Today’s menu

• What is a tariff?

• What effect will tariffs have?

• Reasons for tariffs

• What’s happening in the markets?

• Where are the opportunities?

What is a tariff?

In your heart of hearts, you probably knew that a tariff is a tax.

Here’s how it works.

You import something from another country, those items arrive a port of entry in your country. The taxman in your country has "friendly” customs inspectors at the port who check what has been imported. They look at the documentation and invoices to see the value of the goods. They add a tariff and tell you to pay it. Once you pay, you can take the goods.

If you own a company that is importing raw materials for manufacturing, the tariff makes the material cost more. That means when you manufacture something, you have to sell it for more.

What effect will tariffs have?

For American citizens and companies, tariffs will make many goods more expensive, because items and materials imported will cost more than before.

This will put pressure on American budgets. If things cost more, people will either buy-down (i.e. buy lower quality) or buy less. At the same time, because prices will rise, inflation will rise. As a result, the Federal Reserve (central bank) will increase interest rates, to keep inflation under control. That means everyone who has borrowed money (which is most people, companies and the government) will pay more interest. That will also reduce the amount of money available for spending.

The results:

• The cost of living increases.

• Less money is available for spending and saving – which means less money into the stock market. This could mean lower stock prices.

• There will be less competition because foreign imports will cost more.

• In the long-term, less competition means less innovation and a slower pace of improvement.

President Trump’s intention for charging tariffs is to get other countries to lower their tariffs on US exports. In theory, if everyone drops their tariffs, the whole problem goes away. 

But it’s never that simple.

Reasons for tariffs

Some countries levy tariffs on US goods to collect taxes. But there are other valid reasons for levying tariffs, let’s look at an example.

Imagine your country has a farming industry but corn can be imported cheaper than your local farmers can produce it. From an economic theory standpoint, it is logical to import all the corn you need and let your local farmers go out of business.

But there is a problem with that. If something bad happens, like a drought in the foreign country, it could leave your population starving. Also, something unexpected like a pandemic can leave you unable to import crops, which could leave your population starving. Also, a combative foreign government may decide to play tough with your country and say, “if you don’t do what we want, we won’t sell you crops” – that’s a risk you cannot take because it could leave your population starving. 

Clearly, farming is an important industry and you have to grow crops in your own country. So, you charge a tariff on the imported corn. That makes corn more expensive in your country, which means that your farmers can sell their corn profitably. In effect you keep your farmers alive by the population paying higher prices.

You might ask, couldn’t the local farmers become more efficient? Sometimes it is not possible. They may lack the scale of production to grow crops cheaper, or even worse, farmers in the foreign country may be subsidised by their government. To equalise the playing field tariffs are used.

The point of this example is to illustrate that there are also good reasons for tariffs and it is hard to get rid of them. That means this tariff war may last longer than expected.

If the effect of tariffs is severe, there could even be a global recession. That means everyone, everywhere will take some pain. The USA accounts for 26% of global gross domestic product (GDP), where GDP is an indicator of the size of an economy. That’s a large percentage.

In a tariff war, the people that will take the most pain are US citizens. They will pay for the tariffs in the price of everyday goods and there is no escape. The rest of the world will also suffer, but nothing is stopping the remaining 74% of the world from trading with each other freely.

What’s happening in the markets?

Massive drops in share prices – that’s what’s happening. The S&P500 is an index of the 500 largest US companies. The graph below shows that the S&P500 is down 17% since February 2025. More importantly, look at how the line has dropped off in the last few days since tariffs were implemented.

Some individual companies are experiencing even greater drops. Here’s the stock price drops in the past week for the ROA Watchlist companies. For our new readers, the ROA Watchlist is the ever-growing collection of companies that we consider to be Extraordinary and that we have talked about previously.

These share price drops are massive for just one week. But many of these companies are still selling at high valuations (i.e. high price-to-earnings multiples).

Where are the opportunities?

The opportunities are in market overreactions.

For instance, the US has implemented 32% tariffs on Taiwanese goods. Nvidia designs the semiconductor chips that are powering the artificial intelligence boom. Those chips are manufactured in Taiwan at TSMC. Nvidia is down 14% and TSMC is down 11.2%.

Makes sense that they are down, right?

Not quite, because semiconductor chips are exempt from tariffs. So Nvidia wont pay more for them and TSMC wont sell less of them. Very little has changed for either of these companies - the chips cost the same and the AI boom isn’t stopping.

I’m not suggesting that you buy Nvidia or TSMC. What I am suggesting is that as the market goes through turmoil, a bargain or two might appear.

Lookout for them.

Conclusion

Tariffs are taxes, don’t let anyone tell you otherwise. The whole world is going to take some pain, but Americans will experience the most pain.

Bargains might appear for our favourite type of companies – Extraordinary Companies. Keep your eyes open.

If all the red downward stock prices is causing you distress, stop looking at them. That is the easiest way to avoid doing silly things. Nothing is stopping you from next checking your portfolio in 2026.

I would like to hear what you’re up to.

DM me on social media or email me.