Imagine traveling hundreds, or even thousands, of miles with your handmade products to sell. When you arrive at your destination, you are greeted at the harbor by customs officials who inspect your ship. They take note of your products, their value, your port of origin, and other details before informing you of the required tariffs.
To access the local market, you must pay these tariffs—fees imposed on foreign goods. Failure to comply could mean restricted trade, confiscation of goods, or fines. Throughout history, tariffs have been a key tool for governments to control commerce and generate revenue, often collected at ports, city gates, or trade checkpoints.
What is a Tariff?
Tariffs are taxes imposed on foreign goods, products, and produce. They’re paid for by the importing entity of the goods. Tariffs are typically country or industry-specific. For example, you may see a president impose a 15% tariff on Chinese electric vehicles. As such, the importers that purchase goods from Chinese auto manufacturers will pay this fee. This increase in cost then makes it way to the end consumer as each part of the supply chain passes on the cost of the tariff. Notably, tariffs have seen extensive use lately for both political and financial negotiations.
Why Charge a Tariff on Goods?
As civilizations began to expand and trade increased, it became evident to local rulers that they needed to do a few things to ensure their power wasn’t challenged. First, they needed to generate revenue for their coffers. Charging people to trade in your city is a great way to quickly accomplish that goal.
Trade Dynamics
As global trade expanded the need to control trade dynamics became more important. Rulers noted that tariffs gave their economy an edge in certain markets. Tariffs can be used to great effect when targeting key industries that foreign governments need to generate wealth. When done correctly, they can slow foreign economic growth and influence while boosting domestic efforts.
Protecting Domestic Industries
What do you do when your labor force costs 20x your neighbors and you both rely on the same products to generate wealth? Tariffs provide an answer to this question in that they allow you to restructure the market pricing.
Placing higher tariffs on products means that people will have to choose between paying more for foreign goods vs shopping domestically. This strategy has been extensively used to protect the auto industry in the past. Even today, major US competitors pay tariffs on their luxury imports.
Who can Set a Tariff?
The person in charge is the one who historically sets the tariffs. In ancient times, it was the ruler, which was often a monarch. In modern times, it’s your government that decides how to tax imports. In the US, both Congress and the president have the power to impose tariffs.
A Brief History of Tariffs?
When you examine how tariffs evolved over the centuries, it’s easy to see their importance. Tariffs can boost or cripple an economy depending on how, when, and on what product they tax. Here’s how tariffs went from a simple entry fee to today’s complex geopolitical bargaining chips.
The 1st Tariffs
One of the earliest recorded examples of tariffs dates back to Mesopotamian city-states around 2000 BCE, where traders were taxed on goods passing through key trade routes.
Recognizing an opportunity, the rulers imposed tariffs on vendors. Interestingly, they had to pay the tariff to pass along the trade route, regardless if they wanted to commerce within the city. This decision helped the nation build reserves.
Ancient Greece and Rome
Fast forward to Ancient Greece and Rome. Here, you see tariffs beginning to transform. At this time, tariffs were like an entry ticket that merchants paid to gain access to the local economy. This fixed fee needed to be paid before foreign goods were allowed to enter the city walls, ports, or economy.
Medieval Europe
It was during the Dark Ages that tariffs evolved from the trade levies of ancient empires to a tool of economic nationalism. During this time, Europe was in constant battle and rulers wanted a way to shield their wealth and protect emerging industries within their control.
1800s
The 1800s saw tariffs mature further towards a means of economic protectionism. Legislation like the British Corn Laws stifled international trade, leading to increased interest in free trade by many who believed that governments were damaging the economy. It was at this time that the US started to impose high tariffs as a way to boost its fledgling economy and reserves.
Industrial Revolution
The Industrial Revolution complicated the tariff scenario. As nations began to produce more products, trade became more complex. Budding industries began to compete for market dominance, encouraging governments to step in and impose sweeping tariffs in the name of protectionism.
Sadly, this decision significantly reduced international trade, exacerbating the effects of the Great Depression as nations imposed retaliatory tariffs and global commerce slowed. During this time, major changes occurred to the way tariffs were used and at what scope. The deep economic woes of the great depression were a stark reminder that the economy runs on international trade and that balance was needed for success.
General Agreement on Tariffs and Trade
International cooperation and reduced trade barriers were put in place in the late 40s that sought to help promote global commerce. For example, the General Agreement on Tariffs and Trade promoted a global vision for the economy. This desire eventually inspired the formation of the World Trade Organization (WTO), a group solely devoted to increasing global trade.
USA is a Leader in the Use of Tariffs
According to the U.S. Constitution Article I, Section 8 “The Congress shall have the Power to lay and collect Taxes, Duties, Imports, and Excises.” Notably, the first US tariffs were on British tea in 1789. During the Great Depression, Congress became more flexible and granted the president power to impose and negotiate tariffs within congressional limits.
Tariffs Today
Today, tariffs are used for all the reasons you could imagine. A president may choose to tariff a country to correct a trade imbalance, or to give a local product a boost. Tariffs can be seen as a bargaining chip and as a way to recoup losses due to intellectual property disputes.
