Women's Money Wisdom

Episode 258: Let's Talk About Tariffs

• Melissa Joy, CFP® • Season 4 • Episode 258

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Unlock the secrets of tariffs and their far-reaching impact on our global economy with me, Melissa Joy, CFP®, in this illuminating episode of the Women's Money Wisdom Podcast. Ever wondered how tariffs shape international trade and affect your wallet? Get ready to explore the journey of tariffs from their historical role in federal revenue generation to their modern-day implications under recent U.S. administrations.

In this episode, we dive into:
✅ The history of tariffs and how they were once a major revenue source for governments
✅ Why many economists see tariffs as a negative tax on economic growth
✅ How tariffs increase costs for importers and spark retaliatory trade wars
✅ The role of trade agreements like NAFTA and organizations like the WTO in promoting freer trade
✅ The broader impact of tariffs on everyday consumers and investment portfolios

But that’s not all! While tariffs take center stage, we also shift the conversation to women’s financial education—an essential tool for navigating today’s economic landscape. Financial literacy is the key to making informed money decisions, and we’re here to provide the resources and knowledge to help you thrive.

The previous presentation by PEARL PLANNING was intended for general information purposes only. No portion of the presentation serves as the receipt of, or as a substitute for, personalized investment advice from PEARL PLANNING or any other investment professional of your choosing. Different types of investments involve varying degrees of risk, and it should not be assumed that future performance of any specific investment or investment strategy, or any non-investment related or planning services, discussion or content, will be profitable, be suitable for your portfolio or individual situation, or prove successful. Neither PEARL PLANNING’s investment adviser registration status, nor any amount of prior experience or success, should be construed that a certain level of results or satisfaction will be achieved if PEARL PLANNING is engaged, or continues to be engaged, to provide investment advisory services. PEARL PLANNING is neither a law firm nor accounting firm, and no portion of its services should be construed as legal or accounting advice. No portion of the video content should be construed by a client or prospective client as a guarantee that he/she will experience a certain level of results if PEARL PLANNING is engaged, or continues to be engaged, to provide investment advisory services. A copy of PEARL PLANNING’s current written disclosure Brochure discussing our advisory services and fees is available upon request or at https:...

Speaker 1:

Welcome to the Women's Money Wisdom Podcast. I'm Melissa Joy, a certified financial planner and the founder of Pearl Planning. My goal is to help you streamline and organize your finances, navigate big money decisions with confidence and be strategic in order to grow your wealth. As a woman, you work hard for your money and I'm here to help you make the most of it. Now let's get into the show. And I'm here to help you make the most of it. Now let's get into the show. Just a quick note before we dive in. The information that we share is meant to educate and inspire, not serve as personalized financial advice. Everyone's situation is unique, so be sure to consult with your own financial professional for guidance that fits your life. And just so you know, the opinions shared in this podcast are my own and those of my guests, and they don't necessarily represent those of any organizations that I'm affiliated with. For more important disclosures, please go to our webpage at pearlplancom.

Speaker 1:

Now let's get started. I'm going to tell you, guys, I didn't necessarily want to do this conversation, but current events mean that we're going to have to be. I didn't necessarily want to do this conversation, but current events mean that we're going to have to be talking about tariffs today. It's a topic that is on a lot of people's mind because a major economic initiative for the Trump administration has been to introduce the concept or the potential of tariffs as a key foreign policy and economic policy initiative, of tariffs as a key foreign policy and economic policy initiative. So diving right in this hasn't been a topic that I focused a lot of my time on throughout my 25-year investment career. But today we're going to talk about understanding tariffs on a basic level what they are doing, what you know, the mechanics of tariffs and then we'll talk about the proposals that are happening today or that may happen, as well as some investing strategies. If you're someone who's concerned about tariffs. So everybody ready, let's talk about tariffs.

Speaker 1:

Before we get into the nitty-gritty, I want to break down what a tariff actually is. Simply put, a tariff is a tax on something that is coming into a country In this case, let's say the United States. Instead of collecting that tax through the IRS, the Internal Revenue Service, that tax gets collected by customs agents at the point that the goods come into our country, and so it's a different mechanism. Tariffs existed over time to raise government revenue as well as to influence, kind of the outcomes of competitiveness with domestic goods versus foreign goods. But there's a catch because while tariffs are intended to shield jobs, oftentimes there's retaliatory tariffs. Costs can go up for goods because it's actually the importer, the person who ordered the goods from overseas, that ends up paying for the tariffs. It's not necessarily the exporter who writes the check to the customs office collections of up to $80 billion in tariffs, but that's really a drop in the bucket compared with the revenue that's being collected from the IRS for other types of things, including individual income taxes plus payroll taxes etc. Which totaled $2.5 trillion for income taxes and $1.7 trillion for Social Security and Medicare.

