Tariffs: What Does This All Mean?

The Impact on Markets, Real Estate, and Your Wallet

Political Disclaimer: I don’t do politics. I do economics. I’m not here to argue whether tariffs are good or bad or to stump for one side or another. Tariffs are a tool, sometimes used effectively, sometimes not. My goal is to explain what we know and what I think it could mean for the economy.

Big news on April 2nd from the Trump administration on tariffs. This is all fresh, so things could change in the coming hours, days, or weeks. I’ll keep you updated.

The Basics: What Is a Tariff?

A tariff is a duty (tax) imposed by the government of a country or customs territory, or by a supranational union, on imports (or, exceptionally, exports) of goods. Besides being a source of revenue, import duties can also be a form of regulation of foreign trade and policy that burden foreign products to encourage or safeguard domestic industry.

How Tariffs Affect Pricing

Ok got it, so you tax things coming into the country. So that means it can be solved in a couple of different ways:

Exporter Eats It: The companies sending their goods decide to absorb the cost and make less profit.
Raise Prices: The companies pass the cost onto consumers, making products more expensive.

People have been going nuts in the comments and various articles and such on which one will come to pass. What I hear almost no one saying, but is usually the truth is this: it will be some combination of the two.

What Did President Trump Actually Say?

Everyone gets hit: A 10% tariff on all exports to the U.S.

Some get hit harder: Certain countries face significantly higher tariffs:

China: Up to 54%
Canada & Mexico: 10%
European Union: 20%
Vietnam: 46% (this is basically a China tariff since many Chinese goods route through Vietnam)
Japan: 24%
South Korea: 25%
India: 26%
Cambodia: 49% (same logic as Vietnam)
Taiwan: 32%

Start Date: April 9th

Cliff Notes:

Everyone can get it. Asia and the EU are really catching tariff heat.

Alrighty, how does the market like it?

Well, the fact that this was announced after the market closed tells you a lot about what they expected. Futures markets hated it. Since a picture says a thousand words, here’s a chart of the DOW futures market as of 3:40 PM Pacific on April 2nd.

I’m not an economist, just someone passionate about the economy, but let’s just say futures markets are not happy. Yikes.

Plan or Negotiation Tactic?

I’ve been on record saying that I thought Trump was using tariffs as a negotiation tactic, get as much as possible at the table, then back off. Yeah… I whiffed that one.

Looks like he is ready to go full boogie on these based on this announcement. However, there’s one caveat: Trump said he would consider lowering tariffs if other countries “terminate your own tariffs, drop your barriers.” So maybe this is still a negotiation play? But I don’t think the markets thought Trump was going to go this hard in the paint on tariffs at least based on its reaction. It really reads to me that Trump is trying to flex on most of the world to get them to the negotiation table.

What Does This Mean for the U.S. Economy?

Bad for your 401(k): If the futures trading is any indication, this will be a rough near term for our 401k’s. So maybe take that tracker off your phone for a bit, you’re not going to want to look at it.
Inflationary: I don’t see a way this isn’t inflationary near term. Long term it could level out or back off but near term, I think things are going to get more expensive.
Good for interest rates: In general, when there is a downward move in the stock market there is a “flight to quality” which just means safer investments that will bring some return while they wait out the storm. In short, when the stock market drops, investors move toward safer assets like 10-year Treasury notes and 30-year mortgage-backed securities. As demand for these increases, their yields (expected returns) decrease, making borrowing cheaper. I know that sounds counterintuitive.

Two Possible Outcomes

Full-Blown Trade War - This is the worst-case scenario. This would be where other countries say "two can play it that way" and they increase their tariffs on us, then we’d have to increase the tariffs on them and we just go back and forth tariffing each other to death. This can lead to stagflation which is where the economy stalls but inflation also rises. This happened to us as a country in the 70s due to an oil shock. No way to sugarcoat this: this would go from volatile to bad if a full-on trade war manifests itself in earnest.
Negotiations Continue - Other countries say something like “WOW, he was serious guess we better work this out, and fast”.

Opinion

I am (for now) still in the “This is to bring people to the negotiation table” camp. The U.S. is basically the world’s consumer. It’s tough to have a strong economy without access to the U.S. market or with significantly higher costs to access it.

This is a game of Global Chicken. We’ll see who blinks first.

Oddly, this could be a silver lining for real estate (to the extent that economic slowdowns can have silver linings). Here are two charts that tell the story.

DOW Futures Graph: This doesn’t always predict how markets will open, but usually, it does. And this was a BIG move down. Today is just as bad.

"Silver Linings" Graph: I’ve talked already about how the 10-year treasury and 30-year fixed rates tend to move together… this above graph is the trend line for the 10-year treasury. We haven’t had a near 3 handle (just jargon for “below four percent”) since September of last year and we had a robust rebound in residential real estate with buyers coming back into the marketplace and refi’s spiking as well.

Final Thoughts

The next few days and weeks will be bouncy. We’ll have to see how all this plays out but this will near term be really bad for your 401k but could be good for interest rates and real estate.

Stay tuned, I’ll keep you updated.