How Tariffs and Trade Wars Could Affect Your Wallet

President Donald Trump’s love for tariffs is no secret. On the campaign trail and throughout his time in office (both times), he has taken almost every chance he gets to talk about his plans to use tariffs to boost revenue and to fix trade imbalances with other countries.

“The word tariff, to me, is a very beautiful word because it can save our country, truly . . . We can turn our country around, make it strong, and then guard it with tariffs,” Trump said during an interview with Dave Ramsey a month before Election Day.

Now that he’s back in the Oval Office, Trump is following through on his campaign promise to impose wide-ranging tariffs—and, in the process, potentially sparking an international trade war with friends and foes alike.

But hold up. Unless you have a degree in advanced economics, you’re probably wondering what a tariff is and why people are losing their hair (and sleep) over a potential trade war. More importantly, you’re probably asking how all of this will affect your money and your investments. Let’s break it down.

What’s a Tariff?

First, a tariff is a tax that a government places on goods imported from another country—anything from tennis shoes to computer chips. A country may import retail items (like TVs) or raw materials (like steel or corn).

There are basically two types of tariffs: ad valorem tariffs and specific tariffs.

An ad valorem tariff is a fixed percentage tax on the value of an imported good. So if the United States imposed a 10% ad valorem tariff on all foreign coffee and you imported a $20 bag of coffee beans from Colombia, you’d pay $2 in tariffs in addition to the coffee’s original price.

A specific tariff is a fixed amount per unit that doesn’t change if the international price of the good goes up or down. So if the U.S. imposed a $5-per-pound tariff on all foreign coffee, you’d pay an extra $5 on any coffee you bought from outside the country, whether it was Ethiopian coffee originally priced at $10 per pound or a $100-per-pound bag of Blue Mountain (that’s the good stuff!).

Any country can impose a tariff on goods from any other country, but many countries are bound by existing trade deals and trade rules—and by potential retaliation from other countries—that could make tariffs messy to implement.

Why Do Governments Impose Tariffs?

The theory behind a tariff is simple—at least on paper. When taxes are imposed on an imported item, individuals and companies that need the item have to pay more for it.

Market chaos, inflation, your future—work with a pro to navigate this stuff.

Why would a government want to make it more expensive for its citizens to buy stuff from other countries? There are usually three reasons why a government might impose tariffs on other countries or specific goods, and Trump has cited all three as goals for the tariffs he’s introducing:¹

1. Regulate Trade and Strengthen Economic Security

Tariffs are used to control the flow of goods between countries by making imported goods more expensive. This can be done for several strategic reasons, from balancing trade deficits (importing more than you export) to becoming less dependent on foreign goods from certain countries or specific industries.

If a government thinks trade with another country is getting unbalanced, it might tax certain items from that country. For example, the U.S. imports more goods from China than any other country does—to the tune of $438 billion in 2024. On the other hand, the U.S. exported just $143 billion in goods to China that same year.² The gap between those two amounts—$295 billion—is the trade deficit.

A tariff could be used to potentially close a trade deficit gap, or it could be used as an aggressive negotiating tactic to try to work out a new trade deal with another country. But sometimes that can backfire by inviting retaliation from the country on the receiving end of the tariff, leading to a trade war.  

2. Protect Domestic Industries and Preserve Jobs

Tariffs are often used to shield local businesses from foreign competition by reducing the flow of goods into the country. And supporters say that by protecting those domestic industries, tariffs could help keep certain jobs from moving overseas or even create jobs in some cases, particularly in manufacturing.

Let’s say the U.S. placed a tariff on foreign steel to help create a level playing field in the steel industry and help U.S. companies thrive, for example. That means if U.S. companies continued to buy foreign steel, they’d pay more for it.

To avoid the higher prices on imported (foreign) steel, U.S. companies could buy their steel from a domestic (U.S.) supplier at a better price. But while tariffs might make U.S. steel prices more competitive, the price of U.S. steel might also rise thanks to reduced supply and increased demand.

If that happens, domestic producers may not always offer a better price—just a relatively more competitive one compared to imported steel subject to tariffs. Again, this is in theory.

