio with exposure to lots of different companies, industries and countries. Sticking to your plan and not reacting to ups and downs usually generates the best investment results over the medium-long term.