Tariff Talk: What Trade Policies Could Mean for Your Budget

Summary

NerdWallet's Smart Money Podcast: "Tariff Talk: What Trade Policies Could Mean for Your Budget"

Release Date: December 4, 2024

Introduction

In this episode of NerdWallet’s Smart Money Podcast, hosts Sean Pyles and Anna Helhosky delve into the intricate world of trade policies, specifically focusing on tariffs and their potential impact on the average consumer’s budget. The discussion centers around former President Donald Trump’s proposed tariff plans and the broader economic implications of such measures.

Understanding Tariffs [01:50 - 02:28]

Sean Pyles opens the conversation by defining tariffs:

“A tariff is essentially a tax on imported goods when they enter the country. It's usually a fixed amount or a percentage of the price of the import. Tariffs are used for a few different reasons, to raise revenue, to protect domestic interests from foreign competition, or as a foreign policy tool.” [02:28]

Anna Helhosky emphasizes the current relevance of tariffs in political discourse, especially with Trump’s promises to implement new tariffs upon returning to the Oval Office.

Trump’s Proposed Tariffs [02:46 - 03:54]

Anna outlines Trump’s ambitious tariff plans:

“Trump has promised to levy all kinds of new tariffs when he's president again, including 10% to 20% across the board tariffs on all imported goods, up to 60% tariffs on goods imported from China, and 100% to 200% tariffs on automobiles produced in Mexico. Then last week, Trump also said he would levy a 25% tariff on all imports from Canada and Mexico.” [02:46]

She further notes that these tariffs are in response to concerns over fentanyl smuggling, as stated by Trump on his social media platform, Truth Social.

Historical Context and Economic Concerns [03:30 - 04:27]

Sean reminds listeners that tariffs are not a novel concept, having been utilized by various presidents over the years. However, he points out that economists have expressed significant concerns regarding the magnitude of Trump’s proposed tariffs and their potential economic repercussions.

Anna adds context by referencing the tariffs implemented in 2018 under Trump and their subsequent expansion under President Joe Biden:

“In 2018, Trump levied tariffs ranging from 10% to 50% on goods mostly imported from China... President Joe Biden also expanded some of those tariffs.” [04:27]

Impact on the Supply Chain and Consumers [04:33 - 06:34]

The hosts explore how tariffs disrupt the global supply chain, leading to increased costs for consumers. Anna uses the example of washing machines to illustrate this point:

“In 2018, while Trump was first president, he enacted a 20% tariff on all imported washing machines, and that increased to 50% later in the year. Researchers found that as a result, the price of washers rose by nearly 12%, and dryers also rose by the same amount.” [05:19]

Sean highlights the inflationary effect of tariffs, citing a Goldman Sachs note predicting a potential 1% increase in inflation due to Trump’s tariff plans:

“Goldman Sachs published a note saying that they would likely increase inflation by 1%.” [05:53]

Economic Implications and Revenue Generation [06:42 - 07:36]

Anna discusses Trump’s rationale behind implementing tariffs, which includes raising federal revenue and boosting domestic manufacturing:

“The Tax Foundation says that a 10% universal tariff would raise $2 trillion, while a 20% universal tariff would raise $3.3 trillion.” [06:55]

However, she points out that the revenue from tariffs would not compensate for potential losses from other federal revenue streams, such as expiring tax provisions.

Effects on Manufacturing [07:45 - 08:29]

Sean questions the effectiveness of tariffs in revitalizing the manufacturing sector. Anna responds by acknowledging that while tariffs can protect certain domestic manufacturers from foreign competition, the increased costs can ultimately harm manufacturing competitiveness:

“A 2019 paper by the Federal Reserve Board found that Trump’s 2018 tariffs led to a relative reduction in manufacturing employment as well as increases in producer prices.” [07:45]

Consumer Impact and Purchasing Advice [08:29 - 09:03]

Discussing the real-world effects, Anna mentions that companies like AutoZone and Walmart anticipate price hikes due to the proposed tariffs. Sean advises consumers to consider purchasing essential goods now if they anticipate future price increases, but cautions against unnecessary spending:

“The main assumption is that Trump does indeed enact most or all of the tariffs that he has said that he will.” [09:03]

Money Headlines: Black Friday Spending [10:37 - 11:30]

Shifting gears, the hosts recap recent money headlines, focusing on Black Friday spending trends. Anna shares that retail sales increased by 3.4% compared to the previous year, with online sales surging by nearly 15%, while in-store sales saw a modest increase of 0.7%:

“MasterCard says online sales last Friday shot up almost 15% in store sales, by contrast, rose just 0.7%.” [11:18]

Stock Market: Santa Claus Rally [12:02 - 12:43]

Sean introduces the concept of the Santa Claus Rally, a phenomenon where the stock market tends to perform well in the final two months of the year. Anna references a Barron's analysis showing that the Dow Jones Industrial Average has an average return of 2.6% during November and December, compared to the yearly average of 1.2%:

“The index boasts an average return of 2.6%. Looking at two-month periods across the year, the average is just 1.2%.” [12:26]

She adds that during presidential election years, the average return increases to 3.3%.

