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.

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.