On March 1, the US announced it would be imposing tariffs on imported steel and aluminum. The market did not take this news in stride and stocks tumbled. Since then, more details have come out about which countries are exempt from these tariffs, which has helped soothe the markets. But China remains a big tariff target, which has some investors concerned we are entering into a trade war with them.
What is a Tariff Anyway?
A tariff is a tax imposed by the government on imported goods. Tariffs are used to restrict imports by increasing the price of goods and services purchased from other countries. Governments may impose tariffs to raise revenues or to protect their own domestic industries from foreign competition. By making foreign goods more expensive, consumers are encouraged to purchase domestic goods.
The Downside of Tariffs
While, in theory, tariffs can be good for our GDP, they can also have some negative consequences. Without foreign competition, domestic prices are likely to rise, which can lead to inflation. Furthermore, tariffs can generate tensions by favoring certain countries and industries. This can lead to retaliatory actions potentially escalating into a “trade war” with our global allies.
While this recent tariff talk may get the markets buzzing, we believe successful investment outcomes depend on a long-term focus. So while government tax and trade policy is important and can affect your investments in the short-term, staying well-diversified and focused on long-term goals should help mitigate some of the near-term risks.
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