Financial Success Insights [13:12 - 14:18]

The conversation shifts to personal financial success, with Anna humorously outlining the typical blueprint: “Work hard, play hard, love hard.” Sean presents survey data indicating that many Americans equate financial success with high salaries and substantial net worth:

“The average salary people consider to indicate that you're successful is $270,000 a year and $5.3 million in overall net worth.” [13:20]

Despite this, only 37% of respondents feel financially successful, although 58% believe it’s attainable. Anna notes that financial instability and lack of financial management skills are significant barriers:

“35% say it's because of the economy, 30% say it's because of instability in their income streams, and 20% say it's because they're not sure how to manage their finances.” [13:43]

Sean encourages listeners to engage with NerdWallet’s resources to improve their financial literacy.

Conclusion

Sean and Anna wrap up the episode by inviting listeners to submit their financial questions and reminding them to follow the podcast for more insights. They emphasize the importance of informed financial decisions, especially in the face of potential economic policy changes like tariffs.

Key Takeaways:

• Tariffs Defined: Taxes on imported goods intended to raise revenue, protect domestic industries, or serve as a foreign policy tool.

• Trump’s Tariff Plans: Proposes significant tariffs on imports from China, Canada, Mexico, aiming to reduce trade deficits and address issues like fentanyl smuggling.

• Economic Impact: Tariffs can lead to higher consumer prices and contribute to inflation. While they might generate substantial federal revenue, they can also dampen manufacturing competitiveness and lead to job losses.

• Consumer Advice: Consider purchasing essential imported goods before potential tariff implementations but avoid unnecessary spending.

• Black Friday Trends: Online shopping saw a significant increase, highlighting the shift towards e-commerce.

• Santa Claus Rally: Historical data suggests a modest stock market uptick in late-year months, more pronounced during election years.

• Financial Success: Achieving financial success is often hindered by economic instability and lack of financial management skills, underscoring the importance of financial education.

By understanding the complexities of tariffs and their broader economic implications, listeners can make more informed decisions that align with their financial goals.

Transcript

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[Sean Pyles]

Welcome to NerdWallet's Smart Money podcast. I'm Sean Pyles.

[Anna Helhosky]

And I'm Anna Helhosky and this is.

[Sean Pyles]

Our weekly Money news roundup where we break down the latest in the world of finance to help you be smarter with your money. We'll go deep into a single topic, then leave you with the latest money headlines. Today, we're taking a closer look at tariffs, what they are and how they ultimately affect you.

[Anna Helhosky]

That's right, and we'll explain President Elect Donald Trump's big plans for enacting new tariffs once he steps back in the Oval Office in January. We touched on Trump's tariff plans during our election series in October and in our post election episode on November 13th. So feel free to Check those out. Sean, why don't you kick us off with an explanation of what tariffs are?

[Sean Pyles]

A tariff is essentially a tax on imported goods when they enter the country. It's usually a fixed amount or a percentage of the price of the import. Tariffs are used for a few different reasons, to raise revenue, to protect domestic interests from foreign competition, or as a foreign policy tool.

[Anna Helhosky]

So here's why tariffs are in the discourse right now. Trump has promised to levy all kinds of new tariffs when he's president again, including 10% to 20% across the board tariffs on all imported goods, up to 60% tariffs on goods imported from China, and 100% to 200% tariffs on automobiles produced in Mexico. Then last week, Trump also said he would levy a 25% tariff on all imports from Canada and Mexico. Those are the top two exporters of goods to the United States. He also promised to levy a 10% tariff above any additional tariffs on China. They're the third biggest exporter of goods to the United States. He said on Truth Social that the reason for those threats are due to the rise in fentanyl smuggling.

[Sean Pyles]

Presidents have levied all kinds of tariffs over the years, either on a country or for a particular good, so it's not a new thing. But throughout the campaign, economists expressed concerns about the extent of Trump's tariff plans and the potential impact on the economy. Now, not all campaign promises bear fruit, however. Trump has been bullish before on tariffs, and it's likely he'll have a similar approach in his second term.

[Anna Helhosky]

In 2018, Trump levied tariffs ranging from 10% to 50% on goods mostly imported from China. That includes solar panels, washing machines, steel and aluminum. President Joe Biden also expanded some of those tariffs. Back in May, he increased tariffs on steel and aluminum, semiconductors, electric vehicles, batteries, medical equipment, and solar cells. One thing I want to note as well is that any new tariffs would be added to the tariffs that already exist. So, as you said, Sean, tariffs are nothing new. But it's the scope of Trump's plans that have some economists concerned.

