What are Tariffs?

Tariffs pop up every so often in economic news stories, but what exactly are they, and how do they impact your investments? Let’s find out. 

By definition, tariffs are taxes imposed at the border on international goods. In theory, these taxes make imported goods more expensive, making domestic manufacturers more attractive to consumers. Any country can impose tariffs on another country, and they can be for selected goods or broad swaths of products. As you know, though, theory and reality are often two very different things. 

For example, in 2018, the U.S. put out a list of 1,300 Chinese exports that were subject to 25% tariffs, most notably, steel and aluminum. In response, China imposed tariffs on $50 billion worth of U.S. imports, ranging from soybeans to various chemicals. As a result, businesses using imported steel, such as technology, air conditioner makers, tool manufacturers, and automobile producers felt the pressure from rising costs. But the American steel industry, which is historically a very cyclical segment of the market that has seen many highs and lows—stood to benefit from the trade war. 

For stock prices, the results of tariffs may be similarly mixed. Investors don’t like what imposing additional taxes on foreign goods could do to trade. Some feel it could stunt America’s economic growth over the long haul. And despite the idea that tariffs should help domestic businesses, our global economy rarely makes it quite that clear cut. 

Even with the uncertainty that tariffs can bring to the stock market, some stocks, like utilities, can be fantastic investments. They typically pay high dividends, which account for a high percentage of market returns in flat markets. And their businesses are virtually immune to the business cycle, as customers use electricity and heat and air conditioning regardless of the economy. Most also operate only in the U.S.

To learn more about stocks and investing, download our FREE report, How to Invest in Stocks and Other Investing Basics, today. You’ll learn about the four types of stocks, what it takes to be a successful investor, and you’ll discover five reasons you should skip the broker and invest on your own.