Trump's contradictory trade policies

Summary

Summary of "How Tariffs Can Bog Down a Small Business"
The Indicator from Planet Money
Released: December 18, 2024

The Indicator from Planet Money, hosted by Darian Woods and Waylon Wong, delves into the intricate dynamics of tariffs and their unintended consequences on small businesses through the real-life story of Kim Vaccarella, a small business owner from New Jersey.

---

Introduction: Understanding Tariffs

The episode opens with Darian Woods introducing President-elect Donald Trump's promise to bolster American manufacturing through increased tariffs. Tariffs, essentially taxes on imported goods, are touted as tools to protect domestic industries from foreign competition.

Darian Woods [00:11]:
"President elect Donald Trump wants to have more stuff made in America. And to do this, I'm sure you've heard, he's promising more tariffs."

Waylon Wong [00:25]:
"Tariffs are a tax on imported cars, barbecues, laptops, fridges. I mean, really anything. And the idea is to protect, protect American companies from overseas competition."

While the intention behind these tariffs is to shield American businesses, the hosts hint at underlying complexities that may counteract these objectives.

---

Tariffs and Currency Dynamics

Darian and Waylon explain a critical economic principle: tariffs can inadvertently strengthen the U.S. dollar. This phenomenon runs counter to the Trump administration's goal of making American exports more competitive.

Waylon Wong [00:35]:
"Well, not really. There is one problem with this plan. Tariffs actually strengthen the dollar."

Darian Woods [01:03]:
"Today on the show, we explain tariffs and currencies through the story of one bag manufacturer from New Jersey. And we look at how its experience illustrates how Trump's goals are contradictory."

This sets the stage for a deep dive into the practical implications of tariffs on a small business.

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Case Study: Kim Vaccarella and the Bog Bag Business

Kim Vaccarella's entrepreneurial journey serves as a microcosm for understanding the broader economic impacts of tariffs. In 2008, Kim's frustration with ineffective beach bags led her to innovate a new product inspired by the material used in Crocs sandals.

Kim Vaccarella [03:00]:
"Things were falling into the sand and getting lost like keys and I needed a better beach bag."

Upon struggling to find suitable machinery in the United States, Kim turned to China for manufacturing, where she developed the "bog bag" — sturdy, colorful tote bags designed for the beach.

Kim Vaccarella [03:57]:
"Oh, yeah, I've seen these around. They're like pretty sturdy bags. They have the holes in them. They come in a bunch of colors."

Initially, tariffs were manageable, ranging between 15% to 20% of the bag's value. However, with Trump's election in 2017, these tariffs surged, significantly increasing the cost burden on Kim's business.

Kim Vaccarella [05:04]:
"Some of them have gone up to 40%, you know, essentially doubled. Now it's a substantial cost."

---

The Economic Mechanism: Tariffs Strengthening the Dollar

The core of the episode explores how increased tariffs can lead to a stronger U.S. dollar, which paradoxically undermines the competitiveness of American exports. Here's how it unfolds:

1. Tariff Implementation: Kim's business pays increased tariffs on each shipment of bog bags imported from China. For instance, a 40% tariff on a $50 bag results in an additional $20 per unit.

   Kim Vaccarella [05:44]:
   "You have to eat some as the business, the consumer has to pay a little bit more."

2. Consumer Impact: Higher prices lead to reduced demand among American consumers for these imported goods. Consequently, fewer U.S. dollars flow to China to pay for these goods.

3. Currency Valuation: Reduced demand for Chinese goods translates to less demand for the Chinese renminbi. This weakens the renminbi relative to the U.S. dollar, effectively strengthening the dollar.

Darian Woods [06:25]:
"When American consumers are faced with higher prices, they will buy fewer bags. That means less of those US Dollars going to the Chinese bag factory and being converted to the Chinese renminbi. Less demand for renminbi weakens the Chinese currency in comparison, the US Dollar gets stronger."