[Sean Pyles]

One concern that consumers might have is that tariffs tend to make the stuff you buy more expensive, right?

[Anna Helhosky]

Yeah, they do. But I want to step back and consider how that stuff is made and distributed. In other words, the supply chain. The US Is not siloed, as in, we don't make everything here that we consume, and we don't consume everything that we make. The supply chain is global, and that means we have a network of companies across the world that supply not just completed goods that you buy Like a car, but the raw materials and components used to make that car, too.

[Sean Pyles]

So when the supply chain is disrupted through war, natural disasters, or, say, a global pandemic, there's not enough supply of a product to meet consumer demand. And as we know, when that happens, prices go up. So we have a better sense of the global supply chain and how it works. Let's bring it back to tariffs. How do tariffs affect the supply chain?

[Anna Helhosky]

Ah, so now it's time for the washing machine example. In 2018, while Trump was first president, he enacted a 20% tariff on all imported washing machines, and that increased to 50% later in the year. Researchers and economists at the University of Chicago and the Federal Reserve analyzed the effects of those tariffs and found that, as a result, the price of washers rose by nearly 12%, and dryers also rose by the same amount, even though there was no tariff on dryers. That's because the two are usually sold together. So overall, it was an increase of about $92 in 2018.

[Sean Pyles]

So we know that tariffs can have an inflationary effect. And economists say that if Trump levies the tariffs he has promised it could be or would be inflationary. Last week, after Trump announced his plans for tariffs on Canada, Mexico, and China, Goldman Sachs published a note saying that they would likely increase inflation by 1%.

[Anna Helhosky]

I've seen some economists on the left, the center, and the right who all seem to say the same thing. Trump's tariffs don't make sense from an economic standpoint, and it's likely to fuel inflation. As costs are passed on to US.

[Sean Pyles]

Consumers, tariffs make things more expensive for nations to export, which makes it more expensive for suppliers and manufacturers to get the parts and goods they need, and that cost is passed on to the consumer.

[Anna Helhosky]

There's one other element that I mentioned before, and that's the threat of retaliatory tariffs, which would mean the US Exports would cost more as well.

[Sean Pyles]

I want to back up and look at the reasoning behind Trump's tariff proposals. He says his plans would increase revenue and spur domestic manufacturing. Ana, is any or all of that realistic?

[Anna Helhosky]

All right, so there's a lot to unpack. First off, yes, economists say that tariffs will raise revenue. The Tax foundation says that a 10% universal tariff would raise $2 trillion, while a 20% universal tariff would raise $3.3 trillion. But the revenue raised by those tariffs wouldn't offset the revenue losses that we'd see if the expiring provisions of the 2017 tax cuts and Jobs act are made permanent. There's some other context, that's important. Tariffs haven't been an important source of federal revenue. According to the Budget Lab at Yale University, in fiscal year 2023, the U.S. collected just $80 billion in net customers duties. That's about 2% of total federal revenue in that period.

[Sean Pyles]

So how about manufacturing? It's not what it used to be in this country, even if it's still one of the largest sectors of the economy. Do tariffs increase manufacturing?

[Anna Helhosky]

Yes and no. The US doesn't have the capacity to produce everything that the country needs. As I said before, the US Is part of a global economy, so manufacturers at home still rely on imports from other countries as part of production. A 2019 paper by the Federal Reserve Board that analyzed the effect of Trump's 2018 tariffs on the US manufacturing sector found that import tariffs could protect some US manufacturers from foreign competition. But it also said that any gains are offset by increased costs that could hurt US Manufacturers ability to compete. The Federal Reserve Board even found that Trump's 2018 tariffs led to a, quote, relative reduction in manufacturing employment as well as increases in producer prices.

[Sean Pyles]

Now, some companies like autozone, Columbia Sportswear, Stanley Black and Decker and Walmart have already said that their prices will likely rise as a result of Trump's proposed tariffs. There's a lot of crystal ball reading here, but if that's the case, should people make purchases now before Trump imposes tariffs?

[Anna Helhosky]

This is tricky because as you said, you have to make a fair number of assumptions to make a decision like that. But the main assumption is that Trump does indeed enact most or all of the tariffs that he has said that he will. That's what remains unclear and likely will remain unclear until he's officially president again.

