The U.S. presidential election is just weeks away, and investors are preparing for any major policy changes they could face under a new administration. One of the policy centerpieces of former President Donald Trump’s first term was a trade war, including tariffs on imported goods from China and other countries. Vice President Kamala Harris has blasted Trump’s latest tariff proposals, but the Biden-Harris administration chose to keep many of Trump’s tariffs in place. So far, Harris hasn’t said much about any changes she would make to the tariff structure if elected.
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Here’s a rundown of what every investor should know about tariffs and how they could impact the markets in 2025 and beyond:
— Tariff definition.
— Current tariffs vs. proposed tariffs.
— Potential market impact.
— How tariffs impact investing strategy.
Tariff Definition
A tariff is simply a tax imposed on imported goods. The goal of tariffs is to stabilize prices and/or reduce imports to support domestic businesses that compete with international companies.
For example, Chinese producers of solar panels can undercut U.S. producers on price, flooding the market with supply and making it difficult for American companies to maintain profit margins. A potential solution to this problem is tariffs, which make imported solar panels more expensive in the U.S. market and help American companies compete.
Advocates for tariffs, including Trump, often describe them as a tax on foreign businesses. While tariffs do serve as a headwind for foreign companies selling goods to the U.S., the cost of the tariffs is often borne by companies and consumers that buy the imported goods. Tariffs help support domestic businesses by artificially supporting prices, but other domestic businesses and consumers end up paying those higher prices.
During his first term in office, Trump often cited the U.S. trade deficit with China as a justification for implementing tariffs. A trade deficit is created when a country’s imports exceed its exports. In other words, countries generate a trade deficit when they are a net importer of goods. Because the U.S. has protections for workers, minimum wage laws and other regulations, American companies often have higher production costs than companies based elsewhere. As a result, non-U.S. companies can sometimes undercut U.S. companies, costing Americans jobs.
In 2023, the U.S. had a $773.4 billion trade deficit, according to the Bureau of Economic Analysis.
Current Tariffs vs. Proposed Tariffs
The Trump administration implemented multiple rounds of tariffs that impacted a total of more than $380 billion in trade and boosted taxes by roughly $80 billion.
Here’s a rundown of the Trump era tariffs:
— January 2018: The Trump administration announced various tariffs on washing machines and solar cell and module imports. The washing machine tariffs expired in February 2023.
— March 2018: Trump announced a 25% tariff on imported steel and a 10% tariff on imported aluminum.
— July-August 2018: The U.S. implemented a 25% tariff on about $50 billion of Chinese products.
— September 2018: Trump launched a new 10% tariff on another $200 billion in Chinese goods.
— May 2019: The 10% tariffs on $200 billion in Chinese goods increased to 25% tariffs.
— September 2019: Trump imposed a 15% tariff on $112 billion of additional Chinese imports.
— October 2019: The U.S. imposed 10% tariffs on aircraft and 25% tariffs on agricultural and other products imported from Europe.
The Biden-Harris administration has opted to maintain many of the Trump tariffs, but has also made some of its own changes:
— June 2021: The Biden administration suspended Trump’s tariffs on European goods for five years.
— May 2024: Biden announced new tariffs on $18 billion in Chinese imports ranging from 25% to 100%. The goods include steel and aluminum products, semiconductors, electric vehicles, natural graphite and other critical materials, batteries and battery parts, medical goods, cranes, magnets, and solar cells. Some of these tariffs went into effect immediately, while others are scheduled to be implemented in 2025 or 2026.
Looking ahead, Trump has proposed levying a 10% to 20% tariff on all imported goods and a 60% tariff on all goods from China. He has also mentioned imposing tariffs of 200% for Deere & Co. (ticker: DE) and 100% for U.S. automakers importing vehicles from Mexico. Harris has condemned the Trump tariff plan, claiming additional tariffs would reduce economic growth, increase inflation, and raise costs for American families and businesses.
[Read: Will the Stock Market Crash in 2024? 7 Risk Factors]
Harris has not specifically addressed her own tariff strategy, choosing instead to focus her economic proposals on raising taxes for corporations and the wealthy. In fact, the only mention of tariffs in Harris’ 82-page economic policy plan is a critique of Trump’s proposals.
Potential Market Impact
In general, higher tariffs would be bad news for international stocks that export goods to the U.S., particularly Chinese stocks. They would likely also be bad news for John Deere, automakers and any other U.S. companies that rely heavily on international imports. U.S. companies that produce their products domestically would likely not be impacted.
Cliff Ambrose, federal retirement consultant, founder and wealth manager at Apex Wealth, says tariffs generally raise the cost of imported goods for American companies, which can eat into profits.
“Kamala Harris’ and Donald Trump’s proposed tariff policies could have a noticeable impact on Americans’ investments, particularly in sectors like manufacturing, technology and agriculture that rely heavily on international trade,” Ambrose says.
At the same time, he says, tariffs can help support the stock prices of other industries because they encourage consumers and companies to buy locally sourced goods.
“Overall, tariffs introduce uncertainty, and that uncertainty can lead to fluctuating investment returns,” Ambrose says.
How Tariffs Impact Investing Strategy
Higher tariffs would certainly cause a major disruption for domestic and international companies that rely heavily on U.S. imports. Unfortunately, those disruptions may not necessarily translate to predictable stock market trades.
Bikramjit Saha, assistant professor of economics at Lebanon Valley College, says successfully trading tariff policy is easier said than done.
“Even if one would want to tweak investment strategy, it becomes extremely difficult to identify the correct tweak in the presence of such uncertainty about the tariff imposition,” Saha says.
In fact, Charles Schwab found Trump’s first-term trade war had “little impact on stocks.” Surprisingly, Schwab found the stock prices of domestically focused companies did not outperform stocks that had high international exposure.
It may seem like an obvious way to trade new China tariffs would be a pair trade taking a long position in the SPDR S&P 500 ETF Trust (SPY) and a short position in the iShares China Large-Cap ETF (FXI). However, the SPY ETF has outperformed the FXI ETF by a far wider margin under Biden than it did during Trump’s trade war with China.
To complicate matters further, Saha says tariffs are not implemented in a vacuum. Other policy changes and economic variables may water down or offset a market reaction to new tariffs.
“The effect is likely to be short-lived, and tariff-induced recessionary pressure can be mitigated to some extent if there are accompanying tax breaks that can bear some of the burden of decreased consumer spending,” he says.
David Materazzi, CEO of Galileo FX, says most investors should simply ignore changes in tariff policies and stay disciplined.
“I don’t think it’s wise to change your investment strategy because of short-term events like tariffs,” Materazzi says. “Trying to time the market based on political events is speculative and can be counterproductive.”
Instead, Materazzi says long-term investors should focus on identifying high-quality companies that have durable competitive advantages and are trading below their intrinsic values.
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How Will Tariffs Affect Your Investments? originally appeared on usnews.com
Update 09/30/24: This story was previously published at an earlier date and has been updated with new information.
