I drink an unhealthy amount of coffee. Just black, so I'm not drinking my calories. I live in a little town outside of San Antonio and have a choice of coffee shops to visit. I generally spend my money at the local shops run by local people. They might be more expensive and might not have the convenience of the app, but I believe in supporting local, and so do you! It's why we have chambers of commerce, small business Saturdays, and farmers markets.
What if a big coffee chain was able to offer coffee for a fraction of the price of my local coffee shops? What if they open a store in my little town? At some point, cost savings are cost savings, right? If they start driving out our local spots, there could be a desire from the city council to say, "We don't like how this is working." What if the city council says, "to continue your big brand low-cost coffee here, you'll need to pay for access to our market." If that happened, the prices would get closer, and that would help the local business.
That's more or less how tariffs work.
At their core, tariffs are a cost added to imports to help protect domestic business. While they are simple concepts, their results are anything but simple. Complexity arises from the competing interests that tariffs seek to rewrite.
Let's ask some basic questions and try to acknowledge some realities.
First, who pays for the tariff? Well, the consumer, of course...but wait... that's only if they still choose to buy that product. If there is a suitable domestic substitute, they can choose that one, thereby hurting the imported product and company. Of course, that is only IF there is a suitable domestic product, and that depends on the industry and product.
Do tariffs create inflation? I mean.. yes.. of course they do. I wish they didn't, and I wish I could say no... but removing the cheapest option for consumers will naturally result in you spending more money.. which is inflation.
Are other countries ripping us off? This is a complicated one.. because what does it mean to be ripped off? Do other countries charge us more in tariffs than we charge them? Sure. Are other countries playing unfairly with copyright rules and stealing ideas to make cheaper knockoffs? Yes. Is there another side of noneconomic considerations that affect how we view doing business with other countries? Yes, of course, look into where fentanyl is coming from. So, are we getting ripped off? Sure, one can make that argument from many perspectives, but so can other countries as they look at how we treat them. Like I said, complicated competing interests.
Do the experts agree on tariffs? Honestly, yes, they do. Tariffs are regressive, just like a federal tax hike would be. Economists from Thomas Sowell and Milton Friedman to just about everyone working for investment firms or the Fed really don't love tariffs. Financially and economically, there is risk. It doesn't mean they have a perfectly balanced understanding of human and economic interests and are 100% right about how to go about implementing tariffs, or other policies. However, there is a uniform understanding that tariffs, especially broad and sustained applications, are, ultimately, painful for all parties.
What about bringing back American manufacturing jobs? I am not convinced Americans even want this. It's something we discuss as we look back on the industrial post-WW2 boom, but is this the economy we want? My oldest daughter is obsessed with Hamilton; she talks about him all the time. Hamilton and Jefferson had very different ideas of a healthy American economy. Today, we live according to what Hamilton envisioned. Does it mean Jefferson was wrong? Maybe not. Would you rather till the earth or work in an office with air conditioning? It's simple to say we need to bring back manufacturing so we have American Jobs, but it is complicated whether or not Americans want those jobs. Would Americans even be happy returning to a less service-based, more manufacturing-based economy? I don't have the answer to this; each of you will have to think through it and decide for yourselves what makes the most sense.
Well, the trade deficit is out of control. Is it, though? What do they mean by that? We are the richest country in the world. Is it shocking that we import more than we export? The trade deficit is near all-time highs, that's true, and it would be great if we could export more. If all this gets other counties to drop tariffs then fine, I'd love to ramp up American-made exports. It would be helpful to have more manufacturing, but is that the top priority right now? You tell me.
We could go on and on with every talking point about tariffs and the global economy. The problem, as I see it at the moment, is this argument is VERY COMPLICATED. However, not much reporting is being done on how complicated it is and how to weigh competing interests and act accordingly thoughtfully. I probably don't have to tell you that if you've talked to anyone about this, or been online, or read an article, or heaven forbid, read the comment section on a tariff post, it is easy to see people are at each other's throats about this issue. The nature of people is to try to simplify complexity and defend their position rather than engage in challenging and possibly uncomfortable conversations with each other. That is why things are so uncertain and emotional right now.
The truth is that all of us do things that show we believe in the competing perspectives of the tariff issue. Tomorrow my little town of Helotes is hosting its monthly "Market Days." It is a sort of local business crafts and farmers market in Old Town. If you're around, I'd invite you to check it out. After supporting local businesses, some people will grab McDonalds on the way home rather than get a burger at a local restaurant. As human beings, we weigh our own self-interest, as we see it, against the interest of others. Every decision has a cost that each consumer must weigh. Sometimes, we make good decisions and sometimes bad. Time is usually the judge of that.
To make this more personal, I worked for a huge multinational financial services firm for a long time. I know from experience that their offerings and planning services do not, and cannot compete with, what we offer, or frankly, what other independent firms can offer. However, I have to respect the fact that consumers make decisions to work with big firms for convenience and work to convince consumers their real interest is better served at a firm like mine. This real-life example also illustrates the same thing I'm discussing with tariffs and underscores the same problem - getting thoughtful engagement is hard. A thoughtful, intelligent, and engaged consumer base is the best solution anyone could hope for. Let the chips fall where they may; just know why you are lobbying for the interests you are.
Last thought: whether you are pro or anti tariffs, or pro or anti-Trump, a few things are true that one must consider. First, a prolonged trade war or sustained tariffs are not a great solution. Second, emotions are not a good place to make decisions. Whether as an investor feeling some panic over the market or a foreign country considering what to do about new tariffs. However, knowing emotions are not good doesn't mean people won't make emotional decisions. Look at the market over the last few days. That is evidence of emotion. Regarding what this administration's end game is here, it's hard to say, but... it is true in business that causing emotional uncertainty and preying on that can be a very effective negotiation tactic. I don't love the tactic; it's not something I like to do; if you know or follow me, you know I prioritize education and rational decision-making, but that doesn't mean that I don't know that emotionally driven pressure tactics don't work. With that last little statement, I've tipped my hand into what I hope unfolds over the coming weeks. New deals and lower tariffs are the ideal outcome for us all, and hopefully, we are on the brink of successfully renegotiating global trade deals.
Disclosure: The opinions contained in this material are those of the author, and not a recommendation or solicitation to buy or sell investment products. This information is from sources believed to be reliable, but Cetera Advisor Networks LLC cannot guarantee or represent that it is accurate or complete.