← Plain English with Derek Thompson
Plain English with Derek Thompson
A Toy Manufacturer Explains How Trump’s Tariffs Could Crush His Industry
00:35:09
Loading summary
Transcript25 lines
- [00:00]
Molson Hart
All right, my birdie buddies, my par saving pals, my eagle enthusiasts, it's Joe House here. Major season is finally upon us. The Masters, the PGA Championship, the US Open, the Open Championship, and Fairway. Rowan is here to break down all of the storylines. Offer a little help on those betting cards for every single major this golf season. Join me and our incomparable accomplice, Artur Boots on the ground, Nathan Hubbard, as we guide you from Augusta all the way to Northern Ireland Royal Port Rush. Away we go.
- [00:45]
Derek Thompson
This episode is brought to you by Lifelock. It's tax season and we're all a bit tired of numbers, but here's one you need to hear. $16.5 billion. That's how much the IRS flagged for possible identity fraud last year. Now here's a good number. 100 million. That's how many data points Lifelock monitors every second. If your identity is stolen, they'll fix it, guaranteed. Save up to 40% your first year@lifelock.com podcast terms apply. Today. One last show for the time being on the Trump tariffs and the trade war. In the last three weeks, we've spoken to economists about the tariffs. We've spoken to a historian about the Smoot Hawley tariff and the 100 year legacy of American protectionism. We've spoken to supply chain expert Jason Miller from Michigan State on why China is set up to win the upcoming trade war. But the voice we haven't heard from in all these shows is the voice of business. People who run companies are screaming at whoever will listen that the White House agenda is about to decimate businesses and plunge entire industries, if not the entire economy, into a recession. Today's guest is Molson Hart. He runs a manufacturing business in the US and has for the last 15 years. His company, via Hart, manufactures consumer products in China, Indonesia, Vietnam, and sells them in stores and online shops, mostly in the US his biggest vertical is toys, including brain Flakes, which are molded plastic discs that kids and adults can snap together to build things. Molson Heart is not a bleeding heart, lefty. Quite the opposite. This is a guy who told me he's rooting for the Trump agenda to succeed, who told me in our interview that he wants to believe that the Trump team has its heart in the right place when it comes to bringing back manufacturing in the long run. And yet he has called these tariffs not just a bad idea, but the worst economic policy in American history. I spoke to him this week and he was just incredibly compelling and thoughtful about his business and the toy industry and more generally why it's so hard to bring back American manufacturing quickly and how these tariffs could do incredible damage to America's small businesses. So we've decided to rush out this interview a little sooner than we intended, in part because it's great and in part because this new story is moving so quickly. It really is hard to know what reality will look like next week. And of course, as Molson himself says, this uncertainty is very much, very much the problem. I'm Derek Thompson. This is planning this. Molson Hart, welcome to the show.
- [04:11]
Molson Hart
Thanks for having me, Derek.
- [04:14]
Derek Thompson
So you're the CEO of a manufacturing business. Your company makes consumer products like educational children's toys in China, Vietnam, Indonesia. What do these tariffs mean for your business?
- [04:26]
Molson Hart
For the last four or five nights, every night, I've been meeting with a different one of our suppliers. Sometimes that supplier has been in China. Sometimes that supplier has been in Vietnam and Indonesia. And as a practical matter, we've mostly been trying to figure out how we can route manufacturing out of China through another country to reduce the tariffs from 145%, which is the current China tariff, as of today. Tomorrow it may change, we don't know, to 10% in Indonesia and Vietnam so that we can basically save money when it comes to bringing our products to the United States.
- [05:14]
Derek Thompson
Earlier today, I spoke with a supply chain management professor, Jason Miller, and we were going through his analysis of the products that America most relies on China for imports. And they include things like children's coloring books, 93% of which we import from China, 96% of toys for pets, 74% of toy parts for ages 3 or under. The US just obviously overwhelmingly relies on China for toy manufacturing. And of course, now I'm talking to somebody who works in toy manufacturing who has a supply chain that runs through China. What do you see as the effect of an escalating trade war with China on your industry, the toy industry, first.
