With tariffs being the main news topic of the last couple of weeks, it made sense to send out a blog about what they are and how they work. It is important to discuss such economic items with your financial advisor and make sure you understand how things like tariffs can affect your portfolio and thus your overall financial plans.

What Are Tariffs? A Simple Explanation

Tariffs are one of those economic tools that seem complicated, but their basic function is pretty straightforward. At their core, tariffs are taxes imposed by a government on goods imported from other countries. They’re used for a variety of reasons, from protecting local industries to generating revenue, but the way they work follows a common pattern.

How Tariffs Affect Prices and Domestic Markets

When a country places a tariff on an imported product, it increases the cost of that product for buyers within the country. For example, if the U.S. places a 20% tariff on imported steel, that steel becomes 20% more expensive for American companies or consumers who want to buy it. This price increase can lead buyers to turn to domestic alternatives, which support local producers. That’s why tariffs are often called protective measures—they’re meant to shield local industries from foreign competition. Tariffs can also influence consumer behavior, shifting demand away from imports and toward homegrown goods

The Two Main Types of Tariffs

There are two main types of tariffs:

Specific Tariffs – These are fixed fees based on the quantity of goods, like $100 per ton of imported sugar.
Ad Valorem Tariffs – These are based on a percentage of the value of the goods, such as a 10% tariff on imported cars.

Tariff-Rate Quotas: A Hybrid Approach

Some countries also use tariff-rate quotas, where a lower tariff is applied to a certain quantity of imports, and a higher tariff kicks in after that limit is reached. This structure helps balance access to foreign products with protection for local markets.

Why Governments Use Tariffs

Governments impose tariffs for several reasons:

Protect domestic jobs and industries – By making foreign goods more expensive, local products become more competitive.
Retaliate against unfair trade practices – If a country believes its trading partner is dumping goods (selling below cost) or subsidizing exports, it might respond with tariffs.
Raise government revenue – Especially in developing countries, tariffs can be a significant source of income

The Downside of Tariffs: Higher Costs and Trade Tensions

While tariffs can help domestic producers in the short term, they often lead to higher prices for consumers and strained trade relationships. Countries hit with tariffs may retaliate with their own, leading to trade wars that can disrupt global supply chains.

The Big Picture: Weighing the Pros and Cons

In conclusion, tariffs are a powerful economic tool—but like most tools, they come with trade-offs. Understanding how they work helps consumers, business owners, and policymakers make more informed decisions in the global economy. Hopefully, this helps make tariffs a bit more understandable and gives you a basic understanding when discussing such important things such as how tariffs can affect your portfolio and your risk exposure in your portfolios with your financial advisor.

This is being provided for informational purposes only. The views expressed are those of Silver State Wealth Management and do not necessarily reflect the views of Mutual Advisors, LLC, or any of its affiliates. Investment advisory services offered through Mutual Advisors, LLC, DBA Silver State Wealth Management, an SEC registered investment adviser.

How Tariffs Work