3. Generate Revenue

Tariffs are taxes, and taxes are used to generate revenue. When a foreign product is tariffed (or taxed), the government collects money from the business when it imports that product into the country. Some estimates show that Trump’s tariffs could increase federal tax revenues by about $171.6 billion in 2025 and raise about $2.4 trillion over the next decade.^3,4

But it’s generally understood that businesses pass on the cost of tariffs to their customers. . . making it highly likely that you’ll be the one who ends up paying the tariff through higher prices at the checkout.

Another potential downside is that tariffs could wind up pushing foreign companies to sell their items in other countries instead of in the U.S., leading to fewer imports coming into the country and less tariff revenue to collect.

What’s Happening With Tariffs Right Now?

On his first day back in office, Trump signed an executive order directing certain Cabinet secretaries to take a closer look at trade practices and bring him recommendations for tariffs by April 1, 2025.⁵

That sparked several rounds of will-he-won’t-he drama as Trump began planning and threatening (and, in some cases, delaying or withdrawing) several new tariffs. These tariffs were aimed at multiple countries—specifically against China and, to the surprise of many, Canada and Mexico—and at specific goods (cars, steel, aluminum and copper, for starters) during his first two months in office.⁶

President Trump took his tariff plan to another level during a Rose Garden event on April 2, 2025 (which the administration referred to as Liberation Day) when he announced the following tariff measures:

• A 10% baseline tariff on all imports
• Higher tariffs on specific countries like China (34%), Vietnam (46%), the European Union (20%), and dozens of others
• A 25% tariff on all foreign-made vehicles.⁷

Altogether, the new tariffs were set to increase the overall U.S. tariff rate on all imports to 22%—the highest tariff rate since 1910 (and up from just 2.5% in 2024), according to Fitch Ratings’ U.S. economic research chief.⁸

The tariffs sparked a trade war with multiple countries around the world and immediately sent shock waves through Wall Street and corporate America. Over the next two days, the stock market lost a record $6.6 trillion in market value, the largest decline since the beginning of the COVID-19 pandemic back in March 2020.⁹ (We know. Ouch.)

Then on April 9—after several more days of stock market turbulence, trade war escalations with China, and dozens of countries lining up to negotiate new deals with the U.S.—Trump suddenly announced there would be a 90-day pause on the “reciprocal” tariffs for most nations, but not for China.¹⁰ Instead, Trump raised the tax rate on Chinese imports to 145%.¹¹

But the pause didn’t apply to all of Trump’s tariffs. Treasury Secretary Scott Bessent said the administration is keeping its 10% tariff on nearly all global imports. And remember, this is being called a pause—which means we might be doing this all over again in a few months.  

In other words . . . there’s a lot going on.

What’s a Trade War?

We’ve mentioned the term trade war a few times already, but what does that mean, exactly? Hang with us now because this is where it starts to get interesting.

When countries go back and forth with round after round of new tariffs on each other’s imports, the result is a trade war. Eventually, the two countries negotiate to make their trade partnership more balanced.

Things are particularly heated between the U.S. and China, but what’s happening right now isn’t all that new. During Trump’s first term, when the U.S. saw a deficit between the number of Chinese goods coming into the country and the number of goods going to China, the two countries engaged in a trade war that went through several rounds of retaliatory tariffs and failed trade negotiations. Ultimately, that led to a trade agreement that was signed in 2020, but it delivered underwhelming results and few lasting changes.   

Now with Trump back in office and ramping up the volume on tariffs, those tensions have returned. China says it will “fight to the end” after the president threatened to impose more tariffs on the country after Liberation Day.  It’s anyone’s guess how this current feud will get resolved.  

But in today’s global economy, even countries that have had good trade relationships with the U.S. in the past (like Canada and Mexico) could end up in a back-and-forth over tariffs with their American neighbor. That’s making everybody nervous, including investors.

And that’s why people are watching the situation closely. It could have an impact on the economy, your budget and your investments.

How Do Tariffs Impact the Economy (and Your Wallet)?

That’s the big question on everyone’s mind. From the business owner across the globe who sells his product in the States to the single mom down the street trying to make ends meet, tariffs could impact the lives (and wallets) of producers and consumers alike.

