Though Ferguson Wellman is in the business of investment management, if we were asked to place a bet on what would be Merriam-Webster's Word of the Year 2025, we'd put our money on — tariffs.
The topic of tariffs has been front-and-center in 2025, both in client conversations and content created by our team. In fact, 12 of our last 22 To Coin a Phrase blog posts and one section of last quarter’s Outlook and Insights publication included a focus or mention.
While media headlines suggest tariffs are critical to the framework of the economy, we view tariffs as only one piece of a complex system. To dive deeper into the topic, Joe Herrle, CFA, CAIA, has authored, “Tariffs Today: A Compendium,” a closer look at how today’s tariffs exist in a world that is significantly different from the 1930s.
by Joe Herrle, CFA
Vice President
Alternative Assets
Tariffs have long been used globally to support local industries by incentivizing citizens to purchase domestically made products. At the turn of the 20th century, tariffs were the primary source of tax revenue for many nations. Today, funding comes from income, payroll and corporate taxes. In the U.S., tariffs accounted for approximately 90% of federal income until the Civil War. After World War II, tariffs fell out of favor in developed economies because they often led to reduced trade, higher prices and retaliation from abroad.
In 2018, President Donald Trump broke with this economic orthodoxy by imposing tariffs on imported goods from China and other countries to combat unfair trade practices and reduce the trade deficit. This strategy was also designed to boost domestic manufacturing in the name of national security and economic competitiveness. These measures largely stayed in place through President Joe Biden’s tenure.
Today, the use or threat of tariffs has increased significantly to pursue an even larger set of goals. This host of new tariffs comes even as many economists warn of their negative impacts on the economy.
What is a Tariff?
Simply put, a tariff is a tax imposed on foreign-made goods and is paid by the importing business to its home country’s government. Tariffs are typically calculated as a percentage of the value of goods, like a sales tax.
Who Pays for Tariffs?
Importers are responsible for paying tariffs; however, empirical evidence suggests that the bulk of the cost is ultimately passed on to consumers. This is particularly true for industries with small profit margins, such as retail. If a company in a low-margin industry decides to “eat” the tariff and not raise prices for consumers, they could end up selling goods for less than they cost. Additionally, for essential goods, such as prescription drugs or oil, companies can fully pass on the increased price to consumers, knowing they will make the purchase regardless of the price.
In some instances, exporters may bear some of the brunt by reducing their prices to maintain market share. Also, companies that sell products with a long supply chain, such as cars, may be able to negotiate with suppliers to help shoulder some of the burden. While there are some instances where tariffs do not significantly impact consumers, ultimately the greatest burden of tariffs falls on consumers.
The Objectives of Tariffs
Given the well-documented negative impacts of tariffs, why impose them at all? Tariffs can serve several goals.
1. A Source of Government Revenue
Like all taxes, tariffs are a source of government revenue. In 2024, tariffs accounted for only 1.7% of the U.S. government’s total revenue. For developed nations, this figure typically ranges between 1% and 2%. However, in developing countries, reliance on tariffs is much higher, often reaching double digits as a percentage of total government revenue.
2. Local Industry Protection
In most cases, tariffs are intended to protect domestic industries; they make imported goods more expensive, thereby encouraging consumers to buy locally produced alternatives. We view this objective as a driving force behind the recent tariff measures in the U.S., as the administration aims to revive manufacturing jobs that have been offshored over the past several decades.
Several politically sensitive industries in the U.S. already benefit from such tariffs. For example, sugar producers have been shielded by tariffs since 1789, while the auto industry has profited from the so-called “chicken tax” since 1964, which imposes 25% tariffs on some imported pickup trucks.
3. National Security
National security considerations also play a significant role in the application of tariffs. It is often in a country’s best interest to secure domestic production of critical industries such as defense, semiconductors, industrial metals and healthcare products. In the event of a conflict, having domestic sources of steel, critical minerals, energy and pharmaceuticals becomes essential. For instance, Europe’s reliance on Russia for nearly half of its gas supply has proven problematic, limiting the effectiveness of sanctions intended to help end the conflict in Ukraine.
4. Unfair Trade Practices and Regulatory Parity
Tariffs can also be used to counteract non-tariff trade barriers, such as unfair trade practices and regulatory imbalances. Recently, a common complaint of U.S. companies operating in China has been the forced transfer of technology. In certain cases, China has required foreign companies operating within the country to transfer patented intellectual property, such as trade secrets, in order for them to conduct business—an obligation not imposed on foreign companies operating within the United States.
