There is obviously no tariff on lenders (lord knows we have enough financial hurdles), but tariffs do impact the supply and demand of goods like cars, tequila, and lumber, and therefore can impact inflation. Whether the benefits will outweigh the costs remains to be seen. John D. wrote, “Just thought I’d share a counter point to the ‘tariffs are bad’ comments I keep reading. Even if the worst is true, if I must pay more so ‘Timmy’s dad can have or keep a job,’ so be it. Here is the Breitbart Business Digest’s ‘Debunking the NY Fed’s Tariff Tunnel Vision.’”
On the campaign trail this year, President-elect Donald Trump stated that "Tariffs are the greatest thing ever invented." He promised to place tariffs of up to 20% on goods from some countries. He floated the idea of a 60% tariff on imports from China. And he mentioned a 200% tariff on Chinese cars imported to the U.S. through Mexico. How could lenders be impacted, and what is a tariff, anyway?
A tariff is a tax imposed on imported goods, usually to protect local industries and raise revenue for the government. It makes foreign products more expensive, which influences what people buy. Proponents say that tariffs help U.S. workers and businesses. Critics say they negatively impact consumers and artificially support businesses that shouldn’t be solvent.
Tariffs are collected by customs authorities when imported goods enter a country, and the fee goes to the U.S. Treasury. The importer, usually a domestic company, pays the tariff to the government, and this cost is often passed on to consumers through higher prices. Tariffs are taxes on imported goods that are paid by the importers, not the exporting countries. (Know that is a two-way street: California’s top five agricultural exports to China are pistachios, almonds, wine, dairy, and oranges; any tariffs implemented by China on these good impacts farmers.)
Though many economists doubt the effectiveness of tariffs, conceptually, there are potential benefits. They make imported goods more expensive, a potential boon for U.S. businesses. They also bring in revenue for the government, via the U.S. Treasury, to use for public services and projects. As Trump has emphasized, they can be used as a bargaining chip in trade negotiations, encouraging companies to invest in the U.S. or forcing countries to lower their own tariffs or change policies. But tariffs make imported goods more expensive, which can limit product variety and availability (which typically hits lower-income consumers the hardest). Countries often respond to tariffs by imposing their own, which can lead to a trade war that damages both economies (with consumers ultimately paying the price).
Tariffs can have a distorting effect on markets: By protecting U.S. industries from competition, tariffs can make them less efficient and innovative in the long run. The U.S. government has had tariffs in place since 1789. It seems likely that the second Trump administration plans to take them to the next level. Will the consumer buy something at a higher price, or just not buy it at all?
It may be true that consumers are willing to pay more for some goods in an effort to protect jobs in the United States. Others will argue that a free market is best, and that jobs and products will “seek their own level.” Regardless, for lenders, tariffs are part of the expected economic picture for 2025 and beyond. The threat of tariffs is not the only reason why rates have gone up, but we have watched the 2-year and 10-year yields go from 4.19 and 4.28 before the election results to 4.33 and 4.58, respectively, and along with them mortgage rates which are at a 5-month high. Despite campaign rhetoric, the U.S. economy is doing well. Few expect mortgage rates to improve any time soon. Why would they?