First, let’s go over some basics on tariffs. The US government can’t tax other governments. That’s not how it works. If we impose a tariff on China (for example), it’s not like China is writing us a check. Instead, it’s a tax on AMERICAN COMPANIES who import Chinese goods. How do the American companies afford to do that? By raising their prices. So when we impose a tax on China, it’s paid for by increasing the cost of stuff YOU are buying. It’s a tax on us, designed to make foreign goods more expensive.

Why would we impose a tariff? One argument is it gives American companies an advantage. If China can make a t-shirt for $10 and Americans can make it for $12. If we impose a 25% tariff on importing the Chinese version, then suddenly the American t-shirt is cheaper, $12 vs $12.50. Either way, the end price to the consumer goes up, and prices going up is the definition of inflation.

Another argument in favor of tariffs is to correct a trade deficit. That’s basically when one country is buying more stuff from another country than we’re selling stuff to. As you can imagine the US tends to have trade deficits with most countries. Being the richest nation on earth, we’re buying a lot more stuff than we’re selling with many countries, most notably China.

Trade deficits actually have pros and cons. Briefly, it’s nice to get lots of cheap goods, but can lead to other countries having more leverage to buy up US stock and real estate.

Are these tariffs good? Most economists don’t seem to think so. It appears to be already leading to a trade war (meaning we can’t sell THEM stuff either, further hurting American companies). In broad strokes, trade is good and stifling trade is bad for all economies involved.

ALL THIS SAID, should YOU do anything different with your money? Maybe brace for impact of higher prices, but that’s about it. I wouldn’t change your investment strategy. I’m not. I’m continuing to buy and hold index funds through this administration and all those who follow.

As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.

-Jeremy