- [05:59]
Molson Hart
Of all, super hard to make predictions because tomorrow there could be sufficient outcry about the increasing costs of getting toys for families and children and stuff like that. And you could see that 145% tariff out of China become, I don't know, 20% or something like that. So it's really hard to say. China is really good at making certain types of toys. We buy our toys also, which we design and which we inspect in all the countries in which we manufacture. By the way, on every single shipment, we buy them from China. We also buy them from Vietnam and Indonesia. And certain products, certain toy products can certainly be made In Vietnam and Indonesia right now, amongst the people I know who are selling toys, people are kind of like falling maybe into three buckets. The first bucket is I'm going to cheat to win. The second bucket is I'm going to figure out a way to shift my manufacturing over to Southeast Asia as fast as I can and we fall in that bucket. And the third bucket is this policy doesn't make any sense and it's going to change tomorrow. So I'm just going to wait and see. And so depending on what the enforcement of these policies look like, the first bucket could get in trouble. Depending on whether or not the tariffs are reversed, the second and third buckets of toy companies may either find success or be in trouble. If the tariffs, it's really hard to say. So in general, people are predicting tariffs to cause inflation, which basically in the context of toys, means that the prices of toys will rise, but they can actually just as easily cause deflation because these companies, they budgeted 300,000 or $500,000 to buy their inventory. That $500,000 now has 145% tariff on it. And so that is, I don't know, 1.5 that. So it's like $1.3 million now worth of goods. They have to come up with the extra $800,000 in inventory costs in order to get their products to the United States. If they don't come up with that money, maybe supply goes down for toys and prices do in fact rise. Maybe what happens is that they decide to go bankrupt or they close up shop. And when they go bankrupt, then they close up shop, they want to take their inventory and they want to convert it to cash as fast as possible. And the best way to do that is to lower prices. And in that way you could actually have a deflationary episode, prices coming down. When everyone's inspecting inflation, expecting inflation. So it's kind of hard to know what's going to happen, but it's definitely dark days for the industry, no matter what does.
- [09:00]
Derek Thompson
I want to follow up on two points here. One is that you said an option for various players in the toy industry is will cheat to win. And I want to understand what cheating to win means in this context. And then I want to talk a little bit about how uncertainty actually plays out for a company like yours. So let's talk about cheating first. What does cheating to win look like in a 2025 trade war with China in the toy industry?
- [09:28]
Molson Hart
So if you have 145% tariff, the tariff is actually higher than the cost of the goods, which is, like, wild to think about. So that means that your business is no longer oriented about reducing costs or even, like, improving product quality, because what are you gonna do if you reduce the cost by like 10%, 20%, something like that? It just doesn't matter as much as that 145% tariff. So that becomes your complete and your total focus. One of the ways to cheat is to lie about the value of the goods. So if that product that we're buying for $1 actually costs 10 cents on the invoice, then the tariff goes from being $1.45 per unit to being, I guess it would be 14.5 cents or something like that. So that's one way that you cheat. Another way that you cheat is instead of in a sincere and meaningful way, moving production to Southeast Asia, you just figure out a way to say the products are made in Vietnam. Maybe you just have the Chinese factory, right, Vietnam, made in Vietnam on the packaging. Maybe you weirdly route the container through Vietnam and then ship it to the United States, and boom, now you're paying a 10% tariff. So those are the two main ways to cheat to win. One of the major second order problematic effects of these tariffs is, is that incentives drive behavior. And in the United States, you don't need to have a company and you don't need to have a citizen in the United States to import. So in order for us to export to China and export to the eu, we have to have a responsible person, a responsible party. We may have to register for taxes, stuff like that. In the United States, you don't have to do that. So what can happen is that you have companies that are based outside the United States that have a greater incentive to cheat, because if they cheat, they just lose their shipment. Whereas if an American company cheats, they get sued for fraud at big penalties, which they actually have to pay because they're in the United States, where they can be enforced and potentially people can even go to prison. So there's like, really big incentive problems around these tariffs. And like, superficially, right, the tariffs are like, anti China. But if China can more easily cheat and get around the enforcement of the tariffs because they don't have the skin in the game that American companies do, then paradoxically, it can benefit them.
- [12:03]
Derek Thompson
I'm not sure how to phrase this question, but it's something like, I keep hearing from economists that uncertainty is bad for business. You're an actual business person. How does uncertainty play out for you? Like, what are the decisions you're delaying. What choices are you declining to make at this moment? And in a weird way, are there things you're not slowing down on that you're actually speeding up to get ahead of whatever is coming? Basically, I want to know, what do you do with uncertainty?
