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Paula Pant (17:59)

Monarch is the modern way to manage your money. Whether you need to stick to a budget, track your investments, or collaborate with your partner, you'll get clarity, confidence and peace of mind for your finances. With Monarch. Here are a few things that I like about it. First of all, there's a widget that's directly on my phone. I could just I see it at a glance in the same way that I look at the weather. So I can really quickly glance at my most recent transactions. And I also can see these dashboards where I see my income, I see my expenses, I see how much I'm spending in different categories. It's just a really good at a glance on your phone way for me to get a quick snapshot of my finances. Now Monarch is the top rated all in one personal finance app because Monarch helps you make smart money moves. And right now, listeners of this show can get 30% off your first year by going to monarchmoney.com Paula Monarch is super customizable. You can customize dashboards, you can create budgets and notifications. And the Wall Street Journal awarded Monarch the best budgeting app of 2024. After trying out Monarch for myself, I get why it's the top rated personal finance app. And right now listeners of this show will get 30% off your first year when you go to monarchmoney.com Paula that's M O n a r C H M O N e y to get 30% off your first year. Welcome back. We turn our attention to tariffs. We will answer the question, what are tariffs? What are some of both the benefits and the drawbacks of instituting tariffs? What statements have been made directly by President Elect Trump related to his plans to impose tariffs in the upcoming year? What effect might this have on US Consumers and US Workers? And how clearly can we distinguish between knowledge and speculation? Let's start by answering the question, what are tariffs? A tariff is a tax imposed by one country on goods imported from another country. Tariffs are an important tool in the regulation of foreign trade. Let's walk through an example. Let's say, hypothetically that there is a blanket 25% across the board tariff on all goods that are imported from Mexico. Who pays that? The importing company that is based here in the United States. The company that is bringing those goods from Mexico into the United States will pay that 25% tariff. That money would go to the U.S. treasury. That contains a variety of consequences. Number one, it increases revenue for the U.S. treasury. Number two, it incentivizes the importing company to turn to domestic production and domestic manufacturing as an alternative whenever possible. For example, if you run a clothing company, an apparel company, and you are currently having that clothing made in Mexico or in Canada or in China, then from your point of view as the owner of that importing company, it's a simple math equation to decide if that tariff is sufficiently high enough, if it's onerous enough for you to stop using the services of the overseas company and instead start using a domestic manufacturer. And if you crunch the numbers and the spreadsheet says yes, it's worth paying that added tax, it's worth paying that added tariff. All right, that's your choice as a company owner, and the US treasury collects that added revenue. But by contrast, if you as the US Based apparel company owner decide, you know what, that tariff makes it cost prohibitive, it would be cheaper for me to use a domestic, a US Based manufacturer. Well, then that tariff has had the effect of spurring job creation inside of the United States. So that is the advantage of tariffs. It can bring a boost to US Production and it can bring a boost to those homegrown made in the USA goods. The disadvantage, however, is that if the importing company is paying those tariffs, then that means higher prices for those companies for those importing companies, which leads to higher prices for US Consumers. Because if imports are more expensive and therefore the cost of imported goods are higher, then those prices have to get passed on to the consumer. The importing company can take some of the hit, but they only have so much margin that they can eat. Remember, their employees are expecting wage growth and their own costs of everything from software to the rent on their warehouses has gone up. So at a certain point, there is just no more profit that they can bleed. And the only way for them to be able to stay in business would be by raising those prices. So tariffs can have a positive effect in that they spur job creation domestically and they can also have a negative effect in that they lead to higher prices for consumers. Now, you'll recall when we talked about the November jobs report, as you remember, manufacturing didn't see any new job growth in November. The 32,000 jobs that it reported mainly reflected workers that were returning from strikes rather than new job creation. Tariffs are intended to address that issue. Tariffs are intended to boost domestic manufacturing. And that's precisely why the leaders of many foreign nations are quite concerned about this. As