Tariffs
We’re receiving inquiries from clients regarding tariffs and the effects on investments and I want to address the entire concept. To be clear, tariffs are paid by domestic businesses that import products into the country. They are collected by Customs and Border Protection (CBP) when the product clears customs. So, companies like Target, who import avocados from Mexico, would pay a 20% tax to CBP to have those avocados clear the border. That cost will be passed on to the customer as Target’s CEO noted that price increases could be applied as soon as this week. Therefore, short-term inflation is coming for various products assuming the tariffs are maintained. The bigger question is what the administration’s objectives for the tariffs are.
Two reasons continue to surface: fentanyl imports from Mexico and China and reciprocation from other nations tax on US goods. I’ll take the administration at their word and believe these reasons. But if true, what actions will meet the administration’s standards to remove the tariffs? From a market perspective, this uncertainty is what stocks and bonds struggle to handle. But the real challenge for the economy lies in America’s enormous trade deficit, which has skyrocketed.
Last month alone the trade deficit reached $130 billion, meaning that America bought $130 billion more from foreign countries than it sold and that 130 billion dollars left the country. The reason why domestic companies import so much is because American consumers demand the cheapest product. Because living standards in Mexico and China are so paltry compared to America, goods produced there will be dramatically cheaper than the same goods produced in America. Tariffs are unlikely to change that dynamic and this will come down to whether the consumer is willing to pay dramatically more for the same good produced domestically. Given that inflation was the true culprit for the Harris/Biden ticket last November, I speculate that consumers will more likely turn against the administration before they decide to accept large price hikes.
All this said, the long-term trade deficit must be addressed, as America can’t continue to send $2 trillion a year abroad and expect to maintain dominance. Domestic manufacturing and production are worthy goals but expect the tactics, to that end, to be “fluid”, just like the last few weeks. We will stay tuned and pass along our perspective.
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