- [12:38]
Molson Hart
Yeah, that's a great question. I think it really depends on who you are, your personality, and importantly, your financial position. If you're not in a financial position to take additional risk during this period, because it's possible that this is an opportunity for people. For example, if everyone in China pauses their inventory and you don't pause your inventory, you continue to receive goods, well, then you can be the only place, the only company in the United States that has the product that people need. And so your sales can go up, your prices can go up. So there's an opportunity here. And then there's also a huge downside. It's quite easy in this environment to go to be bankrupt. Some based on talking to other people who are in a similar position. Some people are, like, psychologically freezing up. Maybe it's a money question, maybe it's a personality question. People don't. Some people don't take it seriously. They're like, ah, it'll all blow over. It always does. But for me, I. I'm just kind of like, I'm built weird. And so, like chaos and uncertainty, it kind of gives me energy. And so I'm up every night. I'm full of energy. I'm ready to solve this problem. And I'm like, this is an opportunity. This is one of these changing mom moments in the industry where maybe we can do something. Maybe we can seize this opportunity and do something great and like, kind of like take market share. But so it kind of depends on your personality, it depends on your finances, how you respond to uncertainty. The situation is so uncertain that it's almost impossible to make a prediction. Like, I just don't know what the President is going to do. So at least for us, we try to just, like, pick a strategy that no matter what happens, is probably gonna work out okay.
- [14:23]
Derek Thompson
One thing I'm seeing a lot in the reading and the listening that I'm doing for this topic is that it's very, very hard to just move a supply chain. Like, it's not like the DARA Corporation calls its factory in Indonesia and says, hey, call the boys back, and we move everybody into an equivalent factory in Ohio. That's not how anything works. You must have experience maneuvering supply chains out of China in the last few years as You've tried to make your business more resilient. Tell me about that experience.
- [14:57]
Molson Hart
Yeah, sure. So in 2020 and in early 2021, the cost of container shipping went from, I don't know, let's say four to $5,000 per container. Our warehouse is in Texas. So we're shipping a container, which is that metal box that you see on a truck that also you may see on a container ship stacked up like 6, 7, 10 high, whatever. It went from $5,000 to $25,000, which was a huge cost increase for us because we sell rather large products. So the large products take a large percentage of the container. And when the container cost went from $5,000 to $25,000, it increased our costs a lot. So we had the idea of doing some manufacturing in Mexico. If you've ever been to a Build a Bear, which is a retail store where you can pick a skin. Skin is an unfilled stuffed animal. You can fill it up with the plush filling. Like, imagine a pillow case without the stuffing inside. So you can fill it. So our idea was, let's import skins from Asia to Mexico, and then let's fill them in Mexico to save on this massive container cost increase. So the idea is you ship skins which are like, flat and very easy to ship. It doesn't cost very much money, and you move them to Mexico, then you fill them up, and then you bring them to America. And in this way we can save money. As container prices got very high. You can send a. You can send a message to a manufacturer in China. And like, oftentimes you'll see them answering at 5am, you'll see them answering at 7pm Just work really, really hard. Mexico wasn't like that in the same way. It was hard to get people to reply to us. Ultimately, I went to the supply chain town in Mexico, which specializes in stuffed animals. They really have a place like that. I visited some manufacturers. We purchased. We got some skins. Normally we buy finished products from China. In that case, we bought skins. We brought them. Mexico doesn't have the finest ports. And so it turned out that the most effective way for us to ship to Mexico was actually through the United States. So we shipped to Mexico, and the manufacturer assured us that by the time the skins got there, he would have the import export license that would allow us to import it into Mexico and then export it back to the United States. And then by the time the skins reached the border and we discovered he didn't have the license, the license was going to cost $500,000. And I can't believe, to this day, I still can't believe he did that after making that commitment. And we actually sent the skins from the Mexican U.S. border back to our warehouse where they've been for the last two or three years since. So we failed to get it done in Mexico. So that's kind of an example of how government is important. Like, I really don't understand why the Mexican government doesn't do this, but they just don't make it easy for people to import and then export. Right. So Mexico has lots of tariffs, but they should make it easy for those tariffs to maybe be not paid if the factory exports later. And so that's kind of an example of the difficulties we had manufacturing in Mexico.
- [18:23]
Derek Thompson
Does your experience in Mexico offer a lesson that applies more broadly, that describes how difficult it's going to be for toy companies and even electronics companies and phone manufacturers to pull their factories out of China?
