Your budget may feel a little tighter in coming months as a result of higher prices on goods coming into the U.S. from Mexico and China.
This week, President Donald Trump announced that the U.S. would impose a 5% tariff on all imports from Mexico, starting on June 10. Those duties would progressively rise to 25% by October, the White House says, unless Mexico takes steps to address illegal immigration.
That news follows a month of escalating trade tensions between the U.S. and China. In early May, the U.S. increased existing tariffs on $200 billion worth of Chinese goods from 10% to 25%, after the two countries failed to come to a trade agreement. China then retaliated , outlining plans to raise tariffs on $60 billion of U.S. goods starting at the beginning of June.
What does this mean for us as consumers? The most common result of governments increasing tariffs or engaging in trade wars is that prices for goods increase.
Here’s what you need to know about tariffs, trade wars, and their potential effects.
Although there have been conflicting reports from government officials about how or if higher tariffs will affect the economy, the reality is that most, if not all of the added tax will be paid by American consumers, not China or Mexico.
Why? Tariffs are taxes on imported products. Companies importing the goods tend to pass on that tax in the form of higher prices. So generally, consumers end up paying more.
For example, products that China is exporting to the U.S. come into the country for consumers to buy at a price the market determines. Consumers had been paying the market price plus the 10% tariff on affected goods since last summer. Now, they could pay that market price plus 25%.
As for Mexican goods, U.S. consumers could end up seeing prices inflate 5% this summer—and even higher, later this year.
Why would the U.S. government want to make things more expensive? Their logic is that higher prices for Chinese goods will encourage Americans to buy domestic goods, which may be more attractively priced in comparison. With Mexico, the Trump administration is using tariffs as a political and economic tool to incentivize the Mexican government to address immigration issues.
Tariffs can also lead to trade wars, which is when countries start playing tit-for-tat with trade barriers.
“A trade war is when one country imposes or raises significantly its import taxes or import duties on another country’s goods,” Richard Ebeling, an economics professor at The Citadel in Charleston, South Carolina, recently told Grow. “Then that other country retaliates with corresponding new or higher import tariffs on the initiating government.”
“At the end of the day, the tariffs are eaten by...the American consuming public,” acting as a tax increase, says Ebeling.
As consumers pay more for goods, the economy at large feels the effects, too. It’s possible that your investments, including those in your retirement accounts, may also get squeezed in the resulting bumpiness in the stock markets.
“It creates more volatility,” Doug Boneparth, a certified financial planner and owner of New York-based financial firm Bone Fide Wealth, told Grow recently about the stock market’s reaction to trade disputes.
The morning after the Trump administration’s tariffs on China increased to 25%, for example, the S&P 500, Dow Jones Industrial Average, and Nasdaq all fell at the start of trading before recovering.
It’s unclear if or when a trade deal between the U.S. and China will finally be hammered out , or what will happen with the Trump administration’s new approach to Mexico. But China has retaliated with new tariffs of its own (and may take further action), which could hurt workers and businesses in certain industries, such as the agricultural sector. Mexico could similarly raise tariffs.
But for U.S. consumers, the best thing you can do is to keep your financial goals in mind, continue saving and investing, and stick to your budget. You’ll probably notice prices going up somewhat, but for now, there’s little you can do about it.
“Investors who have a plan in place and are focused on their financial goals in the long term aren’t going to view short-term volatility as something that they need to concern themselves with,” says Boneparth.
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A version of this story originally ran May 13, 2019.