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Towards the end of April, the Trump Administration announced a comprehensive set of tariffs. If fully implemented, this tax increase will apply to all products imported into the United States from every country in the world. The Trump Administration intends to set a minimum 10% tariff on all imports. However, the specific rates vary across different countries and trading partners, with some significantly higher.
If this set of taxes goes through, the most immediate impact will be higher prices and a potentially unstable job market. About one-third of American purchases involve imports, all of which would get more expensive under this tariff scheme. Consumers have already begun anticipating that, cutting back on their spending and expressing increased pessimism about the economy ahead.
Businesses of all categories can expect higher costs. Small businesses will likely be affected the most. We’re already seeing the likely future reflected in the ongoing stock slide since Trump’s announcement.
Here’s what you should know.
A financial advisor can help you manage your portfolio risk during times such as these.
What Are Tariffs?
Tariffs are a specialized tax levied on imported physical goods. The domestic importer pays this tax, and it’s collected when a taxed product crosses the border.
For example, say that a U.S. company imports a $100 bottle of wine with a 10% tariff in place. That company would owe $10 in taxes on that import, effectively raising the total price of that bottle to $110 – $100 for the purchase, $10 for the taxes. Tariffs only affect physical products, not services purchased from foreign firms.
Tariffs are collected in the same country where they are passed. If the United States passes a tariff, it’s collected by the United States Treasury. With the tariff being paid by American individuals and companies. This raises the cost of buying products from overseas. Importers can manage those new costs on a case-by-case basis. In almost all cases, companies manage tariffs by passing most of the new costs along to consumers in the form of higher prices, while absorbing some of the higher costs in the form of lower profit margins.
It’s extremely rare for companies to successfully pass the costs of tariffs along to foreign exporters.
Why Institute Tariffs?
Historically, tariffs were used as a major source of government revenue. During the 19th century, tariffs generated between 50% and 90% of all U.S. government income. However, beginning with the 20th century, tariffs become disfavored as a revenue tool. Most, if not all, major economies have stopped their use and, at time of writing, these taxes make up less than 2% of all U.S. government revenue.
Instead, mainstream economics now suggests two reasons for imposing tariffs: protectionism and level-setting.
Protectionism is the practice of protecting domestic industries from foreign competition. By raising the price of imported goods, tariffs make it comparatively less expensive for domestic industries to make and sell their products.
In most cases, economists consider protectionism harmful. With protectionism, tariffs artificially raise prices, slow trade and advantage less efficient businesses over more efficient competitors.
However, temporary protectionism can allow what’s called “bootstrapping,” in which tariffs protect domestic industries while they launch and reach maturity. This can be particularly effective for industries with high startup costs or other barriers to entry, where domestic companies can become competitive if they’re given the time to build their initial business. In other cases, economists sometimes recommend long-term protectionism for certain essential industries. For example, those related to national defense. In these cases, market efficiency is offset by other public policy concerns.
Level-setting is the practice of using tariffs in response to foreign trading practices. This can mean using tariffs as a negotiating position, in which a government offers to reduce or eliminate its tariffs if a foreign trading partner changes their own laws. Or a government can use tariffs to offset anticompetitive behavior. For example, say a government extends extensive grants or zero-interest loans to domestic businesses. A country might raise tariffs on that country in an effort to level the playing field for their own companies.
How Do Tariffs Affect Consumers?
Tariffs primarily affect consumers by raising prices.
As noted by the Council on Foreign Relations, among many other authorities, “most economists find that the bulk of tariff costs are passed on to consumers. This is particularly true for industries with small profit margins, such as retail.” In fact, tariff costs typically extend beyond the directly taxed industries. Economists find that domestic industries also raise their prices in response to a more expensive market overall.
“That cost,” said Aaron Cirksena, Founder & CEO of MDRN Capital, “usually gets passed straight through to the consumer by prices on store shelves skyrocketing. Whether it’s groceries, electronics, or everyday essentials, you’re paying more for the same stuff not because it’s better, but because it’s more expensive to bring in.”
Prices increase on more than just finished products. In the United States many, if not most, tariff costs affect what are called “inputs.” These are the raw materials or intermediate-stage parts that go into making a final product. Consumer products in the United States are often produced using inputs purchased and shipped from elsewhere. As tariffs raise the costs of these input products, they raise the costs of all final products, as well.
The diffuse nature of imports, from final products to raw materials, makes it difficult to pin down the exact impact of tariffs. However, an estimate from the Federal Reserve suggests that imported products account for around one-third of all consumer spending on physical products. This applies broadly, from imported finished products to domestic products with significant foreign inputs. The universal tariffs announced by the Trump Administration will affect that entire basket of spending, making all of these products more expensive.
Tariffs Affect Lower-Income Consumers Most
If these tariffs remain in place, households will likely feel the impact of higher prices relatively quickly.
“Discretionary spending, which includes things like dining out or family vacations, often gets squeezed first,” said Arron Bennet, CEO at Bennett Financials. “As people feel the pinch in one area, they may cut back on others. The impact on low- to middle-income families can be more pronounced, as they spend a larger portion of their income on essentials like food, transportation and utilities. Ultimately, families may also need to adjust savings plans or reduce contributions to retirement accounts to absorb the increased cost of living.”
