It’s been hard to open the paper or read a news website recently without seeing a reference to tariffs.
For decades, economists and analysts have been close to unanimous in declaring that the free trade of goods and services delivers greater long-term wealth for nations than protectionism.
However, since his election in November 2024, President Trump has gone against that orthodoxy by announcing plans to impose tariffs on some imports into the United States.
In this article, you can discover what tariffs are, the effect they can have on economies, and how they could impact your financial plans.
Tariffs have historically been used as a defensive measure to protect industries
A tariff is a levy imposed by a government on imports into their country.
The business exporting the goods on which a tariff is applied has to pay a stated percentage of the goods’ value as an additional tax.
Historically, tariffs have been used primarily to shield developing industries from foreign competition, making imported goods more expensive and thus making domestic products more appealing.
However, the new administration in the US is looking to use tariffs far more aggressively, and has made it clear that they plan to use them to help drive domestic economic growth and to realign global trade in their favour.
Tariffs can result in higher inflation
A tariff on imported goods will clearly make those goods more costly to buy unless companies are prepared to reduce their profits by covering the cost of some of the increase themselves.
Although the intention is to encourage consumers to purchase domestic goods, it’s likely that the increased cost of some items and, importantly, raw materials will lead to higher inflation. This could be exacerbated by domestic producers raising their prices because of the lack of competition.
Additionally, the imposition of tariffs by one country can easily lead to a trade war as affected countries apply their own retaliatory tariffs.
Notoriously, the Smoot-Hawley Act introduced after the 1929 Wall Street Crash, which increased tariffs on some US imports, created this scenario. Other countries did likewise, and this was a contributory factor in the subsequent depression being longer and deeper than it perhaps should have been.
The recent tariff announcements have led to market volatility
Since taking office at the end of January, Donald Trump has signed executive orders imposing trade tariffs on almost all imports from Canada, Mexico, and China.
For example on 3 March, The Wall Street Journal confirmed 25% tariffs on goods from Mexico and Canada. As had been widely expected, this was followed by retaliatory tariffs imposed by those two countries on US imports.
At the same time, the US also doubled tariffs on imports from China to 20%.
As a result of these announcements, The Telegraph reported that stock markets had “plunged” , with the Dax index in Germany falling by 1.6% and Japan’s benchmark Nikkei 225 by 2.6%.
US markets were also affected, with Newsweek confirming that all the gains the S&P 500 had enjoyed since Trump’s election in November had been wiped out.
Forbes also confirmed that the tariffs announced could boost US inflation by 0.7%.
The extent to which whether tariffs will be put on UK exports to the US is uncertain
On 12 March, Sky News reported that President Trump had imposed tariffs on all imports of steel and aluminium into the US. This will clearly impact on the UK and Australia, who both export those materials to the US.
At the current time, (18 March 2025) it is not known whether the US will impose tariffs on any UK-specific imports and, if they do, at what level they will be set.
One factor that may help the UK avoid wide-ranging tariffs is that trade between the two countries is relatively balanced.
The Office for National Statistics confirmed that in 2023, the UK imported £57.9 billion of goods from the United States, while £60.4 billion of goods were exported to the US.
Furthermore, a BBC report after a recent meeting between UK Prime Minister, Keir Starmer and the US President confirmed that a trade deal could mean tariffs were not necessary.
However, the global nature of trade and manufacturing, means that it may be hard to avoid some economic harm from other tariffs, as some goods may become more expensive for UK manufacturers and businesses.
Meanwhile, an ABC News report suggested that it was hoped that Australia may avoid any direct tariffs as it currently runs a significant trade deficit with the US.
You should avoid being distracted by short-term market fluctuations
Markets don’t like uncertainty, and something as economically impactful as tariffs imposed by one of the world’s largest economies will certainly set alarm bells ringing among investors.
Because of the 24-hour nature of news reporting, it can be easy to succumb to the alarmist headlines pointing out how much stock markets have “plummeted” and the amount that has been “wiped – off” the value of shares.
It’s important to tune out this undercurrent of bad news, in this case prompted by the introduction of tariffs, and stick to your long-term investment plans.
You should remember three important points:
- Investing is a long-term project, and while short-term volatility can lead investors to behave irrationally, staying calm is key.
- Selling stocks when markets dip, as they have done recently, may well result in you creating a tangible loss out of one that only exists on paper.
- Markets typically recover over time, so selling investments now may mean that you miss out on future growth.
By staying focused on your long-term goals, you should be able to ride out any periods of volatility.
Inflationary pressures could mean you need to focus on managing your money effectively
The biggest inflationary pressure will be felt by those countries introducing tariffs and experiencing price rises. However, given the size of the US economy, it’s likely that all countries trading with the US will see price increases on goods.
As you may well have found when UK inflation peaked at over 11% in 2022, it becomes imperative to manage your money carefully as more expensive goods can mean less disposable income.
Furthermore, the common reaction from central banks is to raise interest rates to control inflation, which can affect the cost of borrowing.
Find out more: 5 ways to manage your finances during a period of high inflation
Get in touch
If you’d like help deciding how, and if, to adjust your financial strategy in light of recent tariff announcements, please get in touch with us.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
This article is for information only, it does not take into account your personal objectives, financial situation, or needs. Please do not solely rely on anything you have read in this article and ensure that you conduct your own research to ensure any actions you may take are suitable for your circumstances. All contents are based on our understanding of HMRC and ATO legislation, which is subject to change.