Once the tariffs take effect, you might see prices go up slightly on everything from basic items like peanut butter, orange juice and jeans to big-ticket items like cars, laptops and even houses. Estimates from The Budget Lab at Yale show that all of Trump’s tariffs put together will raise prices by 2.9% in the short run, which translates to a $4,700 increase in spending for each household.¹²

And because of the escalating tariffs placed on China, we may see the largest price increases on items coming from there.

For example, the cost of many televisions imported from China could more than double if companies increase their prices to cover the 145% tariff.¹³ So, a $500 television from China could cost $725 more once it hits the shelves in America ($500 x 145% = $725)—making the new price at least $1,225. The same principle applies to other big items like tractors, snowblowers and boats.

We also might see tariffs impact the global economy in the months and years to come, assuming they remain in place. Other countries may respond with tariffs of their own, which could hurt U.S. farmers and manufacturers who sell their stuff to other nations.

Some economic experts also worry that Trump’s tariffs could trigger a global recession this year because U.S. businesses are feeling less confident and supply chains are likely to get disrupted.¹⁴

But for now, let’s stay focused on what you can control—and that’s how you manage your money and your investments.

Ramsey Solutions is a paid, non-client promoter of participating pros.

How to Deal With Tariffs at Home

Because tariffs might impact the price of everyday necessities like groceries and clothing, you need to keep a close eye on your monthly budget so you don’t accidentally overspend. And you might really feel the tug on your wallet with big-ticket items affected by these tariffs.

Now you know why keeping track of your expenses throughout the month is so important!

Whether you’re in the market for a big item or just trying to figure out how to keep your trips to the grocery store from wrecking your budget, here are some things you could do to adapt in an increasingly tariffed world:

Pay the higher cost.

If a tariff is imposed on a good or product you need or affects the cost of an essential item (like clothing, groceries and gasoline), be ready to adjust your monthly budget and spending to account for those higher prices.

That could mean buying less of certain things or cutting expenses elsewhere. Either way, you’ll need to plan for some changes to your budget.

Purchase items from a company that’s not affected by the tariff.

You could possibly find items that are completely made in America and not affected by tariffs. That’ll be easier for some products than others—but with research and comparison shopping, you still might be able to find good deals out there.

Used items usually aren’t directly impacted by tariffs, but they could be impacted indirectly. When a country puts a tariff on, say, new foreign cars, that means the price of those new cars will go up—and there will also be fewer of them. What happens then? There will be greater demand for used cars, which could drive up the price of used cars for everyone looking to buy one. 

Wait to buy some items until the tariffs lessen again (and they usually do).

Many buyers are scrambling to the closest car dealership or mall to buy a new car or phone before the tariffs hit. But making a big-ticket purchase while you’re in panic mode usually ends with a whole lot of regret and an empty wallet.  

Will President Trump reverse course (again) on his tariffs? Maybe. Maybe not. You could wait and see if he decides to drop the tariffs, introduce new tariffs, or make exceptions for certain industries and items. There’s also the possibility that Trump will negotiate with other countries to lower their tariffs so we’ll lower ours, which would lower prices on imported goods. But at this point, it’s anyone’s guess what will happen next.  

How Do Tariffs Affect Investing?

The folks over on Wall Street have been nervous about the tariffs too. If you don’t believe us, just take a quick look at the stock market. Stock prices on the S&P 500 have been bouncing up and down like an overcaffeinated kangaroo in a trampoline park.

But instead of jumping off the investing roller coaster while it’s still in motion, stay in your seat and keep your seatbelt fastened. Wait out the rocky ride of trades and tariffs. The market will go up and down. But if you ride it out, your investments will pay off. History has shown us that.

In fact, if you zoom out and take a long-term view of the stock market, you’ll see that the S&P 500 is up more than 80% over the past five years.¹⁵

Fear is (and always has been) a terrible financial advisor. Time in the market always beats timing the market. No matter what’s happening in the stock market, start investing, keep investing every month, and let compound growth do its thing.

If you have extra cash on hand, you could even invest that money while mutual funds are on sale (when the market drops), putting you in a great position to ride the market back up when it recovers.

Finally, if these tariff and trade negotiations are making you anxious about your investments or if you’re wondering if you should make some adjustments, talk with your financial advisor.

 

This article provides general guidelines about investing topics. Your situation may be unique. To discuss a plan for your situation, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.