A stronger dollar makes American exports more expensive abroad, counteracting the very protection tariffs aim to provide.

---

Impact on Small Businesses: The Bogged Down Business

For Kim Vaccarella, the increased tariffs have tangible repercussions:

• Immediate Financial Strain: The abrupt rise in tariffs led to an $800,000 toll on her business in a single day, straining her financial resources.

  Kim Vaccarella [05:53]:
  "I really didn't understand fully the tariffs. It was just added to the bottom line or expense."

• Operational Adjustments: To mitigate the increased costs, Kim attempted to pass some of the burden to consumers by raising prices. Additionally, she negotiated with her Chinese factory to lower prices, reducing the influx of U.S. dollars that would otherwise flow to China, further strengthening the dollar.

  Kim Vaccarella [06:57]:
  "I mean, there's only so far you can go. You can't go and recoup all of it by way of the consumer. So there was some times where we were able to negotiate with the factory as well and say, hey, we may not have an option but to pull out."

• Diversification Efforts: Anticipating future tariffs, Kim began exploring alternative manufacturing locations in countries like Vietnam, Sri Lanka, and Cambodia to diversify her supply chain and reduce dependency on China.

  Kim Vaccarella [09:09]:
  "We need to diversify in general, right? You don't want to have all your eggs in one basket."

---

The Broader Economic Implications

The episode elucidates the unintended consequences of tariff policies:

• Strengthened Dollar vs. Export Competitiveness: While tariffs aim to protect American industries by making imports more expensive, the resulting stronger dollar can make U.S. exports pricier abroad, potentially reducing demand for American-made products.

  Darian Woods [07:51]:
  "The side effect from tariffs is the opposite of what Trump wants. A stronger dollar is bad for US Exports."

• Economic Complexity: The hosts acknowledge that various factors influence currency valuations, and while tariffs alone can strengthen the dollar, the real-world scenario involves numerous interacting policies and economic conditions.

  Darian Woods [08:32]:
  "Now, there are a couple of caveats here. There will be a ton of new policies and circumstances happening all at once over the next few years. Some will strengthen the dollar, some will weaken it. So what we've just run through is what economists call ceteris paribus."

---

Conclusion: Lessons from the Bog Bag Business

Through Kim Vaccarella's experience, the episode highlights the delicate balance small businesses must navigate amid shifting trade policies. The key takeaways include:

• Unintended Consequences: Policies like tariffs can have ripple effects that may undermine their original intent, such as strengthening the dollar while aiming to protect domestic industries.

• Adaptation and Diversification: Small businesses must remain agile, adjusting their strategies and supply chains in response to changing economic landscapes to mitigate risks associated with tariffs and currency fluctuations.

• Complex Economic Interplay: Understanding the broader economic mechanisms is crucial for both policymakers and business owners to anticipate and address the multifaceted impacts of trade policies.

Kim Vaccarella [09:14]:
"Exactly."
(Referring to the need for diversification)

The episode serves as a compelling case study on how macroeconomic policies penetrate the operations of small businesses, emphasizing the need for informed decision-making and strategic planning in an interconnected global economy.

---

Notable Quotes:

• Waylon Wong [00:22]:
  "Tariffs are the most beautiful word."

• Kim Vaccarella [05:44]:
  "You have to eat some as the business, the consumer has to pay a little bit more."

• Darian Woods [07:51]:
  "The side effect from tariffs is the opposite of what Trump wants."

• Kim Vaccarella [09:09]:
  "We need to diversify in general, right? You don't want to have all your eggs in one basket."

---

This episode of The Indicator offers an insightful exploration into the complexities of tariffs, providing listeners with a nuanced understanding of how well-intentioned economic policies can have multifaceted and sometimes counterproductive outcomes for small businesses.

Transcript

[NPR]

NPR.

[Darian Woods]

President elect Donald Trump wants to have more stuff made in America. And to do this, I'm sure you've heard, he's promising more tariffs.

