Tariffs: 3 ways to navigate potentially higher prices
Tariffs have been in the news, with some uncertainty around how much the U.S. may impose and how its trading partners may respond. But how could tariffs overall impact the U.S. economy?
The good news is our economy is less dependent on trade than many of its largest trading partners.
This chart shows the United States’ total trade is 24.9% of gross domestic product (GDP), which is much lower than the percentages of its largest trading partners.
This chart shows the United States’ total trade is 24.9% of gross domestic product (GDP), which is much lower than the percentages of its largest trading partners.
On the other hand, the potential for higher prices and uncertainty caused by tariffs could weigh on household and business spending. But a stronger U.S. dollar, which can make foreign goods cheaper in U.S. dollar terms, could partially offset the impact on prices.
What is a tariff?
A tariff is a tax on goods imported from another country. All else equal, tariffs increase the cost of imports, making foreign goods less competitive in the marketplace.
Tariffs and inflation
Prolonged tariffs would likely push U.S. inflation higher, as domestic importers could pass on their increased costs to the consumer. And retaliatory tariffs from other countries could impact industries such as automakers, which have parts crossing North American borders multiple times before final assembly.
Foreign manufacturers and U.S. importers or retailers could choose to absorb part of the cost instead of charging more. But with certain products where profit margins are slim, such as gasoline and perishable food, additional costs are more likely to be fully passed on to the consumer.
3 ways you can prepare for tariffs
You can’t control government policy, but you can take steps to help make your financial situation more resilient against it. If you’re concerned about higher prices, talk with your financial advisor about the following actions.
1. Revisit your budget
The more breathing room you can put between your spending and income, the better off you’ll be if prices increase. You can fine-tune your budget by:
- Substituting or reducing expenses — Look for items that can be swapped for cheaper alternatives, such as generics for brand names. Also, see if you can cut any expenses that aren’t being used or are unnecessary.
- Creating more income — Explore ways to earn more, such as taking on a side job.
2. Refresh your emergency fund
An emergency fund can help with unexpected expenses, and you’ll want to be prepared in case the cost of those expenses (such as car parts) increases. We recommend having three to six months’ worth of total expenses in cash or cash equivalents for emergency needs.
If you’re concerned about uncertainty, holding the higher end of that range may be worthwhile.
3. Consider accelerating large purchases that may be impacted
If you’re already planning to purchase a large item that’s likely to be impacted, you can move up the purchase if you can afford it. Examples could include automobiles or electronics such as phones or computers.
How we can help
With so much uncertainty around tariffs, we recommend you stick with your long-term investment strategy and resist the urge to overreact to headlines. Keep in mind that time in the market has been a better strategy than trying to time yourself into and out of the market.
Your financial advisor can help ensure your investments are aligned with your personal long-term financial goals and help you navigate bouts of market uncertainty.