- [18:40]
Molson Hart
Yes, it does. And what we were doing in Mexico wasn't even that complicated. Right. The skins were plush animal skins that were like 100% finished. All they needed to do was to fill the product, which they were already doing in Mexico, from the plush supplier, because we need to get the plush and put in the stuffed animal, and we still failed. Now imagine how difficult it would be to make all those things from scratch. Like, if we want to make that stuffed animal in the United States, where's the fabric coming from? Where's the fabric manufacturer? Are they on the other side of the country? In which case then we may not be able to do it at a price that consumers are willing to accept because the shipping costs are going to be too high. Oh, does anyone even know how to sell a plush animal? Like, I like it, personally, I've never actually sewed a plush animal. I don't know. I mean, my wife used to work for Ralph Lauren, and so she was kind of helpful when it comes to fashion. But is the know how is it there? Does it. Do we have someone in the United States who knows how to make the plastic nose that's going to go on the stuffed animal, how do we make that product be safe and all that stuff? So we failed to do something at that time. It was actually quite simple. Now making the whole stuffed animal significantly harder than people even realize. Now compare that stuffed animal to an iPhone. So I think we're really underestimating how difficult it's going to be to bring manufacturing back to the United States.
- [20:11]
Derek Thompson
So Mohsen, shortly after the original reciprocal tariff plan was announced, you called it, quote, the worst economic policy I've ever seen. I don't think that needs much elaboration from me. Why did you write that? Why did you feel that way?
- [20:29]
Molson Hart
Well, I could have been being a little bit emotional there, and it's very possible that their heart is in the right place, but their head is not. If the intention is to bring manufacturing back to the United States, the tariffs need to be done in a completely different way. I'm not against bringing manufacturing back to the United States, actually, I would like to see manufacturing of certain things come back to the United States so that we can be a strong, productive nation. But we should be selective about it and we should be more oriented towards iPhones, high value goods and things that play to our strengths. One of our strengths is agriculture. Maybe we should have a tariff on agricultural drones, for example. We should be future and technology oriented. We should have tariffs on robots to encourage the domestic manufacturing on robots so that we can automate our supply chains further. But one of the reasons why this economic policy is not done right is that the tariffs are one completely uncertain. One day they're on, the next day they're off, the next day they're on again. Which disincentivizes building a factory. If you want to build a factory, you need to have certainty from the government. You don't want to build that factory. And by the time it's built, which by the way, takes multiple years, hear from the government that they're no longer tariffs and you've now lost all your money on that factory. The other thing is that the tariffs should kind of be graduated in the sense that if we want to put a 200% tariff on agricultural drones, we should not do it at 200% tomorrow, because we need those agricultural drones tomorrow and then the coming weeks in order to make our fields effective and crop producing for farmers. What we should do is put perhaps a 25% tariff starting in three months, which becomes a 75% tariff in a year, which becomes 150% tariff in two years, which becomes 200% after three years or something like that. Give supply chains time to adapt, give people an opportunity to build that drone factory rather than just throwing a 200% tax on it. Another problem with the tariffs is that they applied a tariffs to components and finished products equally. If you want to develop manufacturing in the United States, you might want to start with final assembly. A lot of cars are assembled in the United States from the import of foreign components. So maybe what you want to do is you want to say, look, we want to start manufacturing these agricultural drones in the United States. We're going to put that 200% tariff on agricultural drones, but we're not going to have the same tariff on the motors. We're not going to have the same tariff on the propellers, which currently, let's say, the supply chain doesn't exist for. And so we're going to have lower tariffs on the components and higher tariffs on the finished goods. That incentivizes at least the assembly in the United States. Another thing is that they applied the tariffs to finished goods, not only to the components, but also to the machines you need to actually make the components. So if you want to make. All right, it's a bad policy. If you want to make these propellers, these drones, these motors, you need machines. And by applying that tariff on the finished product that you also applied on the machine, you just made all the machines considerably more expensive. So it's now become more expensive to open a factory in the United States to make those drones. And so there are all sorts of like major problems with how this is done. They also put like tariffs on coffee, which doesn't grow in the United States. And I think I speak for all of us when I say that we could use a little bit of coffee right now in adapting to this situation.
