What are tariffs and how do they affect investments?

Another way to think about tariffs is that they’re an import tax. They’re placed on goods brought into a country to make them more expensive.

Governments can do this for a few reasons. One purpose is to support local businesses by making their products more appealing to domestic consumers. Another is to serve as a strategic tool for responding to major exports from other countries, especially when those countries impose tariffs or trade restrictions.

For example, if country A has a high tariff on corn, then country B could place a tariff on their cheese. Setting tariffs can be a way to encourage countries to negotiate trade deals.

When tariffs are put in place, the importer pays this extra tax when the goods arrive. This has two outcomes: either the customer is charged more for the goods, or the company selling them makes less profit.

Supply chains can also be disrupted. If a company relies on goods from overseas, tariffs might force it to look for cheaper suppliers or slow production. This uncertainty can reduce investor confidence.

Stock markets can react quickly to news about tariffs. Share prices in affected sectors may fall as investors worry about rising costs or reduced profits. At the same time, companies that don’t rely on imports might see their shares hold steady or even rise.

Some sectors are more sensitive to tariffs than others. Manufacturing is often hit hard, especially firms that import raw materials, or have multiple suppliers – like car makers.

Agriculture can suffer too, particularly if exports are targeted with tariffs in return. Even the tech industry can be affected, as key components are often sourced internationally.

As an investor, it’s useful to know when tariffs are announced and which goods they cover. Understanding which sectors are likely to feel the impact could help you avoid making reactive decisions and focus on long-term goals instead.

Tariffs can affect different types of investments in different ways. For example, shares in companies that rely on imported goods may fall in value. Commodity prices, like metals or crops, can also change if tariffs affect supply and demand.

International funds might be affected if they invest in countries caught up in trade disputes.

To protect your portfolio, it’s helpful to understand what you’re invested in. Check whether your funds or shares include companies in sectors like manufacturing, agriculture, or technology.

One of the best ways you could manage the risk is by diversifying your investments, spreading your money across different sectors and countries. You might also choose to invest in things other than equities, for example bonds or property funds. So, if one part of your investment portfolio is affected by tariffs, others may balance it out.

Another option is to use actively managed funds, which are designed to react to market changes like tariffs, by rebalancing investments.

Try not to be too focused on short term market moves. Tariffs can be removed as quickly as they are put in place, so the landscape for your investments may be very different in five or 10 years.

The “Liberation Day” tariffs are a new set of trade measures earlier this year introduced by the US government. They place new import taxes on selected goods from countries around the world.

These tariffs cover a range of goods, including certain metals, machinery, and technology components. Many countries also have a fixed tariff on anything imported to the US.

The countries and items affected may change over time, depending on how trade talks develop. The announcement had an impact on investor sentiment with markets dipping sharply when they were announced. They then began to recover, as deadlines were postponed and some deals were made.

Tariffs are just one of many things that can affect your investments. Others like inflation, interest rates and global events also play a part. While it’s good to stay informed of what’s happening, it’s best not to react hastily to every piece of news and remember, to think long term.

With patience and a well-diversified selection of investments you can put yourself in a better position to weather the ups and downs of uncertain times.

If you still feel unsure about how tariffs may be affecting your investments, you can talk to an independent financial adviser. They can give you advice based on your goals. The government’s MoneyHelper service can help you find an adviser and offers free, impartial guidance.