importers are incentivized to turn to domestic production to avoid paying higher costs. Exporters that are based in China or based in Mexico or based in Canada might cut their prices in order to stay in business. In other words, those exporters will take a hit to their profits in order to stay alive. And this would harm the economies of the exporting countries. It could significantly harm the economies of Mexico or Canada. And that's one of the reasons why Justin Trudeau, the Prime Minister of Canada, made a trip to Mar a Lago a few days ago to plead with President Elect Trump not to impose these blanket tariffs. Trudeau was the first foreign G7 leader to meet with President Elect Trump since the election. Turning our attention for a moment back to the U.S. we'll talk more about Mexico and Canada and China in a moment, and there's a reason that I'm highlighting those three nations, but turning our attention back to the U.S. we have spoken so far about tariffs in a monolithic manner, but all conversations about the economy are sector specific or industry specific. And there are some industries that benefit from tariffs more than others. Steel and aluminum, for example. Sugar producers and the auto industry. These historically have benefited quite a bit from tariffs. What's interesting about the proposals for how tariffs would be implemented in 2025, what makes them a little unique in a historical context? Because tariffs have been around since the 19th century, tariffs have often been assessed in an industry specific manner historically, meaning that certain industries were targeted with tariffs in order to selectively protect specific types of domestic producers. Now, what's notable about President Elect Trump's proposals is that he is proposing across the board tariffs, in which the variation is based on source country rather than industry. And there are a few particular countries that he has singled out. I'm going to quote directly from a couple of posts on Truth Social, President Elect Trump wrote on January 20 as one of my many first executive orders, I will sign all necessary documents to charge Mexico and Canada a 25% tariff on all products coming into the United States and its ridiculous open borders. This tariff will remain in effect until such time as drugs, in particular fentanyl and all illegal aliens stop this invasion of our country. Both Mexico and Canada have the absolute right and power to easily solve this long simmering problem. We hereby demand that they use this power, and until such time as they do, it is time for them to pay a very big price. So that was what he said about specifically Mexico and Canada, our neighbors. And it has elicited a strong response, both from Trudeau, who we just talked about as well as Mexican President Claudia Sheinbaum, who issued a rather scathing rebuttal. But in addition to Mexico, in Canada, President elect Trump is also targeting the other major world power, China. I will quote him directly, he wrote on Truth Social. I have had many talks with China about the massive amount of drugs, in particular fentanyl, being sent into the United States, but to no avail. Representatives of China told me they would institute their maximum penalty, that of death, for any drug dealers caught doing this, but unfortunately they never followed through. And drugs are pouring into our country, mostly through Mexico, at levels never seen before. Until such time as they stop, we will be charging China an additional 10% tariff above any additional tariffs on all of their many products coming into the United States of America. Thank you for your attention to this matter. End quote. Now, after he said that, he issued another warning and I won't quote this one directly simply because I don't have it in front of me at the moment, but it pertains to the BRICS countries, B R I C S, which is Brazil, Russia, India, China, South Africa, China, of course, which he had previously stated that he would charge them an additional 10% tariff. China was included in this grouping of five countries, the BRICS countries, in a follow up statement in which President elect Trump stated that if the BRICS countries continue a cross border payment rail system, then he would impose a 100% tariff on all five of those nations. Now, if you listened to last month's first Friday episode, we talked about this. And if you listened to our interview with Tatiana Kaufman, we talked about this in that episode as well. Cross border payment rails are networks that allow for the transfer of digital money between countries and between continents. So they connect financial institutions and serve as the underlying infrastructure for international payment methods. Now, the reason that the BRICS countries are trying to develop this system is because they want to develop a method of payment that is a competitor to the US Dollar. The US Dollar is currently the world reserve currency and they are trying to compete with that. They're trying to develop an alternative world reserve currency. If you listened to the last first Friday episode a month ago, we discussed this entire attempt and I gave my