How Trump's tariffs plan might work

Summary

Episode Summary: "How Trump's Tariffs Plan Might Work"

Podcast: The Indicator from Planet Money
Host: Darian Woods
Guest: Kyla Scanlan, Economic Commentator and Author of In This Economy
Release Date: December 2, 2024

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1. Introduction to Trump's Tariff and Tax Cut Proposal

In this episode, host Darian Woods delves into President-elect Trump's ambitious economic agenda, which centers on implementing substantial tariffs and tax cuts. The core promise is that revenue generated from these tariffs will finance the proposed tax reductions, aiming to stimulate the American economy.

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2. Understanding Tariffs Through a Cookie Analogy

To elucidate the complexities of trade policy, Kyla Scanlan introduces a relatable analogy using chocolate chip cookies.

• Kyla Scanlan [00:46]: “Those cookies are meant to explain trade policy because those cookies have ingredients from all over the world.”

The cookies in discussion contain both domestically sourced ingredients like wheat and butter, and imported ones such as cocoa beans and vanilla. Under Trump’s plan, nearly all imported ingredients would incur significant import fees, potentially increasing the cost of these globally crafted goods.

• Kyla Scanlan [03:23]: “About half of the ingredients, vanilla extract, cocoa beans, and spices like cinnamon are imported from outside the United States.”

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3. Trump's Claims vs. Economic Realities

Trump asserts that these tariffs will not burden American consumers. Instead, he claims that foreign producers will absorb the additional costs to remain competitive in the U.S. market. Moreover, he suggests that the tariffs could incentivize companies to relocate manufacturing operations to the U.S., thereby creating jobs.

• Darian Woods [04:34]: “Trump claims the cookies will get cheaper because other countries will potentially eat the extra cost because they really want to be competitive in the US Market.”

However, economic experts like Erica York from the Tax Foundation dispute the feasibility of this strategy.

• Erica York [06:50]: “You just can't squeeze $3 trillion of imports hard enough to get more than $2 trillion of tax revenue out of them. Like, at most that you could like, the revenue maximizing level would be somewhere around $500 billion.”

This highlights a significant shortfall in Trump's plan, as the proposed tariffs would fall drastically short of replacing the $2 trillion annually generated by income taxes.

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4. Economic Feasibility and Revenue Generation

Trump’s proposal includes imposing tariffs ranging from 10% to 60% on imports, with specific rates for different countries—25% on goods from Mexico and Canada, and 10% on those from China.

• Kyla Scanlan [05:09]: “He’s talked about taxing vanilla extract, cocoa beans, spices like cinnamon, and more at a rate of 10 to 20% and 60% if they're from China.”

Despite these high rates, the total revenue from tariffs on approximately $3 trillion of imports would be insufficient to fully fund extensive tax cuts. Income taxes alone contribute $2 trillion annually, making tariffs an inadequate replacement.

• Darian Woods [06:37]: “Income taxes bring in $2 trillion a year, and all those tariffs would bring in a minuscule amount by comparison.”

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5. Impact on Consumers and Businesses

The implementation of broad tariffs is expected to have several adverse effects on both consumers and businesses:

• Higher Consumer Prices: Imported goods like the discussed cookies would become more expensive, directly impacting consumers’ wallets.

  • Kyla Scanlan [07:07]: “Tariffs are going to increase production costs here in the US due to the parts and ingredients import to produce things here.”

• Increased Business Costs: U.S. companies would face higher costs for imported materials, which could lead to reduced profit margins, lower wages, or scaled-back operations.

  • Erica York [08:46]: “When they see this tariff will be like, how do I deal with this increased cost of doing business? Am I able to pass that on to my own consumers? Can I raise my prices? Do I have to eat that cost?”

• Competitive Disadvantage: Higher production costs could render U.S. businesses less competitive globally, potentially leading to decreased exports and retaliatory measures from other countries.

  • Erica York [09:00]: “She says that will put US Businesses at a competitive disadvantage on the global stage.”

• Retaliatory Tariffs: Other nations might impose their own tariffs on U.S. exports, further harming American businesses and the economy.

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6. Consumer Sentiment and Behavioral Changes

Public reaction to the proposed tariffs is mixed, with many expressing skepticism and concern over potential negative economic impacts.

• Unnamed Respondent 2 [01:25]: “I think maybe people haven't read enough about tariffs and who actually pays for those tariffs in the long run.”

There are indications that consumers are already adapting by stockpiling products in anticipation of price hikes.

• Kyla Scanlan [09:58]: “There are already reports of businesses and regular Americans stockpiling products from China and beyond. They're trying to prepare for these potential tariffs.”

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7. Expert Insights and Final Analysis

Economist Erica York provides a critical perspective on Trump's tariff strategy, emphasizing its inadequacy in generating sufficient revenue and its potential to disrupt the U.S. economy.

• Erica York [09:44]: “We look at the first Trump administration and all the tariffs that were imposed there and some of Trump's other advisors and their very serious support of the universal baseline tariff idea, I think that's where things are headed.”

Overall, the consensus among experts is that Trump's broad and sweeping tariff plan is economically unfeasible and could lead to significant hardships for American consumers and businesses without delivering the promised tax relief.

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8. Conclusion: The Real Cost of Tariffs

The episode concludes with a sobering assessment of the proposed tariff plan. While the notion of funding tax cuts through tariffs presents an appealing simplicity, the economic realities suggest otherwise. Consumers may face higher prices, businesses could struggle with increased costs, and the overall economy might suffer from reduced competitiveness and potential retaliatory actions from global trade partners.

