Tariffs: Economic Tool or Recession Trigger?

I don’t know about you, but these days it seems no matter what the outlet, one word continues to be headlines news - TARIFF. It’s all-consuming; “Tariff Impacts” “Tariff Trackers” “Tariff Talks” Tariff Loopholes” -it just keeps going.

Most Americans associate the word tariff with high prices, and let’s be honest, that is what some of the media portrays a tariff as daily. Recently, this messaging has been altered to lead people to believe that tariffs also cause recessions. As is the case with most things in life, it depends on the situation. There is no evidence that tariffs themselves equate to a recession.

In this short article we are going to help expand on what a tariff is, delve into a bit of the history behind tariffs, explore some of their pros and cons.

So, what exactly is a tariff? In its simplest form, tariffs are taxes or duties levied on imported goods and services. They attempt to induce domestic production, as well as revenue, for the country imposing the tariff, by way of increasing the bottom-line cost for the goods and services. The general idea is that by doing this, perhaps it becomes less attractive to purchase items from overseas when compared to their domestic counterpart, thus increasing domestic production. Tariffs can be levied in two main forms: ad-valorem based (percentage based) or a fixed fee. As of late, more attention has fallen to the latter option, sometimes also referred to as a blanket tariff, when associated with a country.

Now that we have a high-level overview of what a tariff is, let’s look at their history. We need to first understand that tariffs did not come about overnight. In fact, tariffs have essentially always been a part of the global economy; dating back to ancient Mesopotamia when traders were taxed as they arrived in city-states bearing goods. As is the case with most things, tariffs have fluctuated over time. Accounting for 50-90% of federal income between 1798-1913¹, down to just 1.57% in 2024². The reasons for these fluctuations are vast, from resource availability within countries, to relationship standings between countries. One thing is for certain; they will continue to fluctuate overtime, as all trade does.

As an advisor, I hear both sides from clients - “tariffs are good”, “tariffs are bad”. In my opinion, it’s not so black and white. Every decision we make has two sides. Economic decisions are no different. 

Let’s start with potential pros: Protecting and creating domestic jobs is one of the largest pros. This also helps to lower unemployment figures while increasing competition amongst not only domestic producers, but also other countries as demand alterations, subsidies, and various levels of support come into play. This can often lead to lower prices for goods and services! Should imports continue even with tariffs in place, an increase in government revenue could go towards benefiting a country, if spent purposefully. 

Now a look at the cons: The most prominent one being the potential for higher prices being passed on to domestic consumers, should imports continue. Tariffs can also lead to tariff wars which no longer become about fair-trading practices, but rather an eye for an eye methodology, therefore discouraging trade. Most people are familiar with the lack of desire to import goods when there is an associated tariff in doing so, but it should be noted that it goes both ways: companies may also feel discouraged when exporting their goods, shifting their focus to predominantly working within their domestic market.

Of course, there is always more to unpack with any economic and political decisions within the world. The deeper rationale around tariffs, along with how, in certain environments, they can be both good and bad, is a conversation for another time. 

If you'd like to have a more in-depth conversation on tariffs and how their implementation (or not) could impact your portfolio, call the office at (425) 778-6160 or click HERE to schedule an appointment with a CWM advisor.

¹ Downie, Harry, et al. Tariffs on the Rise: Implications for Your Portfolio. 14 Jan. 2025, privatebank.jpmorgan.com/nam/en/insights/markets-and-investing/ideas-and-insights/tariffs-on-the-rise-implications-for-your-portfolio.

² Casey, Christopher A. U.S. Tariff Policy: Overview. 31Jan 2025, www.congress.gov/crs-product/IF11030.