[Kim Vaccarella]

Tariffs. I think tariffs are the most beautiful word.

[Waylon Wong]

I think they're beautiful.

[Kim Vaccarella]

It's going to make us rich.

[Waylon Wong]

Tariffs are a tax on imported cars, barbecues, laptops, fridges. I mean, really anything. And the idea is to protect, protect American companies from overseas competition.

[Darian Woods]

Trump has also at times demanded a weaker dollar because a weak dollar is good for American exporters. It means people overseas can more easily afford stuff from the U.S. now, on the surface, these make sense, right? You got two policies that help make things in America.

[Waylon Wong]

Well, not really. There is one problem with this plan. Tariffs actually strengthen the dollar. This is the indicator from Planet Money. I'm Waylon Wong.

[Darian Woods]

And I'm Darian Woods. Today on the show, we explain tariffs and currencies through the story of one bag manufacturer from New Jersey. And we look at how its experience illustrates how Trump's goals are contradictory.

[NPR]

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[Darian Woods]

In 2008, Kim Vaccarella was on a vacation in the Jersey Shore when she got frustrated by her beach bags.

[Kim Vaccarella]

Things were falling into the sand and getting lost like keys and I needed a better beach bag.

[Waylon Wong]

Kim thought, what about a tote bag? But made like crocs, you know, those rubbery sandals.

[Kim Vaccarella]

I was inspired by the material for sure, and just thought that the material would lend itself to the best beach bag ever.

[Darian Woods]

Kim wanted to produce these crocs, meats, tote bags locally.

[Kim Vaccarella]

I had made a few phone calls, you know, in the States to see if there was anybody that has that type of machinery, and I was not successful.

[Waylon Wong]

So she went where everyone else seemed to be going, China. And she's visited the factories there a couple of times.

[Kim Vaccarella]

The machines are moving, the people are moving, and even though they're machine made, they're handcrafted at the end because they come out almost like a wobbly with an umbilical cord, you know, and they have to be set.

[Darian Woods]

So China became, I guess, the midwife to her creation, and she named it the bog bag.

[Waylon Wong]

Oh, yeah, I've seen these around. They're like pretty sturdy bags. They have the holes in them. They come in a bunch of colors.

[Darian Woods]

Yeah. I mean, they could be inspired by high end handbags, who knows, which might be the case because they're not cheap.

[Waylon Wong]

They're not like a tote we would just give away for, I don't know, like a public radio pledge drive or something.

[Darian Woods]

Canvas or death for us.

[Waylon Wong]

Is that what Petra Henry said during the Revolutionary War?

[Darian Woods]

Anyway, back to our trade explainer. Kim pays the factory in US dollars, and the factory owners presumably convert it to the Chinese currency, the renminbi, later on. This will be an important link in the chain when we talk about how exchange rates are affected by tariffs now.

[Waylon Wong]

This was before Trump's first term, before the trade war with China. Even back then, Kim had to pay some tariffs, but they were manageable, she says, between maybe 15 or 20 of the bag's value.

[Kim Vaccarella]

I really didn't understand fully the tariffs. It was just added to the bottom line or expense.

[Darian Woods]

After Trump came into office in 2017, those tariffs went up a lot.

[Kim Vaccarella]

Some of them have gone up to 40%, you know, essentially doubled. Now it's a substantial cost.

[Waylon Wong]

The way the tariffs work in her case is that the factory sends its shipment of bags out of southern China. The ship full of bog bags makes its way to the ports in Los Angeles or Miami or Baltimore. The logistics company she's hired makes a declar to Customs and Border Protection about the wholesale value of those bags and provides Kim's bank account details. If they're worth, say, $50, then a 40% tariff means she has to pay the government $20 per bag. Then after about 30 days or so of the bog bags arriving into the U.S. customs and Border Protection gets the money.

[Kim Vaccarella]

It comes right out of your checking account, which is super fun. Automatically, I paid 800,000 today.

