Tariffs are back in the headlines—and for good reason. As global trade tensions heat up and economic stakes grow higher, understanding tariffs has become essential for investors, business owners, and consumers alike.
Here at James Investment, we want to help you make sense of the forces shaping markets. Tariffs are one of those forces—a strategic tool that shifts economic power, reshapes global supply chains, and yes, can impact your portfolio.
Let’s explore what tariffs really are, why governments use them, and what they mean for the broader economy through four key lenses: decoupling, rebalancing, negotiating, and funding.
What Is a Tariff?
Simply put, a tariff is a tax on imported goods—typically calculated as a percentage of the product’s value. While importers pay this tax initially, the cost often finds its way to consumers through higher prices. Under U.S. law, presidents have considerable authority to adjust tariffs in response to unfair trade practices, national security concerns, or during wartime.
While tariffs theoretically protect domestic industries, their effects run much deeper—touching everything from international relations to company earnings reports.
1. Decoupling: Breaking Economic Dependencies
Increasingly, governments use tariffs to reduce economic dependencies—especially when security concerns arise about relying too heavily on a single country. In recent years, the U.S. has actively tried to decrease its reliance on Chinese manufacturing by incentivizing companies to look elsewhere.
Is it working? The numbers suggest some movement:
Between 2018 and 2023, U.S. imports from China fell by 20%, while imports from Mexico jumped by 38%. This appears to support the “onshoring” or “near-shoring” narrative. However, there’s more to the story—Chinese companies have begun establishing operations in Mexico, allowing products to carry a “Made in Mexico” label while still incorporating Chinese components.
What’s particularly telling is that during this same period, Mexico’s imports from China increased by 37%. This suggests a more complex dynamic: Chinese companies are increasingly setting up manufacturing facilities in Mexico, importing raw materials and components from China, and then exporting finished products labeled “Made in Mexico” to the U.S.
This pattern reveals how challenging true decoupling can be, particularly for products requiring specialized manufacturing or integrated supply chains. The goods that were easiest to source elsewhere have largely been shifted already, leaving behind products that are more difficult or impossible to substitute—those requiring specialized manufacturing capabilities, specific technical expertise, or complex supply chain integration that took years to develop.
Nevertheless, tariffs are accelerating a shift away from traditional U.S.-China trade patterns, encouraging businesses to diversify their suppliers and rethink their logistics strategies.
2. Rebalancing: Closing Trade Gaps
Tariffs also help rebalance trade relationships. The implementation of tariffs represents a notable shift from the free trade paradigm that dominated U.S.-China relations for decades. This previous relationship created a complex strategic dynamic best understood through game theory.
In absolute terms, free trade delivered clear benefits: lower prices for everyday goods, expanded markets for American companies, efficiency gains through specialization, and innovation spurred by competitive pressures. American consumers, particularly lower and middle-income households, gained access to more affordable goods, while many U.S. companies prospered by tapping into China’s growing market.
However, in relative terms, China gained more from this relationship—achieving rapid industrial development and technology transfer, massive trade surpluses with the U.S., accelerated GDP growth (often 2-3 times faster than U.S. growth), and economic leverage that translated to greater geopolitical influence. China leveraged access to U.S. markets and technology to transform from a regional power to America’s primary geopolitical competitor more quickly than anticipated.
This imbalance has troubled policymakers, who view tariffs as a means to reduce trade deficits and revitalize U.S. manufacturing.
Take the 2018 tariffs on Chinese washing machines. Prices predictably increased—but with an interesting twist. A study in the American Economic Review found dryer prices increased too, despite not being subject to tariffs. This phenomenon, sometimes called “excuseflation,” shows how businesses occasionally raise prices across the board during tariff periods to offset various pressures.
Rebalancing trade remains a long-term goal. While tariffs may disrupt supply chains initially, they’re often implemented with an eye toward supporting domestic growth and reducing vulnerability to foreign market fluctuations over time.
3. Negotiating: Creating Leverage
Sometimes tariffs aren’t even meant to stick around—they’re meant to send a message.