[Sean Pyles]

The hard part for all of us is that we don't know exactly what's going to happen tariff wise. It might be a smart idea for folks to get something they know they'll need and is made in China or Mexico or Canada, like an appliance or a smartphone. But don't buy something you don't need now just because it might be more expensive later. Up next, a few money headlines from the last few days. Today's episode is supported by Range Rover Sport. You know, some vehicles are built for performance, some for luxury, and some for adventure. But the Range Rover Sport, it's built for all three. It's the Swiss army knife of cars, except way more comfortable and without the tiny scissors. With its powerful design and sporting luxury, it isn't just a vehicle. It's your statement of intent. It's built to deliver smooth, composed handling with adaptive dynamics which reduces unwanted body movements so even the twistiest roads feel like a breeze. And for those days when the road is more dirt than asphalt, adaptive road cruise control has your back adjusting seamlessly to changing terrain. On top of all that, the Range Rover Sport's dynamic air suspension gives you maximum agility, control and support. So if you're ready to elevate your drive and leave the drama for your destination, head to land RoverUSA.com build your perfect range Rover Sport and get ready to lead every journey in style@land roverusa.com well Anna, did you empty your bank account on Black Friday?

[Anna Helhosky]

Sean I work at NerdWallet. Of course not. I'm a saver at all times and never spend money on anything. Just kidding. I got some deals on skincare for me, toys for my friend's kids, and the same two flannel shirts that I buy for my dad annually. How about you Sean?

[Sean Pyles]

Sounds like you had a very productive shopping weekend. Oh yes, I bought some stuff for myself that wasn't even on sale, but I did pick up a couple of things for folks on my list. So, you know, kind of a mixed bag there. Black Friday and Cyber Monday definitely made my wallet a little bit lighter. And apparently it did for a lot of other Americans too. The annual Mastercard spending poll survey showed that retail sales were up 3.4% on Black Friday from last year's Black Friday.

[Anna Helhosky]

And a lot of us were doing that shopping online even before Cyber Monday. MasterCard says online sales last Friday shot up almost 15% in store sales, by contrast, rose just 0.7%.

[Sean Pyles]

The survey says popular items included jewelry, electronics and clothing and footwear. According to MasterCard, is quote tracking stronger than last year at this time.

[Anna Helhosky]

Hey, never enough sneaks in the closet. Or maybe boots for the storms that hit the Midwest over the weekend.

[Sean Pyles]

If you are sick of winter weather or you're just looking for a change of scenery, then I should let you know that our friends on the travel team just published a list of eight last minute Christmas vacations that you can book in the US you can find a link to that in today's show. Notes.

[Anna Helhosky]

Sean With Thanksgiving behind us, it's time to turn to thoughts of stockings hung by the chimney with care and hopes that a Santa Claus rally might bestow itself upon the stock market.

[Sean Pyles]

Santa yes, this is one of those stock market mythologies that has some element of truth to it. This is the idea that the markets like to rally as we head toward the end of the calendar year. Barron's took a look at it recently and found some merit to that.

[Anna Helhosky]

Yeah, it looked at the Dow Jones industrial averages since the index was created back in May of 1896. It found that if you look at the two months of November and December, the index boasts an average return of 2.6%. Looking at two month periods across the year, the average is just 1.2%.

[Sean Pyles]

Yay, Sansa. Barron's also looked at the impact every four years of a presidential election cycle. And in those years, the November December Dow Jones average return was 3.3%. This is where we say that this is all in good fun. We are not professional crystal ball readers. And this is in no way a promise that either Santa or the Santa Claus rally will appear this month. And finally, Ana, do you believe that there is a secret to success?

[Anna Helhosky]

Oh, definitely. Work hard, play hard, love hard. You know, bumper sticker philosophy.

[Sean Pyles]

Okay, and how about financial success?

[Anna Helhosky]

Save more than you spend.

[Sean Pyles]

I'll buy that. So to speak. For many Americans, the answer to that question lies in their paychecks. Research from the financial services firm Empower found that the average salary people consider to indicate that you're successful is. Drumroll, please. $270,000 a year and $5.3 million in overall net worth.

[Anna Helhosky]

If I had to live on that, then I guess I could. Unfortunately, only 37% of respondents to the research said that they feel financially successful. But a solid majority, 58%, say they believe it's possible to attain that success during their lifetimes.

[Sean Pyles]

The study found that of those who feel they're not hitting the mark for financial success, 35% say it's because of the economy, 30% say it's because of instability in their income streams, and 20% say it's because they're not sure how to manage their finances. And I know what can help with that.

[Anna Helhosky]

Oh. Become or stay a regular listener to Smart Money.

[Sean Pyles]

And that's it for this week's Money News. We always welcome your money questions and comments. Turn to the nerds and call or text us your questions at 901-730-6373. That's 901730, nerd. Or send us a voice [e-mail] and remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcast and iHeartRadio, to automatically download new episodes.

[Anna Helhosky]

Today's episode was produced by Tess Viglen and myself and edited by Rick vanderkinife.

[Sean Pyles]

Here's our brief disclaimer we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances circumstances.

[Anna Helhosky]

And with that said, until next time, turn to the nerds.

[Unknown]

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