Tariffs, Trade Deficits, and the Recent Sell Off
- Thomas Hayes
- Apr 8
- 4 min read
Updated: Apr 9
Saying the market action the past few days has been negative would be an understatement. Thursday and Friday of last week was the 4th worst 2 day selloff in the last 75 years in the S&P 500. This all came on the heels of what President Trump called “Liberation Day”, where he announced customized sweeping global tariffs on more than 50 trading partners, along with baseline 10% tariffs. So who pays the tariffs, how will they impact the economy, and where do we go from here?
Simply put, tariffs are a tax on goods that are imported to the United States, that is paid by the importer at the port of entry. The tariff is calculated based on the value of the goods, which is generally tied to the cost paid to the foreign producer, and cost of shipping the goods.
Let’s take Apple for example. If Apple has their IPhones produced in China, and imports them to the United States, Apple would be responsible for paying those tariffs at the port of entry. But who really bears the cost? Apple isn’t going to just let that tariff eat into their profit margins, and frankly, with the tariff rates that have been proposed, they could hardly afford to. Instead, that cost is passed on to consumers in the form of higher prices. Any of the tariff cost that is absorbed by Apple is likely to result in cost cutting measures, usually in the form job cuts, with the goal of maintaining profit margins.
This price increase is the ultimate goal of tariffs. By increasing prices on imported products, higher priced products made here in the United States can compete. To a lot of people that sounds like a reasonable goal. So what’s the problem?
The problem is we don’t have the factories built to make many of these imported products in the United States, and building those factories could take years. In the meantime, American consumers will bear the brunt of these higher costs, at no benefit. When those factories are built, even if those products can be made just as efficiently as they are overseas (which is unlikely), they will still come at a significantly higher cost, as the wages paid to workers at the factories here in America will be much higher than those paid overseas. At best this results in no net gain, as a portion of people benefit from these factory jobs returning, while consumers pay more across the board. At worst, it is a net negative for everyone. Is it really wise to use valuable resources to produce things Nike sneakers and Lululemon pants in the United States when they could be produced cheaper overseas? Instead countries should be specializing in making the products they produce most efficiently. That begs the questions, do Americans even want the low wage jobs that come along with the production of those products in the United States? With factories becoming more automated, will those jobs even exist?
To make matters worse, as you’ve probably seen in the past few days, the “reciprocal” tariff rates appear to be calculated based trade deficits, and not the actual tariff rates imposed by other countries. For many of these countries, closing that deficit is an impossibility. They simply aren’t wealthy enough to buy as much from the United States as we buy from them. So it isn’t clear what the United States would be negotiating towards if tariffs are already low, and closing the trade deficit isn’t realistic.
With all of this in mind, you can see why the S&P 500, and markets around the world have been selling off the past few days. This uncertainty has markets on edge. However, with the S&P 500 briefly entering bear market territory Monday morning, and the Nasdaq doing so on Friday, it may be time to start looking for opportunities if you’re a long-term investor. That isn’t to say the markets won’t move lower. If the tariffs stay in place for any meaningful amount of time they certainly could, but in the words of finance author Morgan Housel “Every past market decline looks like an opportunity, every future decline looks like a risk”.[1] At some point in the future, long-term investors will likely look back on this as a buying opportunity.
“There’s always a reason to sell”. -Ritholtz Wealth Management’s Michael Batnick
Disclaimer: The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. All performance referenced is historical and is no guarantee of future results.
The hypothetical example above is not representative of any specific situation. Your results will vary. S&P 500 is an unmanaged index which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.
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