Speaker 1:

But over the years tariffs have been used a lot more. In history we may remember them from if you had to take economics classes. In fact, before there was a federal income tax, tariffs were the primary way to get the federal government funded, and indeed between 1790 and 1860, before the Civil War 90% of federal revenue came from tariffs. But nowadays there's a more modern collection of taxes and so tariffs have been considered to be less popular by economists. Tariffs continued to fall throughout the post-World War II era and kind of hit their lows before the first Trump administration. Presidents Trump and President Biden did end up utilizing tariffs and notching back up their usage during their presidencies over the last eight years, and yet tariffs are much lower than they had been in history prior to this century.

Speaker 1:

So, looking back at the history of tariffs, they've been around for centuries. They were a common tool to collect revenue for governments, and so they are kind of a throwback that says that there may not be economic growth. In fact, most asset managers I've spoken to investment portfolio managers consider it to be a negative tax on potential growth and you know kind of potential investment outcomes. So one thing that people really refer to is the roaring 20s and then the change over to the Great Depression, and a lot of people point fingers at the Smoot-Hawley tariffs of the 1930s that really put a nail in the coffin of Herbert Hoover's presidential look back how his presidency has been considered and just were considered to be very punitive economically and usually, or often when tariffs occur, there's a retaliatory act that results in what we often refer to as a trade war, where first there's an initial volley of hey, this is what you're going to have to pay when you export that, and then, as a payback, then the other country says well, you're going to have to pay this on that. So it goes back and forth and tends to escalate Over time.

Speaker 1:

In history, tariffs have been mitigated or reduced through trade agreements. So one of the most famous trade agreements is the North American Free Trade Agreement. These types of agreements are often negotiated by federal governments and the results of them are freer trade amongst the trading partners who are part of the agreements, are part of the agreements, so between the World Trade Organization, nafta, other trade agreements over time. These are kind of the opposite of tariffs, where there's an agreement to have more cooperation when it comes to trade. So now we get to current events and what's going on right now.

Speaker 1:

So President Trump, throughout his election cycle, as he was campaigning for president, said you know, there's bad actors overseas. We really want to use tariffs to punish other countries. This tends to be a kind of presidential outlook that is very punitive and focused on retribution, and that kind of language was going on throughout the election cycle and you know people weren't sure what to think about that. There were a ton of proposals during the election on both sides, but especially from President Trump. And so then throughout the inauguration pathway into when President Trump took over in terms of the US government, there was escalating language of hey, tariffs are coming.

Speaker 1:

There's three particular countries that have been most urgently targeted by the Trump administration. First of all, there's our closest trading partners and neighbors, which are Mexico and Canada, as well as the biggest economy in the world other than the US, which is China. Each of these are huge trading partners with the US. They represent, in combination, the largest percentage of our imports, and the you know initial volley was 25% tariffs on Canada and Mexico, with a small exception of a lower tariff for energy coming from Canada, and then 10% on Chinese goods. There have been some tariffs on Chinese products in the past, but this is much more so. This is a broad and extensive proposal and can be initiated not through Congress, but through the president, and what happened over the last couple of weeks is and, by the way, I'm recording this in early February, so anything could change over time. But what happened was President Trump said hey, canada and Mexico tariffs are going to be starting on February. In early February. I'm not. There's no negotiations, this is what's happening in China, you too. And then there were phone calls with both countries and there is now a 30-day, one-month moratorium, so more to come.

Speaker 1:

I guess, while we're all familiarizing ourselves with those tariffs, the impact on your wallet can be significant. I've heard estimates from in the hundreds of dollars to the thousands of dollars for the typical American family. One example is that the Nonpartisan Tax Foundation estimated that if you, we receive these tariffs in 2025, there would be an $800 cost in terms of your wallet. Where are people going to be hit? Probably at the gas tank, in energy prices and especially on groceries, as many of our imports, both from the North and the South, are food-related. Also, there is often many backs and forths between parts. I'll use the example, since we're in Michigan, of auto parts. One part may be created in China, sent to a factory in Mexico and eventually land in the US, or may go across multiple borders multiple times as things are being assembled and manufactured, so that could cause higher prices. Weekly shopping trips have a variety of things that automatically have potential tariffs, and so you know the cost could be significant. And then, of course, there's the consideration of retaliation, because the US is also an exporter to especially Canada and Mexico, and so when or if there is retaliation, that would also result in impacts to sales, perhaps to employment, et cetera.