take on it, which is that I don't think they'll be successful at doing so. And now with this newest development, which is that President elect Trump is threatening 100% tariffs on the BRICS nations if they continue to even attempt to do so, they are hugely disincentivized from making an attempt that I think many, myself included, would characterize as A Hail Mary attempt. What's interesting about the idea of US Tariffs on the BRICS nations is that generally speaking, the tech sector historically has not really been impacted by tariffs, not in any major way. The impact of tariffs can be very sector specific, and tech, which of course relies heavily on digital products and services, has generally been pretty insulated. So if you think of software, cloud services, digital platforms, these elements of the tech industry typically aren't subject to traditional tariff regulations. But there are segments of the tech industry that heavily depend on physical components. We're talking hardware manufacturers, semiconductor producers, electronics makers. This is where we might see some tech sector impact, because Malaysia has warned that any U.S. tariffs on BRICS nations could impact semiconductor supply. Malaysia, I should add, has applied to be part of the BRICS bloc, but that application has not yet been accepted. The BRICS bloc is attempting to challenge the world order that is dominated by Western economies. That's a big part of the reason why they are attempting this de dollarization effort. I should also add, and I want to give a little bit of broader context, the whole conversation that we've had, even my definition of tariffs, has been rooted in what is happening today. So we've been talking entirely about import tariffs. Just to be absolutely clear from a not that this applies to what's currently going on, but just from an academic perspective. There are different types of tariffs. There are import tariffs, there are export tariffs, there are revenue tariffs where the goal is simply for the treasury to make more money. There are protective tariffs. So there's all kinds. But what we're talking about in this context are not export tariffs. There's no discussion of that, and there's no discussion of revenue tariffs. The goal is not for the treasury to make money. The goal is to influence the behavior of other nations and to bolster domestic production. So these tariffs, the ones that we're talking about, the tariffs that are likely to go into effect in some form or fashion to some extent or another in 2025. Will these tariffs benefit those of us who live inside of the United States? As consumers, no. But as workers, yes. In certain industries, as long as there are no retaliatory tariffs, which we'll talk about in a moment. As consumers, across the board, there are no benefit to tariffs, and there are often drawbacks. The nonpartisan Peterson Institute for International Economics estimates that a 20% across the board tariff and a 60% tariff on China would cost the typical US household one that is in the middle of the income distribution. That household would face additional costs of more than $2,600 per year. Another study that was done by the Budget Lab at Yale estimates that tariffs would raise consumer prices by somewhere between $1,900 to $7,600 per household. Now, most of this would be at the grocery store because much of our produce is imported, 60% of fruit and almost 40% of vegetables. But outside of the grocery store, we would also see higher prices on items like clothing and furnishings. The US International Trade Commission found that in 2021, the tariffs that we've had in place, and actually, I'll talk about that in just a second, but the tariffs that we've had in place increased prices between 1.7% to 7.1% in the 10 most affected sectors. And those sectors include apparel, car parts, furniture, and computer equipment. Now, when we talk about the tariffs that we've already had in place, we are referring to tariffs that were instituted during President Trump's first term, which were then held in place by President Biden, who kept or increased the majority of President Trump's tariffs, particularly on China. Going back to the core question, right, the question, are tariffs, quote, unquote, good or bad? Is not really an applicable question because as people who live in the United States, we are both consumers and workers. There is widespread agreement that tariffs result in higher prices for consumers. That's been unequivocally demonstrated. But no pain, no gain. In exchange for that burden of higher prices, we also, as workers get more jobs, there's a bigger boost to manufacturing, we revive more industries and communities, we reduce trade deficits. We also, and many economists point this out, we reshore our supply chains, and that could enhance domestic safety, particularly in specific key industries where there's a national security interest in maintaining a domestic supply production. So we arguably may or may not have greater national security as it relates to the supply chain. Our discussion so far has not really covered the topic of retaliatory tariffs. And that that's