With the south of Spain’s rugged coastlines, miles of white sandy beaches and the odd tapas restaurant or two, it’s no wonder sun-seeking Brits flock to the area in their millions.

However, there’s one often overlooked town at Spain’s southernmost tip, sitting on the Strait of Gibraltar, that holds a growing significance. Just nine miles north of Africa, the unassuming small port town of Tarifa once operated as a busy gateway into Europe for a long-gone empire. At the time, Tarifa started to charge for its use, quickly gaining an association among sailors for its tax on trade.

Lending its name to what’s becoming one of the watchwords of 2025, we can see that countries have levied tariffs on each other for thousands of years. Yet over the past few weeks, such moves have increasingly made the headlines.

How consumers may be impacted by tariffs

A key pledge of Donald Trump’s election campaign, tariffs placed on foreign imports will be central to his economic policy. The move may help to balance the books after he looks to enact tax cuts across the US. Indeed, during his campaign, he told voters that any incoming levies were "not going to be a cost to you, it’s a cost to another country."

But are Trump’s words nothing more than hot air? Many economists believe so.

In simple terms, a tariff is effectively a tax levied on a good as it enters the country, aimed at keeping equivalent domestic products competitive while simultaneously filling up the government’s coffers.

The levy is usually paid by the company importing the goods, but who ends up paying in the grander scheme of things is very much a moot point. If the company paying the tax absorbs the cost, then it’s clear it’s bearing the burden. However, it’s far more common for it to simply up the price and pass that expense onto the consumer.

The Washington-based Peterson Institute for International Economics has estimated that Trump’s new proposed tariffs would lower the incomes of Americans in real terms, with the impact of tariffs ranging from around 4% for the poorest fifth to around 2% for the wealthiest fifth of the population.

Declaring that he would move forward with steel and aluminium levies as well as targeted 25% tariffs on two of America’s closest trading partners, Canada and Mexico - although paused at the time of writing – and slapping a blanket 10% tariff on all Chinese goods, with the EU next in his crosshairs, Trump has now instigated a tit-for-tat trade war.

We’ve already seen Beijing announce an investigation into US tech heavyweight, Google and place tariffs on imports of US oil, coal, gas, cars and farm equipment, merely ramping up tensions.

The fear of inflation and taking a ‘wait and see’ approach

With the price of goods potentially rising at the checkouts, another unintended consequence of a tariff war is inflation. With various central banks having hiked rates to levels not seen for decades in a bid to stymie inflation, outsized price rises rearing their heads again would not be welcome news.

This sentiment of unwelcome news is clearly echoed by the US Federal Reserve, with Boston Fed President Susan Collins recently commenting that "with broad-based tariffs, you actually would not only see increases in prices of final goods, but also a number of intermediate goods too."

We’ve already seen that the Fed is willing to take a ‘wait and see’ approach when it comes to cutting rates, with the markets now predicting, at most, two rate cuts this year, down from the four anticipated during September last year.

This could set the scene for a stronger US dollar and yields on treasuries higher than the Andalucian heat.

While Trump’s policies could well be beneficial for smaller companies in the US, reflecting our broader US exposure within the portfolios, over the longer term a well-diversified, actively managed portfolio should act as port in a storm for investors.

How apt it is then, that the town of Tarifa is located within the administration of Andalusia, an area famous for breeding hunting dogs. However, much like the popular Andalucian Hound, many economists will be hoping that when it comes to tariffs, Trump’s bark will be worse than his bite.

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The value of investments can go down as well as up and your clients could get back less than they paid in. The views expressed in this blog should not be regarded as financial advice.