Speaker 1:

So how do you deal with this? First of all, I think the thing that I want to remind people about any time when there's uncertainty is make sure you're doing the work that you should be doing to understand what's going on within your life and within your home. Focus on what you can control. And so when I say that and I'm thinking about potential rising or escalating costs with tariffs I'm thinking about employment considerations for people whose professions or industries may be impacted by these rising costs, and or their own manufacturing or exporting activity. I'm thinking that a solid foundation of a financial plan where you have a rock solid plan for your emergency reserves, cash on hand, be focusing on your budget, understanding what is absolutely necessary and what is discretionary, even if you're not making changes on what you're spending.

Speaker 1:

I think that is really valuable. I would certainly emphasize that for those of you who have tighter, you know, kind of cash flow, where you don't have as much money at the end of each month, then getting a solid focus on your budget is really important at a time like this, because prices may be changing. This type of consideration is tariffs. Um. This type of consideration is uh tariffs often for many economists, um would assume that that would keep interest rates higher for longer, because it's likely you know we're talking about higher prices, so it's likely that the economic impact may be that um rates stay higher because inflation stays higher for longer. Um, higher interest rates are the tool that the Federal Reserve uses to try to reduce inflation over time, and so, having a really solid game plan for both your borrowing and keeping the amount that you have on credit cards low, keeping your cash on hand high, make sure that you have extra cash that's really savings in a higher yield savings account so that you can get adequately compensated for the money that you've set aside All of these, I think, are really important when it comes to investing.

Speaker 1:

We've been in an environment where investing has been really feel good when it comes to investing in large companies in the US, and so one of the things I would also consider is, on the investment side, take a look at the mix of stocks and bonds you have. You may be surprised that the stocks are much higher because bonds have been somewhat muted in their returns, but certainly a lot lower than stocks coming off of a time period where bond returns were actually negative and stock prices have been inflated and higher, especially in the very biggest, the largest companies, which make up a big percent of the S&P 500, which is the biggest index, our most frequently used index for large company stocks. And so I would be thinking, hey, I might want to revisit my investment allocation. And so I would be thinking, hey, I might want to revisit my investment allocation. It may not be as easy to make money in the biggest companies, or even in the middle and small companies, so do I have the right mix that, or do I have a mix that was more appropriate for a few years ago? If you haven't been rebalancing, you probably have a mix that has a lot more stocks than you might realize, and I think there's a purpose for bonds and portfolios, especially because they do pay reasonable interest rates relative to time. And if there are big unexpected disruptions and I'm not predicting that at all, I'm just saying you need to be prepared for anything, because you cannot predict what's going to happen from day to day in any year, and certainly I think not in 2025, I would make sure to have bonds in your investment account as well, if appropriate, and of course, I can't just prescribe everyone for the same portfolio, not knowing your individual circumstances. So I'm just giving kind of broad, generalized advice.

Speaker 1:

I would also be thinking about you know, in addition to diversification, you may be looking for things that don't behave exactly like stocks and bonds. So diversifying investments to include alternative investments may make sense. Also, be looking at the companies in your portfolio and if costs are crowding out the ability to have choices on what you spend money on. Perhaps essentials are, you know, the place to focus on consumer staples and things like that. Do be looking at the types of companies that can kind of reflect and rebound and be innovative and stay on top of things. I think those types of companies could be very valuable and there is a case for foreign investment because of the change in currency prices. So make sure you're diversifying beyond just our shores. So if you think US, canada and Mexico, as well as China, may be impacted, maybe there's other parts of the world that would be a little bit sheltered from the current, you know, kind of forecast when it comes to the economy, with everything I probably sounded like a broken record on this podcast.

Speaker 1:

I would encourage you to remember that a financial plan can help you to avoid the to have a game plan for a variety of environments, a financial plan focused on both risks and rewards, and it's something that I, time and again, in times of uncertainty, I ask people to return to. I wouldn't say go to cash. I wouldn't say, you know, to dig into one particular outcome or expectation. I think this is an extraordinary time to remember that agility, resilience and flexibility are a key part to successful financial decisions. So, in spite of headlines that may make you fearful, in spite of the need to talk about an economic concept that we haven't had to visit much over my 25 plus year career, I think that a game plan that puts your finances in the context of the world around us is one that will be enduring.

Speaker 1:

I hope you enjoyed this conversation, whether we wanted to talk about tariffs or not. Until next week, have a good one. Thank you for listening to the Women's Money Wisdom Podcast. If you found value in this episode, the best way you can support the podcast is to forward an episode to a friend or leave a review. Go to pearlplancom and the podcast link to get all the resources and links mentioned.

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Melissa Joy, CFP

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