where we really start playing 3D chess. Whew. That's where things get interesting. So so far, what we've talked about is what happens if we raise taxes on imports that come into the country. What we've covered in the last, what, 15, 20 minutes, however long this has been, what we've covered are the effects of that, just that which, as you can see and hear, that alone is quite nuanced, complex and wide ranging. But what happens downstream? What happens when our partner trading nations impose their own retaliatory tariffs? We're going to take one final break to hear a word from the people who make this show possible. And when we come back, let's unpack that, because that's where things get really fascinating. When you think about businesses that grow their sales beyond forecasts like feastables by MrBeast or a legacy business like Mattel. You know you've got a product with a lot of demand, you've got a focused brand. But there's also an overlooked secret, and that is the business behind the business that makes selling and buying simple. And for millions of businesses, that is Shopify. Nobody does selling better than Shopify, home of the number one checkout on the planet. And it includes shop Pay, which boosts conversions up to 50%, meaning fewer carts going abandoned and more sales going. If you're growing your business, your commerce platform needs to be ready to sell wherever your customers are screaming, scrolling or strolling, whether that's online or in your store. Because businesses that sell more sell on Shopify. Upgrade your business and get the same checkout that Feastables by MrBeast and Mattel uses. Sign up for your $1 per month trial period at shopify.com Paula all lowercase go to shopify.com Paula to upgrade your selling today. Shopify.com Paula Hiring with Indeed your search is over. Indeed is your matching and hiring platform with over 350 million global monthly visitors so that you can ditch the busy work and use Indeed for scheduling, screening and messaging. And Indeed doesn't just help you hire faster. 93% of employers agree Indeed delivers the highest quality matches compared to other job sites. Its matching engine is constantly learning from your preferences, so the more you use it, the better it gets. And over three and a half million businesses around the world use Indeed to hire great talent fast. Now, when we hire inside of afford anything, we do so because we're busy. But hiring itself is really slow and overwhelming. So when you're busy, it's great to have an engine like Indeed that is both fast and high quality. And listeners of this show will get a $75 sponsored job credit. To get your jobs more visibility at Indeed.com Paula just go to Indeed.com Paula right now and support our show by saying you heard about Indeed on this podcast. Indeed.com Paula Terms and conditions apply. Need to hire you need Indeed. Welcome back. Let's talk retaliatory tariffs because this is where we go from playing checkers to playing chess. One thing I should clarify before we get started. Earlier I talked about the Brics nations which I defined as Brazil, Russia, India, China, South Africa, which is what Brics stands for. But then I mentioned that Malaysia had applied to join and I realized that probably created a question in many of your minds because you were probably going, wait a second, how could Malaysia join? Would that be Brixham M. Brics? No, actually, great question. Glad you asked. BRICS is actually a block of nine countries. Back in the day, if you really want the history of this back in the day, BRICS was BRIC singular. It was Brazil, Russia, India, China, and it was this group of four emerging markets. And if you were an emerging markets investor, you could buy a brick ETF and call it a day. Over time, more countries joined that bloc. So South Africa joined and they went from BRIC singular to BRICS plural. And now the BRICS alliance also includes Egypt, Ethiopia, Iran and the uae. Those are the nine countries that have been accepted into the BRICS alliance. But there are, in addition to Malaysia, there are a total of about three dozen countries that have applied to join in Southeast Asia. In addition to Malaysia, Thailand, Vietnam, Indonesia and moving into South Asia. Even Bangladesh have expressed interest in joining. Bangladesh, by the way, has a thriving economy. Pay attention to how much of your clothing says made in Bangladesh. Just start paying attention now. They are facing some big, big challenges right now. Their currency got absolutely hammered after their former prime minister stole a bunch of money from the central banks and then fled the country. That's a whole other saga for a whole different day. When you wonder why people put so much faith and trust in the US dollar and in the US central banks, it's because some of the stuff that happens elsewhere is just unimaginable. There's this concept in psychology. It's called your assumptive world. It refers to these core beliefs, the core ideas that you have about the way the world operates. That's the difference in the type of assumptive world that we live in here in the US versus the type of assumptive