What Is a Tariff and How Do They Affect You?

With each new administration comes new policy shifts, and one area of focus right now is trade. The Trump administration recently announced tariffs on imports from Canada, Mexico, and China, and you may be wondering about their potential impact on the economy—and more importantly, on your investments and retirement planning.

While market fluctuations are a natural response to economic policy changes, it’s important to maintain perspective. Here’s what you need to know about tariffs, their potential effects, and why staying focused on your long-term financial strategy is key.

How Do Tariffs Work?

Tariffs are taxes imposed by the federal government on imported goods. These costs are paid by companies that bring goods into the U.S., and their impact can ripple across businesses, industries, and consumers.

The latest round of tariffs includes:

• 10% on imports from China
• 25% on imports from Mexico
• 25% on most imports from Canada (with a 10% tariff on Canadian oil and gas imports)

These measures are already in effect for China, while those for Canada and Mexico are set to occur in early March. However, the situation is fluid and negotiations between the affected countries are ongoing, which means the current tariffs for China could change, and those for Canada and Mexico may be avoided.

The economic burden of tariffs is often shared among producers, importing companies, and consumers. How that burden is distributed depends on factors such as supply chain flexibility and the availability of alternative sources. Businesses that cannot easily relocate production may absorb the higher costs or pass them on to consumers through increased prices. While they may try to find alternative suppliers or relocate production, these shifts take time and money.  

In industries like auto manufacturing, where components frequently cross borders multiple times during production, tariffs could be applied at several stages. This could lead to higher costs for both manufacturers and consumers.

Economic Effects: What to Expect

Bond markets have already begun factoring in expectations of higher inflation due to these policy changes. Tariffs typically result in higher prices for imported goods, which can contribute to inflation. The extent of this impact depends on several factors, including how businesses adjust their supply chains and pricing strategies. The new administration has not said if the tariffs are long term or if they will be used as a short-term negotiation tool, which adds to the uncertainty of their impact.

For U.S. companies that rely on imported materials, increased costs may lead to production slowdowns or shifts in operations. The broader effects on employment, corporate earnings, and economic growth remain uncertain, as they will depend on the duration and scope of these tariffs, potential trade negotiations, and how other countries respond. Is your job affected? Learn about the important financial steps you can take to manage through this change.

What This Means for Your Investments

Market fluctuations in response to tariff news are part of the broader economic cycle. Instead of reacting to short-term volatility, maintaining a disciplined investment approach is key. Consider these strategies:

• Stay diversified. A well-balanced portfolio can help mitigate risks associated with market fluctuations.
• Keep contributing. Continue funding your employer-sponsored retirement plans and other long-term investments.
• Avoid emotional decision-making. Reacting to market swings can lead to costly mistakes.
• Stick to your plan. Trying to time the market often results in missing key growth opportunities.
• For retirees, review your plan and goals. If you’re taking distributions, ensure your withdrawal strategy accounts for market volatility.

If you have concerns about how tariffs may affect your financial situation, a trusted financial professional can help you assess your plan and stay on track. As always, Edelman Financial Engines is here to provide guidance and keep you informed on market developments so you can make confident financial decisions. Feel free to reach out to us with any questions or concerns you may have.

And to learn more about tariffs and their potential impact, check out the latest video in our “Ask a Planner” series.