- [24:23]
Derek Thompson
One thing I'm watching is that this is a very transactional administration. And when you read stories like for example, the Nvidia CEO Jensen Huang having dinner with the President and getting the White House to exempt some of his chips from export controls, it definitely smells bad. But the broader principle here that I think is worth paying attention to is not just the possibility of corruption, but the fact that big companies have a much easier time making those kinds of asks of the White House. Like, small companies don't have the manpower to constantly adjust to all these tariffs. But even more importantly, maybe they can't. They don't have the resources to lobby the relevant US Trade representative to win an exemption for their particular thing. Do you think it's reasonable to worry about this trade war becoming a kind of Christmas tree for one off deals that helps big corporate giants and ironically hurts the little guys?
- [25:23]
Molson Hart
Yeah, I think that's definitely right. Look, when you hear about Tim Cook or Jensen Huang having dinner with the President, the optics of that are obviously horrible, right? So hey, do me a favor. Dinner was a million dollars or whatever, but it doesn't necessarily mean that something, that the money was passed under the table or whatever, that a bunch of Trump coin was purchased. It could also mean that Trump, the president, doesn't understand how the supply chain works, and he doesn't understand that you can't snap your fingers and open up that factory in the United States. And maybe he just needs to have information to understand how the policies need to be changed. So it's not just about having a big company and big money, but it's also about having a voice. And so I hope that the administration listens to the voices of the companies, big and small, particularly the ones that employ a lot of people to hear how this is going to affect them, because I do think that many of them have their heart in the right place, but the execution on these ideas is really poor. And so maybe the right small businesses can voice their opinion and the tariffs will change in some sort of way to be not only more beneficial to them, but what's actually important, which is the country at large.
- [26:50]
Derek Thompson
Let's say the tariffs don't go anywhere. It remains 145 on toy parts from China. How does the toy industry look different.
- [26:56]
Molson Hart
In three years if the tariffs don't go anywhere? Don't get me wrong, I love our educational toys. Toys are the least of our worries. What about transformers and pumps and air conditioners? A lot of these products aren't really, like, made anywhere but China, where China has like 50, 60, 70% of the market share when it comes to the manufacturing of those products. Like, at a certain point, the stores of the stock of the replacement transformers, the replacement pumps that we need for clean water are going to run out, and there isn't anyone building new factories for those things, and the factories won't be ready in time. So as much as I'd like to see the tariff reduced on educational toys, because educational toys make people smarter, they make kids smarter, and that's what's needed to bring manufacturing back to the United States. As much as I'd like to see that, I'm going to tell you the truth, Transformers and pumps are actually more important. And so I don't know what we're going to see if we don't have power. It's like a really frightening thing, to be honest. And so hopefully this message comes across because by the time you have a shortage of transformers in a particular location in order to get a new order of Transformers, it's not Amazon prime where you're like, ah, yeah, I'll just go to Amazon prime, click a button, buy now. Cool. It's there in two days. Like, it takes months to make the transformers to ship them, perhaps by sea I don't know, maybe you can ship transformers by air. They're going to be significantly more expensive. And so that's kind of what worries me. As for the toy industry, I mean, I'm not sure what's going to happen, but a lot of companies are definitely going to go under, that's for sure. But right now I'm just more concerned America's like a net food importer than we have been for the past two years. What about the cost of food? So yes, I'm totally concerned about my company and I'm concerned about my employees and keeping them employed. And I want kids to have educational toys. But there are other things that we need to resolve first. And that is the thing that's, that's like really, it's like weighing on me.
- [29:10]
Derek Thompson
Molson Heart, thank you very much.
- [29:12]
Molson Hart
Derek, thank you so much.
- [29:15]
Derek Thompson
Many thanks to Molson Heart. I just want to recircle a point that's somewhat compiled from this show you just listened to. And our last show this week with the supply chain expert Jason Miller. Even if you were committed to the Trump White House agenda to restore critical supply chains in military equipment and energy and computing, there is just no reason to do it in a way that crash decouples the entire American toy supply chain. More than 70% of American toy imports, 90% of American coloring books come from China. A full on trade war is going to punish families and crush small businesses and the toy business for no good reason. Like it's not in America's strategic interest to restore Halloween lawn equipment or stuffed animals for the purpose of restoring American greatness. I remain incredibly worried that we haven't seen the worst of this policy or anything close to it. And I think a lot of companies and families and people are going to suffer because of this utterly misguided trade policy. Okay, deep breath. Next week I promise I will move on to other subjects. I promise. I promise. Thank you all for listening.
- [30:53]
Molson Hart
Sa.