An Econ Primer to Help Navigate Inflation and Trade Barriers 

As financial advisors based here in Seattle, we’ve noticed a surge in questions about inflation and trade barriers. If you’re like many of our clients who are working in tech, raising a family, and planning for the future, you too might feel apprehensive about the news. With good reason; it’s natural to wonder how recent buzzwords, including “tariff,” might affect your long-term wealth goals. 

While it can feel unsettling to see headlines about rising prices, tariffs, and trade tensions, your portfolio doesn’t necessarily have to suffer. Understanding the basics of how trade barriers and inflation work can help you make more informed financial decisions. 

Below, we explore these concepts, what they mean for you, and why maintaining a level head (and a solid plan) is essential.

Inflation 101 and Historical Context

Inflation is a gradual loss of purchasing power reflected in a broad rise in prices for goods and services over time. Consider it the “erosion” of your dollar’s purchasing power. For example, a dollar from 20 years ago could buy a lot more than a dollar can today. 

Historically, inflation has varied depending on various factors: government policy, technological changes, energy costs, and global trade dynamics.

• A famous early example of severe inflation is the hyperinflation of the 1920s in Germany’s Weimar Republic, where prices skyrocketed so fast that currency became almost worthless. (It didn’t help that they tried to print money to solve the problem). 
• More recently, there was a period with both high inflation and uneven economic growth called “Stagflation” in the 1970s. Stagflation resulted from high budget deficits, lower interest rates, the oil embargo, and the collapse of managed currency rates.

Luckily, central banks, including the Federal Reserve, have more tools and a better understanding of how to regulate the economy than policymakers in the 1920s. Modern technology, widespread global trade, and quicker monetary policy responses typically help manage inflation before it spins out of control. (Assuming, of course, that we can all work together). 

Trade Barriers and Tariffs

When you hear about trade barriers, it generally means any policy that makes importing or exporting goods harder or more expensive. This year’s buzzword “tariff,” is essentially a tax placed on goods and services coming into a country. The taxes are typically charged as a percentage of a product’s value. 

Tariffs are rarely beneficial for any side, as history shows. Similar in design to what’s happening now, the Smoot-Hawley tariffs of the 1930s produced a global trade war triggered by retaliations. These were enacted, in part, to appease domestic constituencies, but ultimately they served to hinder international economic cooperation and trade in the late 1920s and early 1930s. Bottom line, tarrifs can damage international relationships lasting decades.

Tarriffs are just one type of trade barrier, imposed by governments to protect domestic industries from overseas competition. The goal is usually along the lines of boosting local production and jobs. However, (as we’ve seen of late), tariffs also tend to raise prices for consumers because they reduce the availability of cheaper foreign goods. And they don’t really do much to win any friends around the globe. Hence, many doubt whether tariffs really protect local industries in the long run or simply drive up costs and spark retaliatory measures from other countries.

Other trade barriers include:

• quotas (limits on the volume of imported products)
• import licenses
• complex safety regulations that make it difficult for foreign producers to sell goods
• preferential treatment or cheaper financing for select industries

Winners vs. Losers: Are There Any True Winners?

Although tariffs can offer short-term advantages to particular industries or regions — such as domestic steel or agricultural producers — the economy as a whole often suffers from reduced efficiency and higher prices. Consumers end up paying more for goods that were previously cheaper. Exporters also face retaliation in the form of counter-tariffs, making their products less competitive in overseas markets. In truth, there are few genuine long-term winners in a trade war; large markets like the United States might weather the storm longer because of diversified economic bases, but nobody comes out entirely unscathed.

Comparing the U.S. to other expensive markets (like some in Europe) can be revealing. Both regions have relatively higher living standards, stronger labor protections, and robust infrastructures — which often translate to higher production costs. When tariffs enter the picture, any price cushion or competitive advantage can change quickly, altering the global trade landscape. Smaller or less expensive markets might initially have some cost advantage, but if trade barriers hamper their exports to big consumer nations, they also end up struggling.

How Trade Barriers Affect Asset Classes

If trade barriers ramp up and global tensions rise, historically, we see more volatility in riskier assets like certain stocks — especially those heavily reliant on exports or international supply chains. 

• Tech. Tech companies often have complex international supply chains, and barriers can disrupt production or raise costs. (Some say it’s currently “worse than the worse case scenario.”). 
• Bonds or Utilities Stocks. Some more defensive or less risky assets, such as certain bonds or utilities stocks, might become relatively attractive during uncertainty because they provide steadier returns and can be perceived as safer havens. The problem with these is that they don’t usually do great during periods of high inflation.
• Precious Metals. Investing in gold has often been seen as a hedge against inflation because when inflation rises. Currencies can lose value, and gold’s relative scarcity can make it a more stable store of value. It does, however, have its list of pros and cons.
• Real Estate. Though it depends on location, interest rates, and broader economic conditions, real estate can also act as a hedge over the long term.

Central Banks and the Importance of Trade Partners

Central banks, including the Federal Reserve, use monetary policy to manage economic fluctuations and achieve price stability, which helps inflation stay low and stable…ideally. In normal times they can adjust interest rates or employ other measures (like quantitative easing) to stabilize the economy. When inflation starts climbing too fast, the Fed often raises interest rates to make borrowing more expensive, which helps cool off spending. Conversely, if inflation is too low or economic growth slows, the Fed may lower interest rates to encourage borrowing and spending. To call back to stagflation, the central banks would be wing-clipped if we have low economic growth and high inflation at the same time. (We can’t lower rates to support economic growth in fear of pushing inflation much higher).

In a world of interconnected supply chains, stable trade relationships are critical. (So it’s no wonder you’re feeling nervous as you’re paying attention to the news). For example, a smartphone might be designed in California, assembled in China, and rely on rare metals from Africa or South America. Barriers anywhere along that chain can cause ripple effects on availability, pricing, and company profits. Maintaining healthy ties with our trading partners is essential — even if economic or political factors/persons sometimes strain those relationships.

Don’t Panic, But Do Plan (and Talk With Your Advisor)

All of this can sound overwhelming, especially if you’re juggling a demanding tech career, saving for college for your kids, and trying to stay on top of a mortgage or two in an ever-evolving Seattle real estate market. 

Our advice: Don’t panic, but do plan. Keep a well-diversified portfolio that’s aligned with your risk tolerance and long-term goals. Pay attention to how trade developments might impact specific companies or sectors in your holdings, but try not to make knee-jerk reactions based on the latest headlines. And most importantly, before making significant changes to your financial strategy, talk to your trusted financial advisor — someone who knows your personal situation and can guide you through these ups and downs with a level head.

Growing your knowledge about inflation, trade barriers, and how global markets interconnect gives you the power to make informed decisions. We may not know how trade wars and tariffs will resolve themselves. But understanding the basics helps you stay confident and prepared, no matter what comes next. Northern Lights Advisors can help. Simply reach out today. 

Northern Lights Advisors is a fiduciary, fee-only Registered Investment Advisor (RIA) firm based in Seattle, Washington. The information in this article is not intended as tax, accounting, or legal advice. Read the full disclosure here.