Posted by Christina Traurig on June 21, 2018
What exactly is a tariff? The direct definition of a tariff is “a tax imposed on imported goods and services.” Tariffs can be used to protect domestic industries by making imported goods more expensive or to raise more revenue for the government. As a recent example, the US Government has decided to impose a 10% tariff on aluminum. A US company that buys aluminum from a Canadian company will now pay 10% of the purchase price to the US Government as a tax. The big issue with tariffs comes when other countries retaliate with tariffs of their own, resulting in a trade war.
What does this mean for your portfolio? In short - expect more volatility. As of right now there are relatively few tariffs. However, the talk of additional tariffs increases the potential for a trade war and is spooking investors. Right now, it’s impossible to guess which sectors could potentially be impacted significantly. This is why it’s important to have a well-diversified portfolio with mutual funds in many different types of companies. It is also important to have bonds in the portfolio to reduce the risk of loss from stocks.
What does mean for your everyday life? The bottom line is that you could see the cost of the goods and services that you purchase go up. US companies will have to figure out how to cope with the increased price of the imported materials they are purchasing. The ways they can do this are by cutting investments, cutting jobs, and increasing the prices of their products. Using the aluminum example, soda and beers cans will now cost more to make and you could soon see an increase in what you are paying for the next 12-pack of your preferred canned drink.
For now, we will sit tight, hope that cooler heads prevail, and a solution is worked out soon.