[Darian Woods]

You paid $800,000 in tariffs today?

[Kim Vaccarella]

Yes.

[Darian Woods]

Wow.

[Waylon Wong]

I don't want to know what the overdraft fees are when something goes wrong there. Whoops.

[Darian Woods]

I forgot to have that in the bank account today for reference. SPOG is a big company, about $100 million a year in revenue. But those tariff payments, leased shipments, are already costing Kim real money.

[Waylon Wong]

This is where you can start to understand how tariffs strengthen the US Dollar. When those tariffs increased last time, Kim tried to figure out how to make that work financially.

[Kim Vaccarella]

You have to eat some as the business, the consumer has to pay a little bit more.

[Waylon Wong]

And when American consumers are faced with higher prices, they will buy fewer bags. That means less of those US Dollars going to the Chinese bag factory and being converted to the Chinese renminbi. Less demand for renminbi weakens the Chinese currency in comparison, the US Dollar gets stronger. Basically, less American spending in China, less demand for the Chinese currency.

[Darian Woods]

There's another mechanism here as well. Kim says when tariffs are raised, she also tries to share some of the pain with the factory.

[Kim Vaccarella]

I mean, there's only so far you can go. You can't go and recoup all of it by way of the consumer. So there was some times where we were able to negotiate with the factory as well and say, hey, we may not have an option but to pull out. You know, meanwhile, knowing in the back of your head, it's not that easy in, in our particular case, where there's multiple molds, I mean, we own hundreds of molds to remold everything at a new factory. You know, it's. It's just. It's a lengthy and expensive process.

[Waylon Wong]

So Kim was like, I'm going to take my molds and go. And she's like, wait a minute, I can't do that.

[Darian Woods]

Yeah, but they, they didn't need to know that.

[Waylon Wong]

Well, you know, the bluff worked. When Kim was able to agree on lower prices from the factory gate, that again meant less US Dollars being sent the Chinese factory, which then would again mean less demand for renminbi and a weaker Chinese currency relative to the US.

[Darian Woods]

The side effect from tariffs is the opposite of what Trump wants. A stronger dollar is bad for US Exports. If you're an American selling, say, powdered milk into China, that powdered milk is going to look more expensive from the Chinese side so they'll buy less of it. This is why Trump has railed so much against the strong dollar. It makes life harder for American farmers and manufacture.

[Waylon Wong]

So this is the tension the key pillar of Trump's economic agenda, tariffs, is likely to strengthen the dollar further. And that's actually what we saw in the days after Trump's election. The dollar strengthened significantly, likely in anticipation of new tariffs.

[Darian Woods]

Now, there are a couple of caveats here. There will be a ton of new policies and circumstances happening all at once over the next few years. Some will strengthen the dollar, some will weaken it. So what we've just run through is what economists call ceteris paribus. It's Latin for other things equal. So in an imaginary world, with everything else frozen, this is what would happen. But in the real world, currencies are notoriously difficult to predict.

[Waylon Wong]

As for Kim, she's doing what she can ahead of any new tariffs. Production is maxed out and she's looking at factories in other countries like Vietnam, Sri Lanka and Cambodia.

[Kim Vaccarella]

We need to diversify in general, right? You don't want to have all your eggs in one basket.

[Darian Woods]

You don't want all your factories in one bug bag.

[Kim Vaccarella]

Exactly. Exactly.

[Darian Woods]

Did that reverse. Did that idiom reversal work?

[Waylon Wong]

Ellen, how many factories can you fit in one of these bog bags? Sound pretty roomy.

[Darian Woods]

And look, this time she may not be bluffing.

[Waylon Wong]

Dun dun, dun.

[Darian Woods]

This episode was produced by Cooper Katz McKim and engineered by Jimmy Keeley and Kwesi Lee. It was fact checked by Sara Juarez. Cake and Cannon edits the show and the indicator is a production of npr.

[Unknown]

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