world that others live in. And that's the reason why there's so much faith and trust in the US dollar. All right, I will get off of my Bangladesh tangent. We can talk about that on a different day because it's an incredible, tragic, fascinating, morbid, heart wrenching story. I insert adjective here. But all of that that's happening in Bangladesh now came on the heels of decades of incredible economic growth in South Asia. They grew to be the second largest economy in South Asia, after India, of course. Their economy has grown at an annual average of 6.25% for the last 20 years. And they cut their poverty rate by more than half over the span of a dozen years between 2010 to 2022. Both of those stats come from the CIA World Factbook. So being from Nepal, a country that's also in South Asia, that's not doing nearly as well as Bangladesh, it's been amazing to watch their story. One one can only hope that one day Nepal will do as well as them. But anyway, thank you for indulging me as I went off on that tangent back to the BRICS countries. The I guess Bangladesh is a good example of countries that are doing relatively well in their home region. Bangladesh, Indonesia, Malaysia, Vietnam, Thailand and then heading east from there. Turkey, Algeria, Nigeria. These are all nations that have applied to join the BRICS bloc. There are also many countries that have been invited to join but either have not responded yet, such as Saudi Arabia, or that have declined the invite, such as Argentina. And if you want some really interesting listening, listen to Javier Milei, the President of Argentina. Listen to his interview on the Lex Friedman podcast. Fascinating stuff. And that's also a different topic for a different day. We could do a whole podcast episode just unpacking the economic story of Argentina. But let's get back to the episode of today, which is tariffs. And we are now in the section where we're talking about the impact of retaliatory tariffs. The US Department of Agriculture, the usda, conducted a big report on the economic impacts of retaliatory tariffs in January 2022. Specifically, of course, the report was about its impact on US Agriculture. But as we previously stated, much of the impact that US Consumers are going to feel on import tariffs will be felt at the grocery store. And what we've seen in the past is that many of the retaliatory tariffs have also had a disproportionate effect on food producers. So pork, for example, was quite specifically targeted by retaliatory tariffs passed by China. But I'm getting ahead of myself. In 2018, the US imposed tariffs on steel and aluminum imports, and we also imposed tariffs on a much broader range of imports from China. In response to these, a group of countries, including China, Canada, India, Mexico, Turkey, and the EU, imposed retaliatory tariffs on many U.S. exports. And specifically, those retaliatory tariffs targeted a pretty big range of both agricultural and food products. The impact on individual product lines ranged anywhere from 2% to 140%. That is a wide range. So 2% to 140% was the range. And these retaliatory tariffs increased the price of agricultural exports in the home markets of those countries relative to other alternatives that were either produced domestically or that were imported from other international sources. And by the way, that is important to note because if the US does impose 100% tariffs on China, for example, it's entirely possible that many of those producers will route their goods through other nations. So there are really two things that happen. One is that high tariffs imposed on certain countries simply make exports from other countries more attractive. High tariffs imposed on Mexico, China, Canada and the nine block of BRICS nations will make imports from any country that isn't one of the ones that I just named more attractive by comparison. So it offers a competitive advantage to, let's say, imports that come from Chile or Peru. Now, to be clear, President elect Trump has suggested 10% across the board tariffs on all imports coming from any country. But given that there are specific countries that are being targeted with higher tariffs, it makes those particular nations less competitive and by contrast, other nations more competitive. So Even though the 10% across the board would still be there, nations that typically may not yet trade as much with us would have a stronger shot. And by contrast, if those retaliatory tariffs are imposed on the US what that means is that from the point of view of a company owner in Canada or in China, if those tariffs are applied on US Exports, it means that either domestic production in their own home country or exports from some other nation that doesn't have either any tariffs or as severe of tariffs, those would become, relatively speaking, more attractive. Now, what this report from the USDA found was that as of October of 2021, many retaliatory tariffs were still in effect. With a few exceptions, Canada and Mexico's retaliatory tariffs were removed in May 2019. And China announced tariff exemptions for some products after the US China phase one economic and