Additionally, differences in regulatory standards can also give unfair advantages to producers in other countries. Take for example emission and pollution regulations. U.S. manufacturers must comply with stringent air emissions regulations, such as the EPA’s National Ambient Air Quality Standards (NAAQS). Competitors in countries like Vietnam or Bangladesh operate under far less stringent, and therefore less expensive, rules. This regulatory disparity raises production costs for U.S. firms by up to 15%, making their goods less price-competitive in the global marketplace.
Tariffs and Trade Deficits
One of the major aims of the current tariffs is to reduce trade deficits, which is a major point of contention between economists and lawmakers. A trade deficit is simply the difference between the value of goods a nation buys from one country and the value of goods it purchases. Notably large trade deficits are the ones the U.S. has with China, Mexico and the European Union.
At first blush, running a trade deficit sounds categorically undesirable as exporting nations are extracting more money from the U.S. than we are getting in return. However, the additional capital surplus countries hold needs to be invested. And what has been the safest and best growth market for investment? The United States.
Having “surplus” countries (e.g., China) reinvest in the U.S. by purchasing our Treasury securities and bonds allows our nation to run a high budget deficit without the consequences of sky-high interest rates. It also enables the U.S. to continue investing in our nation. In America, our consumption is so high that we lack sufficient savings to meet our investment needs. Foreign investment fills that gap, allowing for greater spending by the American consumer. To reduce our trade deficit, we would either need to consume less and save more or decrease the amount invested in the U.S. In effect, Americans purchase inexpensive goods from China and other countries in exchange for U.S. Treasury securities, which serve as IOUs.
Economic Impacts
With consumers facing higher prices, tariffs present two challenges: higher inflation and lower growth. When both occur simultaneously they result in an economic condition called stagflation. Stagflation is an alarming concept in finance because the cure is painful. Specifically, to spur economic growth, the Federal Reserve usually cuts rates and the government increases spending which typically leads to higher inflation. Thus, policymakers are forced to determine which is worse: high inflation or low growth.
Upon further analysis, there are meaningful mitigating factors on both the growth and inflation fronts. Namely, when faced with higher prices, consumers have the choice of substituting a lower-priced good, thus negating some of the inflationary impacts. As mentioned previously, in some cases the importers and exporters absorb some of the cost increases. Domestic firms can also shift supply chains and import goods from countries facing a lower tariff rate.
The History of Tariffs in the United States
In assessing the potential impacts of tariffs today, one can look to the past. Although the U.S. economy over 90 years ago is very different from today, there are some takeaways from history.
Amid the Great Depression, the U.S. imposed the Smoot-Hawley Tariff Act of 1930, which raised the effective tariff rate on imported goods from 13.5% to nearly 20%. The goal was to raise government revenue, but the fallout was universally negative. Tariff revenue decreased due to the huge decline in demand for imports. Additionally, more than two dozen countries raised retaliatory tariffs on U.S. goods, sparking a trade war. Overall, global trade declined by 66% over four years, U.S. GDP declined sharply and unemployment soared from 8% to 25% by 1933.
It is important to note, that there are fundamental differences in the U.S. economic structure that make these two tariff episodes substantially different in their potential economic impacts. The modern U.S. economy is predominantly service-based. Services currently constitute approximately 70% of personal consumption expenditures, while goods comprise only 30%. In the 1930s, the opposite was true: Goods accounted for approximately 70% and services were the remaining 30%. Since services are generally less directly affected by import tariffs than physical goods, this structural shift provides an inherent buffer against tariff-induced price shocks in today’s economy.
Furthermore, a potential mitigating factor is that the U.S. enters this episode of tariffs in a position of strength. We have a resilient labor market and solid consumer spending. Both household and corporate balance sheets remain strong. Conversely, the economy was in decline in the year leading up to the Smoot-Hawley Act.
Unemployment rose from 3% to 8%, the country was facing an agricultural crisis, bank failures were rampant, the stock market had crashed and consumer spending had fallen by 10%. While there are negative economic impacts from tariffs, we expect today’s economy to be significantly more resilient than in previous periods of high tariff rates.
Outlook
During periods of uncertainty, it is worthwhile to step back from the onslaught of negative headlines and assess longer-term fundamentals. This is especially important when anxiety is high and emotional responses can be detrimental to long-term financial security.
There are still many unknowns about today’s tariff landscape. Examples include which industries will be targeted or spared and how long the measures will last. As we wait for more clarity, we can find perspective on what we do know. Namely, while the path forward will likely be bumpy, it is not uncharted and is far from hopeless.
The U.S. economy is like a snowball rolling down a hill. It just keeps getting bigger. In the long run, economic growth is the product of changes in the labor force and productivity. In terms of population growth and average age of the workforce, the U.S. has the best demographics in the developed world. The U.S. also enjoys the highest productivity momentum anywhere. As such, our economic trajectory remains toward expansion, not contraction.