Potential tariffs, like many other things in life, are not necessarily all good or bad

December 14, 2024

Love summer, hate winter. Love dogs, hate cats. Love the Vikings, hate the Packers.

Almost nothing is all good or all bad, yet we often feel a need to cast things as one or the other. This is lazy thinking. A skier might love aspects of winter, who doesn’t love cuddling a purring kitten and believe it or not, certain people from Wisconsin find highly unlikely redeemable features in the Packers.

This binary thinking is problematic in finance because it makes us overconfident in an unknowable world. Let me give you an example.

I am not generally a fan of tariffs. They are essentially a tax on imports that ultimately we as consumers pay. Their ultimate impact might be inflationary, deflationary or both. Increasing costs by taxing them is inflationary, yet when costs go up, there is less money to spend on other things.

Companies are trying to get ahead of possible tariffs by increasing their inventories. This makes it difficult to understand if companies are deriving sales from anticipated needs or resource management. Uncertainty around the impact of tariffs makes it more challenging to lower interest rates. If interest rates stay high, the dollar could as well, thereby reducing the costs on foreign goods tariffs were supposed to create.

Realpolitik leads to countries often imposing retaliatory tariffs against us. And while tariffs can be a short-term solution, they can create long-term problems. China was already shifting its purchases of soybeans to Brazil before we instituted tariffs, but it is hard to argue the shift didn’t accelerate because of those added costs.

Isn’t it obvious we should hate tariffs? Not necessarily.

Tariffs might have potential benefits or serve certain purposes. This tax on goods can raise money for government that can go toward other programs or to paying down debt. Some countries provide special benefits to industries that make those products more competitive than homemade goods. Other countries might have different labor regulations or enforcement mechanisms that artificially lower their costs. Tariffs might help level the playing field.

Tariffs can promote the growth of certain industries that our leaders view as necessary or strategic. The threat of tariffs might bring countries to the negotiating table, resulting in better trade outcomes. Tariffs might result in an increase in our manufacturing at home as we try to control our supply-chain risks, thereby creating employment opportunities.

There is a saying that knowledge is an obstacle to knowledge. When we are certain of something, we are no longer curious. When you find yourself viewing things as all good or all bad, then you are no longer able to comprehensively analyze the costs/benefits of an issue. This affects not just our finances but also our relationships. This type of thinking is us vs. them: I know what’s best for me, and I also know what’s best for you, and the greatest of all closed-minded ironies, “I can’t talk to them about this because they are closed-minded.”

How we weigh conflicting viewpoints comes down to a variety of reasons: our upbringing, our social and economic circles, what we choose to read or watch, our values. If you really want to understand a subject, don’t just read or watch what the people you disagree with are saying about it. Try to understand what is right about those viewpoints rather than why it’s wrong.

An additional benefit of studying opposing views is it might make you more forgiving of your own mistakes, allowing you to stop doing something that is no longer serving you. When we are completely convicted about something, we tend to continue to find things that support those convictions and disregard others that don’t match our worldview. The best financial outcomes come from recognizing errors and making a change rather than stubbornly plowing ahead.

The downside of this both-sides approach is it can lead to false equivalencies. Just because an idea has some merits, it doesn’t mean it has equal merits. People might cling to beliefs in spite of contrary overwhelming evidence. Understanding a broader perspective doesn’t mean you accept it.

We can find something positive in anything, except maybe the Packers.

- Ross Levin

This article originally appeared in the Minneapolis Star Tribune on December 14, 2024

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