trade agreement was signed in January 2020. And then in October of 2021, the US and the EU made arrangements as well in which the US lifted its tariffs on steel and aluminum imports. They replaced it with a tariff rate quota, and in return, the EU lifted its retaliatory tariffs. And so the effect of all of that is that those retaliatory tariffs led to a significant reduction. I'm quoting directly here. Retaliatory tariffs led to a significant reduction in US Agricultural export. Two retaliating partners, end quote. Now, on its face, that sounds like precisely what you would expect. The question is by how much? And this report found that food exporters suffered losses totaling more than 27 billion from the time period of 2018 through the end of 2019. Now the bulk of these losses, 95%, was due to China's retaliatory tariffs. China accounted for 95% of the losses, in part because they are such a major trading partner, particularly again in the agricultural realm, which is what this report covers. But again, I highlight this report because agriculture and food is where we expect to see the bulk of the impact. So the damage was 27 billion. Most of it was China. The report has some breakouts of how that breaks down in terms of soybeans versus pork, which I won't go into. But this is what's interesting. At the state level, losses were primarily concentrated in the Midwest. Iowa suffered the Most losses at 1.46 billion in annualized losses, followed by Illinois at 1.41 billion and Kansas at 955 million. I'll quote again quote. The state level losses were uneven and not directly proportional to the size of state level exports. States that produced more of the commodities most severely targeted by retaliation, soybeans, sorghum, pork and cotton, experienced higher losses, end quote. And so this is a component of the tariff discussion that is often not talked about in the mainstream media, which is that not only will tariffs impact households differently based on their household income, and not only will tariffs impact industries differently, and we've spoken at length about sector specificity, but in addition to all of that, tariffs are going to impact states differently. And so while we can't predict the future, we know what has happened in the past and specifically in the recent past, 2018 and 2019. And we know that it was the midwestern states in particular that got hit the hardest. What we know, at least from the past is as I mentioned earlier, technology and software is an industry that by and large is less affected by tariffs. Healthcare and pharmaceuticals is generally shielded by domestic production. Many medical devices and pharmaceuticals are manufactured in the US or they are inside of trade agreements that protect them from heavy tariffs. Retail and E commerce, there's mixed impacts. There are retailers that depend on a lot of foreign made goods such as clothing, electronics, various other consumer goods. Those retailers do face higher costs because of tariffs, but as E commerce grows, a lot of companies are able to adapt by sourcing products from companies located in countries that are either outside of the scope of tariffs or that have the lowest tier of severity of tariffs, the cheapest tariffs. Historically it's been manufacturing and agriculture where we've really felt the impact. Farmers, you know, soybean farmers in particular really rely pretty heavily on exports to China. And historically they saw a drastic, drastic reduction in sales due to retaliatory tariffs. So will we see that again? Time will tell, but that is the landscape that we are heading into as the New Year approaches. We will pause here. We will wrap today's episode in our End of the Year episode, our New Year's Eve episode. We will resume this discussion and build on it. We'll take a look back at the economic landscape of 2024, at what has happened in the financial markets, in the trading markets, and we'll look ahead to 2025 and get a sense of what's there. So we're going to have at the end of this year a double header, our New Year's Eve episode as well as our first Friday January episode where we are going to really ground ourselves in research driven, fact based knowledge about the economic landscape of our times. Thank you for listening. Thank you for being part of the Afford Anything community. If you enjoyed today's episode, please do three things. First, subscribe to our newsletter affordanything.com newsletter we're reviving it. It's active again. We are sending out fresh information that you won't find anywhere else. This is not stuff that's on the podcast. It is fresh for you and you can subscribe to it at no cost@affordanything.com newsletter. Second, make sure that you are following this podcast in your favorite podcast playing app. And while you're there, please leave us a review and third and most importantly, share this with the people in your life. With friends, family, neighbors, colleagues. Share this episode Share this podcast with the people that you know. Thank you again for tuning in. My name is Paula Pant. This is the Afford Anything podcast and I'll meet you in the next episode.