Tariff Considerations for Investors
Tariffs are taxes, sometimes called duties, to be paid on a specific class of imports, and function like a tax on imported goods. Historically their purpose was to protect domestic producers, and often are compared to value-added-taxes (VAT). However, whereas a tariff is applied only to specific imports, a VAT is a broad consumption tax on both domestic and imported goods, and for imported goods you could have both. For example, tariffs are applied to the customs value of goods, and then a VAT is applied to the total value. What tariffs and taxes have in common is the government receives the proceeds, but where they differ is who pays.
A VAT is paid by the end consumer, but a tariff can be paid by several different parties depending on who has a position of strength or weakness; you have an exporter, an importer, various entities in the middle as part of distribution, and you have the end consumer. But, as mentioned earlier, the government receives the revenue generated from taxes and tariffs, and both are component parts of fiscal policy, which is under the purview of governments. Consequently, how a government approaches fiscal policy as a whole will ultimately determine the true economic impact from its tax and spending policies.
Fiscal policy coupled with monetary policy (which is under the purview of central banks) drive the economic strategy of countries and the economic success or failure of countries has a major impact on asset prices. If tariffs are thought of as part of the toolset of fiscal policy, it is reasonable to assume they will impact the economy but it’s uncertain how because fiscal policy is much broader, and the ultimate impact will depend upon decisions made by the governments (fiscal policy) and central banks (monetary policy).
A rise in inflation may prove to be transitory if a one-time tariff slows demand and inflation remains stable. On the other hand, a series of tariff hikes could be much more problematic as retaliatory measures by trading partners could result in more sustained inflation over time.
Tarrifs, even if transitory, will increase overall price levels, thus it is likely to lead to reduced consumer spending, and many economists are expecting slower consumer spending in 2026.
GDP growth is likely to slow in 2026 driven by reduced consumer spending.
Tariffs protect domestic producers, but it will take time to re-shore production and moving production to the US is likely to increase costs.
Businesses and investors like certainty, but the level of uncertainty around fiscal and monetary policy and the overall geopolitical risk climate is driving uncertainty.
Investors are likely to experience increased market volatility until more is known about the economic impact of tariffs, and the decisions made from both fiscal policy and monetary policy are known. The US right now has a higher level of debt relative to its economy, as measured by GDP, than at any time in its history - including at the height of World War II.
Will tariff revenue be used to pay down debt, could it be used to increase the means of production when re-shoring, will income tax reductions mitigate the tariff increase - or will the government use the increased tariff revenue as an income and wealth transfer? All of these considerations, when or if they manifest themselves, impact asset prices and investors need to be aware of them when executing their investment strategy.