What are tariffs: how they affect crypto and the economy

As a tool to shape the landscape of international trade and influence various markets, tariffs are often used to protect local industries or gain leverage in trade negotiations. For crypto traders, understanding tariffs and their economic impact is essential given how they're intertwined with broader economic trends. From increased inflation to currency fluctuations, these factors can directly impact the price of crypto given that they're influenced by macroeconomic conditions.

This article will explore what tariffs are, their effects on the global economy, and how they specifically impact the crypto market.

TL;DR

• Tariffs are taxes imposed on imported goods to protect local industries, raise revenue, and influence trade negotiations, which can impact the broader economy.

• Tariffs raise import costs, potentially increasing consumer prices and reducing demand, which may lead to inflation and affect economic growth by limiting trade volumes.

• Trade tensions from tariffs can drive interest in crypto as a safe-haven asset amid economic uncertainty.

• The 2018–2020 U.S.-China tariffs increased costs for electronics, impacted global supply chains, and heightened interest in Bitcoin as a hedge against traditional market volatility.

• Traders should monitor economic indicators and consider diversification, stop-loss orders, and holding stablecoins to navigate potential crypto market volatility influenced by tariffs.

What are tariffs?

Tariffs are essentially taxes that governments impose on imported goods. These taxes can raise the cost of imported goods, impacting the economy and trade in multiple ways. While they're generally intended to protect domestic industries, tariffs tend to have broader consequences across the economic landscape.

Understanding tariffs in international trade

In a global economy, countries trade goods and services, often at lower costs when sourced from abroad. Tariffs come into play when governments want to protect local industries from cheaper imports or reduce reliance on foreign products. By making foreign goods more expensive, tariffs can reduce the volume of imports, potentially benefiting domestic producers. Businesses might then pass these higher costs onto consumers, raising overall living expenses and reducing purchasing power.

It's ultimately this aspect of consumers taking on the increased cost that makes tariffs a hotly debated topic during times when stock market prices are widely detached from economic well-being. With all this in mind, you're probably wondering if tariffs help or harm crypto and the greater economy. To answer this, we'll have to consider the impact of international tariffs by looking at past implementations of such tariffs.

Taxes vs tariffs: key differences

While both tariffs and taxes are government-imposed fees, they differ significantly in their application and purpose. Here's a brief summary of how they're different.

General taxes like income tax, sales tax, or property tax, apply to a wide range of economic activities within a country and are primarily designed to fund government operations and public services. These taxes are often imposed so governments have access to more revenue.

Conversely, tariffs are specifically levied on imported goods. They act as a barrier to international trade, making foreign products more expensive for domestic consumers so national interests are protected from foreign competition. Governments may impose tariffs as a strategic move to influence trade negotiations or retaliate against other countries' trade policies.

How do tariffs hurt the economy?

An unpopular trade policy among some economists, tariffs have gained a notorious reputation for multiple reasons. Here are some ways tariffs can potentially harm the overall economy.

Increased costs and reduced demand

When a tariff is imposed on an imported good, its price often increases. This price hike can discourage international trade by increasing the cost of imports. When goods become more expensive, consumer demand often falls because people are unlikely to pay a higher price for the same item. This can hurt exporters and lead to decreased economic activity as consumers take time to seek domestic affordable alternatives.

Potential trade wars and economic isolation

A trade war occurs when countries engage in tit-for-tat tariff increases, which escalate into broader economic tension. Trade wars often result in a lose-lose situation for the parties involved because of the decreased export volumes, higher costs for imports, and overall economic isolation that can occur. Such prolonged trade tensions can also harm global markets and increase uncertainty for traders, including those in crypto.

How do tariffs help the economy?

While tariffs can disrupt trade and raise prices, certain groups stand to benefit. Here are some ways tariffs can boost an economy.

Protection of domestic industries and job creation

Tariffs can shield domestic industries from foreign competition, potentially leading to job creation and economic growth in specific sectors. This can be particularly beneficial for new or growing industries, shielding them from foreign competition until they mature and become competitive globally.

Reduced foreign dependence

Tariffs can also be used to protect industries deemed critical to national security, such as defense, energy, or technology. By reducing reliance on foreign suppliers, countries can enhance their self-sufficiency and resilience.

Case study: the U.S.-China trade war and the crypto market (2018–2020)

To understand the broader impact of tariffs, let's now consider the period from 2018 to 2020 when the U.S. implemented tariffs targeting various Chinese imports. These tariffs affected numerous sectors, including technology and agriculture, leading to increased consumer prices and heightened trade tensions. For example, tariffs on Chinese electronics made consumer devices more expensive, with costs often passed on to American consumers. This contributed to inflation concerns, altered supply chains, and created fluctuations in the exchange rate between the Chinese Yuan and the U.S. Dollar. Here’s some context on how these tariffs specifically influenced the crypto space.

Rising tensions and increased demand for Bitcoin

Put simply, the trade war heightened economic tensions between the U.S. and China, creating instability in traditional financial markets. This uncertainty led some traders to explore alternative assets like Bitcoin. As traditional assets became more volatile due to trade concerns, Bitcoin’s appeal as a “non-sovereign” asset grew, especially among forex traders wary of currency devaluation.