Trump Tariffs
The US Census Bureau shows that in 2024, the country maintained a ~$295B trade deficit on goods with China. Such deficits have been pointed to be President Trump as a reason for issuing multiple tariffs on countries since his reelection. The deficit is the highest in countries where the US is the biggest importer of goods, including China, Mexico, and Canada. Consequently, Trump has said he will impose sweeping tariffs to balance out the deficit.
President Trump has also used Tariffs as a way to negotiate with countries to accept deported immigrants. In one incident, the president threatened to impose 25% tariffs on all Colombian goods after the country refused to let American military planes land with deportees. The tariffs had the desired effect, and Columbia’s president soon stood down from the confrontation. The president even sent his presidential plane to assist in the deportations.
In response to Trump’s increased rhetoric surrounding tariffs, multiple countries have stated they will initiate retaliatory tariffs on American goods. In the case of nations like China where the US is a major importer and exporter of goods, the trade war could result in strained diplomatic relations.
Meanwhile, US allies have been left scrambling in an attempt to figure out how to economically combat these taxes without damaging their economies further. As such, there continue to be debates and closed-door sessions with world leaders hammering out the details of Trump’s new strategy.
Do Tariffs Work?
Historically, tariffs can work, but they aren’t guaranteed. Tariffs on foreign industries like the auto industry have helped the US retain market share, even while their manufacturers and product quality didn’t compete. The added cost of imports is enough to make many people stick with domestic options.
If done right, tariffs enable governments to sculpt economic landscapes and improve their positioning. They can help to even out trade deficits and are a guaranteed way to generate revenue for the state. Additionally, they provide locals with an edge over imports, protecting domestic jobs and the local economy.
The problem with tariffs is that they are not guaranteed to work. If done wrong, they can lead to major issues such as economic collapse, inflation, and even war. As such, lawmakers must understand the effect of tariffs and how they alter global supply chains, trade patterns, and diplomacy.
Will Tariffs Change Investment Strategies?
There are many ways in which President Trump’s tariffs could alter investment strategies for traders. Tariffs create new concerns that traders need to evaluate to increase their profitability. As such, you can expect to see many traders readjusting to account for the new economic landscape.
Risk Appetite
Those seeking safer asset classes will want to avoid any industry in the tariff scope. Assets that are potentially safer may include things like gold, silver, and even Bitcoin. These are likely to see a spike in usage as tariffs are less likely to negatively affect these assets because they are not tied to any government or industry directly.
New Technology
Tariffs can drive innovation in some aspects as people will naturally seek out ways to avoid paying these taxes. There are already many technologies that may, in time, help businesses reduce exposure to tariffs. For example, 3D printers will eventually be able to handle the majority of construction on-site. This method reduces the need to bring multiple pieces together that are derived from different locations which could result in more tariffs.
Renewables are another way in which new technology will help locals avoid tariff costs. Solar, wind, and other renewable energy allow nations to stop relying on foreign oil or other resources. If used correctly, technology is a powerful tool that can enable countries to lower the tariff burden.
Regional Concerns
Many traders seek to avoid certain regions solely based on their likelihood of being subjected to tariffs. Regions that have a particular industry that competes with US markets could be a target. Also, areas known for low labor costs could see some of their products tariffed to help imbalance the costs. Savvy traders will seek to reduce exposure to regions that may see tariffs.
Commodities
Tariffs can cause prices of certain commodities to suddenly spike as well. When there is a tariff on a major producer of a commodity, the price of that commodity usually increases as supply is now smaller. This scenario can result in some traders avoiding certain commodities to prevent a scenario where the market sways suddenly due to politically imposed tariffs.
Currency Fluctuations
The same scenario goes for currencies. Local currencies can collapse if the country’s main export is suddenly cut from its main market. The US uses tariffs and sanctions as a way to economically punish countries that they deem as a threat or violating current norms.
Focus on Local Development
The main purpose of tariffs is to get consumers and investors to focus on the local economy. For centuries, that has helped communities ensure that they didn’t lose control of their money-making industries without a fight. Recognizing this scenario can help you decide if a long-term investment in a reliable foreign company beats supporting a local startup.
Companies that May Benefit from Current Tariffs
Several US companies are set to see a boost in revenue thanks to the sweeping tariffs imposed recently. From the auto industry to local breweries, there is a lot of momentum for these firms to capitalize on this situation. Here’s one company set to see a major uptick in business
Steel Dynamics (STLD -0.86%) entered the market in 1993. This Indiana-based steel manufacturer processes +1M tons of valuable metals yearly. Notably, the latest sanctions targeting foreign steel and aluminum industries are sure to kick up domestic demand, providing Steel dynamics with a larger market share.
Steel Dynamics, Inc. (STLD -0.86%)
Notably, Steel Dynamics operates plants in the US and Mexico, which may allow it to adjust supply chains in response to new tariffs and trade policies. Additionally, it has consistently ranked in the Fortune 500 and has a history of providing reliable services and products to the market. These factors make Steel Dynamics a smart project to consider.
Tariffs – Reshaping the Global Economy
Tariffs are a powerful tool that, if used correctly, are meant to protect the local economy. However, the scope and scale of which they are being instituted today are unmatched. As such, some believe that economic protectionism will result in another depression. For now, you may want to stock up on essential and costly products originating from countries on Trump’s potential tariffs list.
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