What Are Tariffs? (And Why It’s Not What Most People Think)

A tariff is a tax on imported goods, paid by the importing company – not the foreign country. These costs are usually passed on to the consumer through higher retail prices.

For example, if a U.S. retailer imports $1,000 worth of clothing from overseas and faces a 25% tariff, the total cost becomes $1,250. That extra $250 is typically added to the final price tag you see at the store.

Tariffs are often marketed as a way to penalize foreign producers; their implementation makes foreign goods less competitive. But functionally, they operate more like a domestic consumption tax. These taxes tend to be regressive, meaning they impact lower-income households more because a greater portion of their income goes toward essential goods that may be affected.

Why Would America Institute Tariffs?

Experts generally agree that tariffs can function as either targeted or broad instruments.

A precision-based approach can be seen in policies like the CHIPS Act (Creating Helpful Incentives to Produce Semiconductors Act), which incentivizes domestic manufacturing of semiconductors to reduce reliance on imports from China or Taiwan. While not a tariff, it shares strategic objectives with targeted trade policies.

Targeted (Precision) Tariffs:

• Designed to protect key industries tied to national security or economic independence (e.g., steel, semiconductors).
• Often paired with domestic subsidies or investment.

Broad Tariffs:

• Imposed across many goods or entire countries.
• Intended to address trade imbalances or retaliate against unfair trade practices.

The Trump administration’s broader tariff agenda was framed around:

• Protecting American jobs and manufacturing by making imports less competitive.
• Reducing the U.S. trade deficit, particularly with China.
• Countering unfair trade practices, including forced technology transfers and intellectual property theft.

While these goals may appear reasonable, they come with side effects. Research from the Peterson Institute for International Economics[i] and others has shown:

• Higher prices on inelastic goods like fuel and food.
  Supply chain disruptions and delays in shifting production domestically.
  Reduced competition, which can raise prices and lower efficiency.

[i] Chad P. Bown and Melina Kolb, Trump’s Trade War Timeline: An Up-to-Date Guide (Washington, DC: Peterson Institute for International Economics, January 2025), 5–13

How Tariffs May Affect Your Personal Finances

We live in a global economy. Even products labeled “Made in the USA” often contain parts or materials from abroad. When tariffs raise input costs, even small price increases can accumulate across household budgets.

This affects both discretionary and non-discretionary spending. Essential items like groceries, gasoline, and basic clothing, where demand doesn’t change much with price, can disproportionately impact lower-income families.

From an investment perspective, companies often innovate to stay competitive. However, tariffs can disrupt supply chains, raise expenses, and lower profitability. These dynamics influence:

• Consumer prices, especially for electronics, appliances, autos, and apparel.
• Business operations, potentially limiting wage growth, hiring, or expansion.
• Stock market volatility, affecting your 401(k), IRA, or brokerage account.

Trade policy isn’t abstract. It has real consequences for household budgets and investment strategies.

History Repeats Itself: The Smoot-Hawley Tariff Act

If you’ve seen Ferris Bueller’s Day Off, you’ll remember Ben Stein’s famously dry lecture:

“Smoot-Hawley Tariff Act… anyone? Anyone?”

That reference stems from real economic fallout. The 1930 Smoot-Hawley Tariff Act aimed to protect U.S. agriculture and industry but instead provoked global retaliation. International trade collapsed, worsening the Great Depression.

According to trade historian Douglas Irwin, broad tariffs tend to raise consumer costs and reduce long-term economic output. Their short-term political appeal often obscures their downstream financial impact[ii].

[ii] Douglas A. Irwin, Clashing over Commerce: A History of US Trade Policy (University of Chicago Press, 2017), pp. 9–10, 26–27.

What Investors and Consumers Should Keep in Mind

If tariffs continue as a part of long-term trade policy, regardless of which party is in office, consumers and investors should stay proactive:

• Stay diversified. Tariffs create uncertainty in global markets. A well-diversified portfolio can help buffer shocks.
• Watch key sectors. Industries like tech, manufacturing, and agriculture often feel the effects of tariffs first.
• Be mindful of major purchases. Big-ticket items like cars or appliances may face price volatility depending on trade policy shifts.
• Think long term. Trade policy is cyclical. Don’t let short-term headlines derail your financial plan.

Final Thoughts: Trade Policy Meets Personal Finance

Tariffs aren’t just political talking points. They show up at the cash register, in company earnings reports, and on your personal balance sheet. Understanding their structure and impact helps you make smarter financial choices, especially in an increasingly uncertain global environment.

Just last month we spoke of the importance of why staying invested is important (Don’t Let the Recession Catch You Off Guard). The market can have large swings. After Trump rescinded his tariffs, in less than four hours we witnessed a jump in the S&P 500 of more than 9%.

Looking for help navigating market uncertainty or building a globally resilient portfolio? Schedule a free consultation with our team at Envest Asset Management.

If you’re wondering how current policies could affect your financial future, we’re here to help.