Impact on crypto mining costs

At the time, China was the global hub for crypto mining. As such, crypto mining tech imports experienced increased scrutiny due to tariffs. This raised costs for Chinese-made ASIC mining hardware. As the cost of mining increased, smaller mining operations faced challenges, indirectly affecting the crypto supply chain and impacting Bitcoin prices.

Regulatory impact on Chinese mining dominance

The tariffs on tech imports and increased regulatory scrutiny on Chinese goods also impacted the domestic crypto mining industry. With higher costs on Chinese electronics, some mining operations in the U.S. sought alternatives, leading to shifts in mining hardware sourcing and operational costs. Although China’s crypto mining dominance remained strong, the tariffs created an environment that highlighted vulnerabilities in crypto’s reliance on specific supply chains.

A look at how U.S. tariffs affected crypto and the broader economy

Source: TradingView

According to IMF experts, the impact of tariffs tends to extend to broader economic indicators like inflation and the stock market. Let's now consider how inflation measures up against the U.S. stock market that's represented by the S&P 500 index. From 2018 to 2020, inflation rose as high as 2.9%, partially due to higher import costs. Contrary to some predictions of economic slowdown, the S&P 500 surged by over 33% in the same period. While it's impossible to isolate the impact of tariffs on the stock market, it's clear that the broader economic environment played a significant role in driving stock prices higher. These include factors like interest rate cuts, the pandemic, and robust corporate earnings.

Source: TradingView

Comparing stocks to the crypto market, Bitcoin was still establishing itself during this period. Although economic factors like inflation concerns and trade tensions can influence the crypto market, Bitcoin’s price movements during this time were driven more by factors such as technological developments, evolving regulation, and growing interest. In fact, Bitcoin’s rapid price increase highlighted its unique role as a speculative asset and potential hedge against economic uncertainties, which drew increased interest during periods of trade policy tension.

How tariffs can indirectly impact crypto

While tariffs directly impact traditional markets by increasing costs for imported goods and possibly affecting consumer prices, they may indirectly influence crypto prices by being the cause of economic uncertainty and inflation concerns. As a decentralized and perceived “safe haven” asset, Bitcoin and other cryptocurrencies can attract traders seeking alternatives to traditional markets during times of economic volatility. Trade tensions and inflation fears might therefore bolster interest in crypto as a store of value, positioning it differently from traditional assets impacted more directly by tariff policies.

On the opposing end of the argument, if tariffs heavily contribute to inflation, the government may feel compelled to begin hiking interest rates to keep inflation under control. This could lead to a shift away from risk-on assets like crypto towards defensive assets like treasury bills and bonds, since rising interest rates could affect the liquidity available in the financial markets. Additionally, this shift can also reduce the flow of institutional investment into the crypto market as higher interest rates offer alternative lower-risk gains elsewhere.

Overall, this case study illustrates that while tariffs directly affect conventional sectors like manufacturing, tech, and agriculture, the crypto market operates within a different set of rules and dynamics. As such, informed traders should be aware that economic policies like tariffs can influence traditional assets and consumer prices but crypto prices often respond to broader economic sentiment rather than direct market costs. Understanding these differences can help crypto traders better navigate periods of economic change and identify opportunities where crypto may serve as a counterbalance to traditional assets.

Preparing for market impacts of tariffs on crypto

If high-profile tariffs are implemented on a large scale again, crypto traders can take steps to anticipate and navigate the resulting market volatility. Here’s how to stay prepared.

Monitoring economic indicators

Tariffs can influence fiscal and monetary policies, which in turn affect the economy and potentially the crypto market. For crypto traders, closely monitoring key economic indicators like inflation rates, interest rate changes, and currency exchange fluctuations can provide early signals of potential volatility. Staying updated on new tariffs or escalating trade disputes can help traders anticipate shifts in market sentiment and prepare for the possible impact on crypto.

Risk management strategies for crypto traders

To handle the market fluctuations that tariffs may introduce, crypto traders can adopt several risk management strategies.

• Diversifying across crypto assets: Consider holding a variety of crypto assets, including major coins like Bitcoin and altcoins with unique use cases. Diversifying across these categories can help mitigate risk by reducing reliance on any single type of asset.

• Setting stop-loss orders: Stop-loss orders can help minimize potential losses by automatically selling assets if prices dip below a certain level, providing a safeguard against sudden volatility.

• Maintaining a stablecoin warchest: Keeping a portion of your portfolio in stablecoins can reduce exposure to market swings while providing liquidity to buy assets at lower prices if opportunities arise. Stablecoins also serve as a hedge during periods of inflation or currency devaluation.

• Considering crypto as a hedge: For traders who also hold traditional investments, crypto assets can act as a hedge against inflation or devaluation during times of economic turbulence, potentially balancing risks across asset classes.

Final words and next steps

Tariffs are a critical tool in international trade that can reshape markets by increasing import costs and creating economic uncertainty. While they benefit certain domestic industries, they often lead to inflation and disrupt trade. For crypto traders, tariffs present ample trading opportunities and risks given the volatility involved when tariffs are enacted. By staying informed and employing sound risk management, crypto traders can better navigate the potential impact of tariffs on their trades.

Interested in understanding why some traders view Bitcoin as a safe haven asset? Check out our guide that compares Bitcoin vs gold. If you're eager to hedge your holdings ahead of a catalyst, learn how you can do so with our guide on how to hedge with options.