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This week was one of the sharpest downturns in the stock market we've seen since the early days of COVID-19 5 years ago. The reason is crystal clear: the Trump administration's announcement and implementation of wide-ranging global tariffs on international trade.

I wanted to use this article to collect some thoughts about this action, why it has had such a dramatic effect on the stock market, and what I plan to do with my investments as a response. Much of the information and opinion has been somewhat hysterical and strongly grounded in political opinion, instead of a balanced look at the pros and cons as well as the potential outcomes of this action.

The Tariffs

A tariff is pretty simple, it is just a tax levied by the government on goods entering the country. For example, if there is a 25% tariff on China and a company wanted to import $1 million in steel from there, they would have to pay an extra $250k to the government in order to do so. That's it.

Why are tariffs implemented? There are 3 reasons:

• Protect domestic industry: A tariff can "level the playing field" between how much foreign goods cost vs. competing goods made inside a country. By making domestic goods price-competitive, tariffs can slow down the loss of jobs and industries to lower-cost manufacture in foreign countries.
• Raise government revenue: Like any tax, tariffs add more dollars into the federal government's treasury.
• Creates leverage on trade negotiations: If a foreign country's economy is largely dependent on exports, tariffs from the importing country can be a catalyst to renegotiate trade agreements to more favorable terms.

These are the perceived benefits of implementing tariffs, but what are the costs? Here are the main ones:

• Higher cost of goods: Consumers lose the benefit of lower-cost foreign goods. Nominal costs rise to a point where domestic industry is more competitive, but it remains more expensive for consumers.
• Trade wars: Foreign producers may retaliate with higher tariffs of their own, making exports from domestic producers more expensive overseas.
• Inefficiency and uncertainty: Tariffs are indisputably an artificial price control, which prevents optimal resource allocation and efficient markets.

So, those are tariffs in a nutshell. One thing that is important to recognize (and VERY germane to this site) is that tariffs are usually applied to *products*, not *services*. There are some countries (like Germany and France) that levy digital services taxes on revenue earned inside their country by foreign firms. The new Trump tariffs do not tax service revenue - but foreign countries may look to implement or raise them in retaliation.

Why Tariffs Are Being Implemented Now

The "Trump tariffs" represent an "across-the-board" 10% tax on all imports, with higher rates for certain countries.

These higher rates are (purportedly) based on how much American goods are being taxed for import into those countries. For example, imports from China will be taxed at the 10% rate from above, but also an additional 24%, bringing the total tariff rate up to 34%. The main reason for this was to attempt to balance a U.S. trade deficit with China of almost $300 billion.

China responded in kind, implementing a 35% tariff on U.S. goods entering its country.

The U.S. government has identified several adverse domestic impacts of 3 decades of globalization that it is attempting to address with tariffs:

• Trade deficits and unfair trade practices: Globally, the U.S. runs a $1.2 trillion trade deficit, meaning it imports FAR more goods than it exports. In fact, it has trade deficits even against countries with far fewer resources that rely on it for national security, like Canada, Mexico, and Vietnam. This has led to allegations of unfair trade practices (including foreign tariffs), and "taking advantage" of the United States to grow their own economies.
• Destruction of domestic industries and jobs: Globalization has undoubtedly decimated many domestic manufacturing industries. Domestic textile and apparel manufacturing has dropped by 80% since 1990, electronics by 60%, automotive by 50%, steel by 60%, furniture by 80%, industrial equipment and machinery by 40%, pharmaceuticals by 40%, shoes and sporting goods by an astounding 90%.... And these are just the largest ones. About 7 million U.S. industrial jobs have been lost in the last 50 years due to globalization.
• Spiraling budget deficits and national debt: The federal budget deficit will be close to $2 trillion for 2025 - meaning the government spends that much more than it brings in. As a result, the national debt has exploded to $37 trillion, with an annual interest cost of $478 billion annually. Tariffs will bring in additional revenue to help pay down the debt and narrow the deficit. Also, economic uncertainty can have the side effect of lowering interest rates, making the debt less expensive to re-finance in the near term.
• National security: Globalization has accelerated the offshoring of industries that are critical to national security, such as semiconductor manufacturing. Tariffs are leverage to help bring these industries back in-country.

What Could Go Wrong?

A LOT!

Retaliatory tariffs, like China's 35% rate, are not too surprising. However, I don't see these as a super-effective response. In a tariff war, the country with the most imports "holds the cards", and that is clearly the U.S. in this case.

One thing I'm watching are potential foreign taxes on digital services, which are dominated by U.S. tech companies. This would be an effective way to punch back against U.S. industry, as many tech giants earn a good deal of revenue overseas. On the other hand, many foreign countries (like the EU) have already imposed draconian rules on these firms, and tariffs could be a leverage to get easement on those.

Cost of goods are clearly the biggest potential impact. Tariffs are going to make a lot of things the U.S. doesn't produce much of - apparel, electronics, furniture, etc. - a lot more expensive, at least in the near term. Even domestically-produced goods could see rises in costs as price competition becomes less intense. While I don't necessarily see this leading to inflation (which is a measure of money supply), it could certainly lead to rises in cost of living.

How I'm Approaching Tariffs With My Portfolio

Largely, I am in a "wait-and-see" mode, with cash freed up for potential purchases. I'm optimistic that we are approaching a good time for stock buyers, for several reasons:

1. Tariffs are artificial: Tariffs are an artificial, largely arbitrary, and easily modified trade lever. As quickly as they are levied, they can be drawn back or removed. I expect many negotiations to take place over the upcoming weeks and months that will likely lead to better trade agreements, which in the process should lead to a rebound in confidence and stock prices.
2. Improved government balance sheet: The current administration is focused on improving the federal balance sheet, with tariffs being a key component on the revenue side. A better balance sheet means less need to print money, which means less inflation. Longer term, tariff revenue could replace contributions from individual income tax (and other taxes), freeing up more consumer dollars for purchases.
3. GreenDot Stocks picks are not in the crosshairs: Most of our picks are service-oriented and overwhelmingly domestic, meaning they should not feel a major impact from tariffs, at least initially. I've always kept geopolitical concerns high in mind when choosing these stocks, and that should pay off for us in this current turmoil. Additionally, they all have strong economic moats that should help them retain customers even if prices need to go up.

Conclusion

The current tariff shock has been pretty remarkable, sending the major indices down well over 10% in just a few days this week. While I believe there is good reason for the uncertainty and economic fears, I also feel there are valid reasons for this trade action. What's more, I see it as largely a "shock-and-awe" negotiating tactic by the sitting President, who is known for such things, to stimulate discussions on re-negotiating current trade deals that have clearly taken advantage of the United States' economic strength. I don't believe such (frankly) ridiculous tariff rates can or will be sustained for any long period of time.

For that reason, and given the largely isolated nature of most of our picks, I'm in a "wait-and-see" mode, with cash readily available for deploying into new investments at great prices.

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