The Art of the Tariff (and How it Affects Investors)
Yesterday, Donald Trump unveiled his Tariff plan on imports from outside countries. Originally declared “Liberation Day”, the stock market has taken the news poorly. The S&P 500 dropped 5% today, leading some commenters to refer to April 2nd as “Liquidation Day”.
Here’s what we’re telling clients about the Tariffs:
What is a Tariff?
A Tariff is an import tax on goods. The importer pays the tax, and the price increase is often passed along (in part or whole) to the consumer.
Who are the winners and losers of a Tariff?
Winners are:
The government due to increased taxes they receive.
Domestic producers (and lower cost competitors) of the product with high Tariff costs.
Losers include:
The consumer who pays a higher price for the product.
The importer who pays a higher tax.
The producer who sells fewer products (assuming supply/demand dynamics don’t change).
What are the New April 2 Tariffs?
Let’s assume you want to buy a new Jacket that has a selling price of $100. According to the April 2nd Tariffs, importing that jacket will have a Tariff (surcharge) of:
$34 if it’s coming from China
$10 if coming from the U.K.
$24 if coming from Japan
The Tariff will be borne by the importer, who will then pass part or all of the higher cost through to consumers. You can view the whole list here:
Why would the Government implement Tariffs?
The goal is to increase tax revenue nationally, while incentivizing US economic growth. Businesses may want to produce more goods domestically. Shoppers may want to buy more U.S. made goods.
How can businesses and consumers counteract Tariffs?
The producer can lower their selling price to stay competitive.
The importer can absorb the higher cost and have reduced margins.
The consumer can choose to buy less, or buy a competitor’s product.
One example is Ford’s announcement to offer customers Employee Pricing for the next two months to counteract price increases. Despite being a US company, Ford imports several auto parts that are manufactured elsewhere.
How do Tariffs affect Investors?
The stock market likes free trade, which allows companies to outsource labor and goods to the cheapest providers. Lululemon, for example, sources most of its $100 leggings from China, Vietnam, Cambodia, and Taiwan. Those countries often pay less than $1 an hour as minimum wage for manufacturers. The company can then collect a huge profit when it resells the goods.
For more reading on the investment implications, here are some of Blackrock’s house views