Governments frequently use tariffs (or simply the threat of them) as negotiating chips to achieve diplomatic or economic objectives. From a game theory perspective, free trade isn’t a purely zero-sum game (where one side’s gain equals another’s loss), but rather a positive-sum game in absolute terms where both countries can become wealthier simultaneously. Tariff wars, however, tend to be negative-sum games—when both sides implement protective measures, consumer prices rise in both countries, supply chains get disrupted, market efficiencies are lost, and overall economic growth slows.
This helps explain why free trade persisted despite relative power shifts—the absolute gains were important enough to outweigh concerns about relative position for many years, at least until the pandemic highlighted U.S. vulnerabilities from overdependence on Chinese goods.
Recent administrations have viewed tariffs as a means to gain leverage in negotiations and address specific issues like drug trafficking and immigration. Some analysts suggest that tariff threats may be primarily a strategic maneuver designed to pressure trading partners into lowering their own trade barriers or making other concessions, without necessarily implementing the threatened tariffs.
This approach feels particularly relevant in today’s geopolitical climate. While tariff threats once triggered market skepticism, actual implementation has created volatility, especially when combined with labor shortages and supply constraints. Still, when used judiciously, tariff threats can achieve policy goals without causing the full economic disruption that comes with prolonged trade conflicts.
4. Funding: Generating Government Revenue
Finally, tariffs have historically served as a revenue source for governments.
Before income taxes became widespread, tariffs were among the primary ways the U.S. funded its budget. Their role today is more limited but still significant. The National Economic Council head, Kevin Hassett, estimated that a 10% tariff on Chinese imports could generate between $500 billion and $1 trillion over a decade.
The revenue potential isn’t unlimited, though. If trade volumes decrease or other countries impose retaliatory tariffs, the economic impact could offset revenue gains. Additionally, tariffs can contribute to inflation, particularly affecting lower-income households that spend proportionally more on goods.
The impact of tariffs is not evenly distributed across society. Lower-income households bear a disproportionate burden of tariff-related price increases since they spend a larger proportion of their income on physical goods. Specific industries face particular vulnerabilities—the auto industry, with its highly integrated North American supply chain, is especially susceptible to tariff disruptions.
Corporate profit margins face particular pressure as companies must decide whether to absorb increased costs or pass them on to consumers. The ability to absorb these costs depends on a company’s existing profit margins and cost structure. For instance, footwear manufacturer Crocs anticipated an $11 million headwind to gross profit due to additional tariffs.
Nevertheless, when used alongside broader fiscal tools, tariffs remain one way to fund specific priorities—though one that comes with clear trade-offs.
The Bottom Line: Strategic Tolls with Far-Reaching Effects
Despite often being portrayed as blunt instruments, tariffs are multifaceted tools. They serve strategic, economic, and political purposes—from reshaping global trade flows to strengthening domestic industries.
Several factors may mitigate the inflationary impact of tariffs. First, exporters might choose to absorb part of the tariff costs by lowering their prices to maintain market share, while retailers might accept reduced profit margins rather than pass on the full cost to consumers. Second, tariffs typically represent a one-time price shock rather than an ongoing inflationary pressure.
However, new rounds of tariffs could have a more pronounced inflationary impact than previous measures, as companies face fewer options for avoiding these costs through supply chain restructuring. The goods that remain sourced from China are likely “stickier”—harder to substitute or source elsewhere.
Like any tool, tariffs’ effectiveness depends on how they’re used. Poorly timed or overly aggressive tariffs can backfire, raising consumer prices, squeezing profit margins, and hampering economic growth. Used thoughtfully, however, they can help rebalance power dynamics, support negotiations, and drive needed reforms.
For you as an investor, understanding both the purpose and impact of tariffs helps you make more informed decisions—especially in a world where trade tensions affect everything from inflation rates to quarterly earnings.
At James Investment, we keep a close eye on global policy shifts and help our clients navigate through market volatility. If you’re wondering how trade policies might affect your investment strategy, our team is ready to provide guidance tailored to your financial goals.