In this way, tariffs work the same as sales taxes, property taxes and other flat-tax schemes. Lower-income households pay proportionally more of their income to these taxes than their wealthier counterparts. A $50 grocery bill is a smaller share of income for a family making $100,000 than for a family making $50,000, so the wealthier family is less likely to notice if that grocery bill ticks up to $60. Too, wealthier households and businesses usually spend more of their income on services rather than products, which are not directly affected by tariffs.
The same is true for smaller businesses. A small business or one with narrower margins has less ability to absorb the shocks of tariff-related price hikes. They typically have to pass more of those costs along to their customers, becoming less competitive relative to larger businesses. Discretionary-spending industries, like bars, restaurants and many retail shops, often see a noticeable loss in business due to these higher prices, as customers cut back on unnecessary spending.
However, consumers and businesses at all levels are affected by the higher prices that a widespread tariff scheme will introduce. Households have noticed this, and the University of Michigan’s Consumer Sentiment Index has steadily dropped for the past several months. This index, which measures how individuals feel about their current and future finances, rated 57.0 in March 2025, as compared with 79.4 in March 2024. Investors have noticed, as well. The S&P 500 initially lost more than 10% of its value, a drop of more than 600 points, when the Trump Administration announced the tariffs, but has since recovered at the time of this writing.
If you need help managing your finances, consider reaching out to a financial advisor.
Significant Legal Questions Remain
U.S. customs agents have already begun collecting these taxes. This creates the first broad opportunity for parties to challenge the law, as courts typically require plaintiffs to have suffered a realized harm before they sue. That is to say, someone cannot sue based on a tax that might be collected. They can typically only sue for money they have actually lost. This is a rule known as “standing.”
Multiple parties sued shortly after the Trump Administration’s announcement. Many more are likely to sue now that standing can be more clearly established, and the outcome of these lawsuits is highly uncertain. The Constitution explicitly gives Congress authority over all taxes, including foreign commerce such as tariffs. However, Congress has also passed laws that give the President some authority to unilaterally announce tariffs in specific contexts. Most notably, the President can levy tariffs during national emergencies and in cases of national security.
President Trump, alongside his announcement on tariffs, announced a state of national emergency related to trade.
Most legal experts agree that the President’s tariffs do not meet any reasonable interpretation of the underlying statutes. They suggest that there is no national security or emergency context for, say, taxing French wine, Canadian timber or Chinese toys, and that arguments to the contrary are a mere pretext.
It is unclear how courts will address these arguments.
What Should Households and Investors Do?
So, what should you do in response to all of this? In the immediate future, move slowly.
As Cirksena said, tariffs put “pressure on budgets that are already tight as it is. When essentials go up in price, families have to cut back on the spending, dip into their savings, or even rely on credit cards to help… People will become more cautious.”
That caution is, in general, a good place to start. From a budgetary standpoint, anticipate general uncertainty, but likely inflation.
The first consequences of these tariffs will likely be chaos. Beyond the uncertain legal status of these taxes, the Trump Administration itself has been unclear about the intended nature of its tariffs.
Representatives from the administration have said, at alternate times, that the new tariffs will create jobs by onshoring industry, that the taxes will raise $6 trillion in new revenue and that the tariffs are a bargaining chip to address unfair global trade practices. These explanations are mutually exclusive and represent entirely different intended durations and enforcement practices for tariffs.
If the tariffs are collected (which would raise revenue) it means that imports have continued uninterrupted. This means there’s no room for domestic industry to grow. On the other hand, if these tariffs are a bargaining position, it means that they will be waived as part of negotiations. This allows for neither protectionism nor revenue.
Compounding the uncertainty, the Trump Administration set its tax rates based on a formula which confuses the concepts of trade deficits with trade barriers. As with any first principals error, this makes it difficult to know what the Administration’s long-term goals or practices will be, as its stated explanations do not apply to the matter at hand.
So for the moment, consumers and businesses should approach this as a deeply uncertain issue. One that will likely increase prices in the short (and possibly long) term.
If the Trump Administration stands by these tariffs, by its own estimates, prices will increase by approximately $6 trillion across the economy. There’s no way to forecast what percentage of that will be passed on to consumers vs. absorbed by businesses. However, historic practice suggests that most of those price increases will be reflected on the store shelves. One analysis from Yale suggests that consumers should expect about $3,800 per year in additional costs. This would likely be felt significantly in low-cost consumer products, such as food and daily essentials, as well as in the energy industry, which is historically sensitive to global trade disruption.
Prepare for how and where you can reduce household spending if this ends up squeezing your budget. If possible, also shore up your emergency fund. Widespread consumer disruption also tends to disrupt the business environment, which can lead to job losses. That concern has been compounded by stock market losses, which have already begun to approach recessionary levels at time of writing.
Investors should follow the same advice. Treat this as a time of extreme uncertainty. There’s no way to know what the business environment will look like in the weeks or months ahead, so prepare for high volatility. For individuals, the best practice is often the same as always. Continue following your plan and invest for the long term. It’s rarely wise to sell assets in the face of short-term losses. Stick to your plan, understand that the market is currently fluctuating, and don’t panic.
A financial advisor can help you create a plan that takes your situation and goals into account.
Bottom Line
On April 2, the Trump Administration announced a sweeping set of tariffs that will be levied on every country trading with the United States. This tax scheme has created far more questions than it answers, but here’s what you should know so far.
Tips on Understanding Recessions
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- Despite all the recent talk, the U.S. economy is not currently in a recession. While there is reason to be concerned about uncertainty and potential inflation, it’s also very important to understand what a recession is.
- Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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