Tariffs will take effect in ways you don't expect
How the Trump Tariffs will affect your wallet
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Simple incentives can lead to complicated results. I’ll explain with a story about the rat problem in Hanoi.
Hanoi was the capital of French-controlled Vietnam. In 1902, the city faced two problems: One, there were a lot of unemployed people looking for jobs. Two, the city had a rat infestation. The government decided to kill two rats with one stone by offering a reward of 1 cent for every rat killed. Bounty hunters could collect the reward by turning in the tails of dead rats, also solving the unemployment problem. At first, this seemed to work great but soon officials noticed that rats without tails were running around the city. What was going on?
The bounty hunters realized something: a dead rat would get them a bounty, but a live rat without a tail would breed and more rats meant more money in the future. So they would just sever the tails of rats and let them free. Eventually, rat farming operations started popping up in the countryside and the government had to scrap the program. All the rats bred through this “program” were let loose, and the rat problem in the city got worse than before.
When I see talk of tariffs today, this is what comes to my mind.
How do tariffs work?
Tariffs are just another word for taxes on imported goods. The idea is simple. When imported goods have a tax on them, they become more expensive, and companies are forced to manufacture and hire locally instead of relying on other nations. But in reality, those taxes don’t come out of the exporting country or the importing company’s profits—they get passed on to consumers. That means you’ll be paying more for everyday goods. Analysts estimate that these tariffs could cost the average American household an extra $2,000 to $4,000 per year (BBC). Everything from electronics to clothing to groceries could see price increases as businesses adjust to the new trade environment.
The second problem is that tariffs can have unintended consequences. In the 1960s, during the cold war, chicken imported from America was very popular in the US causing the market to be flooded with cheap imported chicken. Europe tried to curb this by imposing a tariff on the US, and the US retaliated by imposing a 25% tariff on imported light trucks, a move originally meant to hit Volkswagen and other European automakers. (This tariff, called “The chicken tax” is still in effect today).
But businesses found loopholes, like the bounty hunters in the rat story:
Ford figured out that if they shipped their vans to the U.S. with seats installed, they could classify them as passenger vehicles, which had a much lower tariff. Then, once the vans arrived, the seats were ripped out, turning them back into commercial trucks—all while dodging millions in tariffs.
Mercedes disassembled and reconstructed fully assembled vehicles to bypass the tariff.
The point is, tariffs rarely work how you expect them to. Usually, tariffs are rarely implemented – they’re more of a bargaining chip to negotiate with other countries. But this time might be different:
How will other countries respond?
There are a few different tariffs that might be coming up: For example, a 25% tariff on Canadian and Mexican imports, which the White House is justifying as a way to pressure these countries into curbing fentanyl trafficking. Or a 50% tariff on steel and aluminum imports from Canada. There’s also a planned hike on Chinese tariffs from 10% to 20%, along with reciprocal tariffs on any country that is imposing a tariff on the US. The tariffs on Canada and Mexico have been temporarily paused, but we’re still on shaky terrain.
If countries we’ve been doing business with for years start getting “taxed” by us, they might retaliate by imposing tariffs of their own. Canada has announced counter-tariffs on U.S. goods, escalating tensions with one of America’s biggest trading partners (The Star). China, meanwhile, is imposing tariffs on U.S. agricultural exports and blacklisting certain American companies. China’s foreign ministry has also said that if war is what the US wants, be it a tariff war, trade war or any other kind of war, they will fight it to the end. These moves could hit U.S. farmers hard, as China is one of the biggest buyers of American soybeans, pork, and other agricultural products.
At best, this could be a game of chicken. But if no one blinks, we could be looking at an all-out trade-war. Once that happens, it triggers a downward cycle where people buy less, cut back, make less money, and our economy shrinks… which might result in a GDP loss of 1.2%. The last time Trump imposed tariffs on China in 2018, the trade war cost the U.S. economy over $300 billion and disrupted global supply chains for years (Al Jazeera). If this new round of tariffs escalates in the same way, it could mean more supply chain issues, weaker exports, and prolonged market volatility.
Interest rates and the stock market
Originally, the Fed was expected to lower rates in 2025 as inflation cooled. But if tariffs push prices higher, that plan could get scrapped as the Fed waits and watches for things to stabilize. The market is pricing in the likelihood that rates will remain higher for longer, and this might mean we’re unlikely to see a rate cut as quickly as most people expected. If unemployment rises will inflation also remains high, this could lead to “stagflation” – something we haven’t worried about for years.
What about the stock market? Well, the stock market hates uncertainty, and that’s reflecting in stock prices. Generally, global competition is good for companies because they are forced to innovate and this leads to progress. With tariffs in play, local players might not feel the need to deliver better products or services. The tariffs being implemented and then paused, is leading to confusion as well.
The S&P 500 fell after the announcement, with industries most exposed to trade—retail, manufacturing, and tech—taking the hardest hit (CNN). Companies that rely on imported goods, raw materials, and global supply chains are scrambling to adjust, and the longer these tariffs remain in place, the more companies will look for ways to cut costs, relocate factories, or raise prices.
Many tech companies rely on Chinese suppliers for everything from semiconductors to smartphone components. Tesla lost 40% of its value from its peak, and could be sensitive to higher costs on imported materials (Yahoo Finance).
What You Can Do About It
There’s no sugarcoating it—these tariffs are here, and they will have real economic consequences. But there are steps you can take to protect yourself:
Keep a 3-6 month emergency fund at all times: That way, you won’t need to sell investments to pay for your living expenses in the event you lose your job, your income slows down, or something unforeseen comes up while the market is low.
Diversify your investments across industries: Tech Stocks lost 78% in value during the Dot Com Bubble and Crypto fell 85% in 2018. But the more you spread out your money, the more you reduce your risk and volatility.
Keep buying in and don’t panic sell: It’s gut-wrenching to see your investments drop 20-50%. When you should be buying in, you probably go “I’m out of here!” But study after study shows that sticking to your plan by buying the entire market and holding is usually the best strategy.
Keep a steady income and save extra cash: A drop in the stock market might lead to job losses and unexpected situations. Having multiple streams of income and keeping extra cash can put you in a much safer position.
Most important of all, stay out of margin debt and leverage! This is not the time to be reckless, and if you’ll be needing money in the next 3 to 5 years, it’s a bad idea to go all in right now and then some.
The idea behind tariffs is simple—make imports more expensive to boost domestic production. But in reality, things rarely go according to plan. Businesses find loopholes, global supply chains adjust, and retaliatory tariffs can end up hurting the economy just as much as helping it. But regardless of whether this is an empty scare or an economic threat, focusing on increasing your savings and investing for the long term is usually a good strategy.
That’s all for today. I’ll see you next week! If you found this information useful, share it with a friend. Have tariffs affected your industry or job? Let me know your thoughts below. I read every comment:
Welcome back, my friend.