President Trump's Tariffs Take Effect: 4 Things You Need to Know

In late January, a newly sworn-in President Donald Trump announced that tariffs would be imposed on goods coming into the United States from Canada, Mexico, and China. Canada and Mexico were quickly able to negotiate a month-long pause to try to work out a more permanent deal to avoid new tariffs altogether.

Trump, who has said he considers tariff to be "the most beautiful word in the dictionary," made clear this week that he was not bluffing as the tariffs on Canada and Mexico took effect today as did increased tariffs on goods from China.

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What does this mean for investors? Let's take a look at four things investors should know.

1. The details

A blanket tariff of 25% is now levied on nearly all goods from Canada and Mexico, with the notable exception of Canadian energy products -- think oil and gas -- which come with a 10% duty. Importers pay the tariff. Chinese goods, which received a lower rate of 10% in the initial round but were not a beneficiary of the month-long reprieve, now carry a 20% duty.

In response, China has levied 15% tariffs on U.S. goods, while Canada and Mexico have promised their own retaliatory fees, with Prime Minister Justin Trudeau of Canada saying that the United States "launched a trade war against Canada, their closest partner and ally, their closest friend."

2. What it could mean for your wallet

All three countries are major trade partners of the U.S. and prices for many everyday goods could increase immediately. Groceries could be especially hit given the U.S.'s reliance on agricultural products from its neighbors. But all sorts of products -- from cars to computers -- will be impacted, and perhaps very quickly.

Over time, increased prices seen in products further up the supply chain like lumber, steel, and gas, could lead to rising inflation. Assuming the tariffs aren't increased -- in the past, Trump has threatened 60% tariffs against products from China -- the Federal Reserve Bank of Boston estimates they could add as much as 0.8 percentage points to core inflation. While that doesn't sound like much, it is certainly enough to have a significant impact on the economy.

As Ryan Monarch, an economics professor at Syracuse University, recently told The Motley Fool when asked about tariffs:

Tariffs cause the price of affected goods to rise. In fact, research into the 2018-2019 trade war has shown that the prices of U.S. imported goods affected by tariffs rose by nearly the entire amount of tariffs imposed, meaning that U.S. importers bore the brunt of the increase in costs. Additionally, if importers substitute towards alternatives that are more expensive than their original suppliers, this can also cause prices to rise. ...

It also depends on how importers respond to higher costs: In 2018-2019, many U.S. importers did not pass on the full amount of their cost increase to their consumers, and increases in consumer prices are the traditional metric of inflation. ...

All told, tariffs lead to higher prices, but there are numerous possibilities for how exactly these higher prices may be reflected in overall consumer price inflation.

3. What it could mean for your portfolio

The new tariffs come at what could already be described as a precarious time in the market. Consumer spending, the lifeblood of much of our economy, has slowed. The new tariffs are likely to exacerbate this. Companies that sell directly to consumers, especially those whose supply chains are tied up in China, Canada, or Mexico, will be hardest hit. Leadership from Target and Best Buy warned about rising costs that will be passed on to consumers, impacting sales.

It's not just consumer-facing companies that could be hit. High-tech companies from Nvidia to IonQ could see their supply chains impacted, eating into margins. The latter, in its recent 10-K filing, spelled it out, saying, "Tariffs and trade protection measures, especially in China and the United States, may adversely impact our business, including our ability to obtain products from our suppliers."

4. Focus on the future

In uncertain times like this, it's important to take the long view. First, we do not know for sure how this will play out in the long run. There is room for an all-out trade war to be avoided or, although I'm dubious, perhaps the positive impacts of a protectionist approach could outweigh the negative impacts.

Short-term stock movements are incredibly hard to predict accurately or time properly. Investing regularly in a broadly diversified portfolio and holding for the long term will almost always beat out a more active approach.

A great strategy, especially if you are overwhelmed with picking specific stocks, is to focus on investing in low-cost broard-market exchange-traded funds like the Vanguard S&P 500 ETF and the Vanguard Total Stock Market Index Fund ETF.

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Johnny Rice has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Best Buy, Nvidia, Target, Vanguard S&P 500 ETF, and Vanguard Total Stock Market ETF. The Motley Fool has a disclosure policy.