• Darian Woods [09:18]: “Basically, the average family could end up paying thousands more per year in higher prices.”

As the episode wraps up, the metaphorical cookies remain a symbol of the intricate and far-reaching implications of trade policy, underscoring the delicate balance between domestic economic promises and global economic realities.

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Notable Quotes:

• Kyla Scanlan [00:46]: “Those cookies are meant to explain trade policy because those cookies have ingredients from all over the world.”
• Erica York [06:50]: “You just can't squeeze $3 trillion of imports hard enough to get more than $2 trillion of tax revenue out of them.”
• Erica York [08:46]: “When they see this tariff will be like, how do I deal with this increased cost of doing business?”
• Darian Woods [09:18]: “Basically, the average family could end up paying thousands more per year in higher prices.”

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This comprehensive exploration provides listeners with a nuanced understanding of the potential ramifications of Trump's tariff and tax cut proposal, highlighting the complexities of trade policy and its profound impact on the U.S. economy.

Transcript

[NPR Host]

NPR.

[Darian Woods]

This is the indicator from Planet Money. I'm Darian Woods. Two big campaign promises from President elect Trump were tax cuts and tariffs, and specifically the idea that the money generated from the tariffs will pay for the tax cuts. Joining me to discuss all this is Kyla Scanlan, economic commentator and author of in this Economy. Kyla, welcome to the show.

[NPR Host]

Thank you, Darian.

[Darian Woods]

So today you're joining us to talk about tariffs and tax cuts and cookies. That would explain these cookies, which I was told to bring into the studio. So I thought you were just being really generous.

[Kyla Scanlan]

No, those cookies are meant to explain trade policy because those cookies have ingredients.

[NPR Host]

From all over the world.

[Kyla Scanlan]

They might have cocoa beans, spices like cinnamon or vanilla. And right now, all those ingredients come come in tax free. But under these new proposals from President elect Trump, nearly everything coming into America would face big import fees.

[Darian Woods]

Now, Trump says that other countries will pay these fees and not Americans, and that we can make enough money from tariffs to cover all the tax cuts he's promising. So how is the American consumer responding to all this? Well, we surveyed some folks at a park in downtown Denver.

[Unnamed Respondent 1]

Yeah, I think that's a really bad idea.

[Unnamed Respondent 2]

I think maybe people haven't read enough about tariffs and who, who actually pays for those tariffs in the long run. And I'm thinking if we want to make any major purchases, we should do that now, before January 20th.

[Unnamed Respondent 3]

I mean, I see pluses for it.

[Darian Woods]

And I see negatives for it, both. So no resounding endorsement from this vox populi in downtown Denver.

[NPR Host]

For what it's worth, those comments clock in. From what I've heard from a lot of people over the last few weeks, either they're not sure how this would work, or they see it as a bad idea or even inflationary.

[Darian Woods]

So today on the show, we pull apart these cookies and we see if they'll get more expensive under the potential new tariffs or if, like Trump claims, these cookies might actually benefit the American consumer.

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[Kyla Scanlan]

Let's start with what we've got right now. Darian.

[NPR Host]

I ordered these chocolate chip cookies from.

[Kyla Scanlan]

A bakery in New York City. And about half of the ingredients, vanilla extract, cocoa beans, and sp spices like cinnamon are imported from outside the United States.

[NPR Host]

The other half, wheat, whole milk, butter.

[Kyla Scanlan]

Brown sugar, eggs, and salt are all USA produced. Those cookies in front of you, Darian, are global cookies.

[Darian Woods]

I can see a world in these baked goods. So under President Elect Trump's proposal, those imported ingredients will be taxed, and that means some very nice cookies might be about to get a bit more expensive.

[Kyla Scanlan]

That's a general consensus among economists. A tariff is just a tax on goods from overseas. And the conventional economic wisdom is when you tax goods coming into the country, consumers end up paying more in the store.

[Darian Woods]

And most of the things we use are like these cookies, our iPhones, our coffee makers, our shoes, our clothes. They're made up of parts and materials from all over the world. So there's a worry that Trump's tariffs could make all of those things more expensive and raise inflation.

[NPR Host]

Still, Trump claims the cookies will get cheaper because other countries will potentially eat the extra cost because they really want to be competitive in the US Market.

[Darian Woods]

He also says some companies could move their operations to the US to avoid tariffs and potentially create cookie related jobs. He didn't say that specifically around cookies, but you get the joke right?

[Kyla Scanlan]

It's worth mentioning these cookies, as you know, Darian, already have some tariff exposure baked in. In 2018, the Trump administration imposed tariffs on roughly 15% worth of imported goods.

[Darian Woods]

Yeah, we had Trump tariffs before on things like industrial machinery and steel, but those are targeted tariffs that Trump introduced during his first administration, not the broad, sweeping ones he's proposing now.

[Kyla Scanlan]

It's also worth mentioning the Biden administration kept most of those targeted tariffs in place. In fact, it even raised some of those tariffs. But what Trump is proposing now is a whole different tier. He's talked about taxing vanilla extract, cocoa beans, spices like cinnamon, and more at a rate of 10 to 20% and 60% if they're from China. And he's floated even higher numbers recently. 25% on goods from Mexico and Canada and another 10% on China.

[Darian Woods]

Yeah, and we Bring a lot of stuff into the U.S. these tariffs would hit all $3 trillion worth of what we import.

[Kyla Scanlan]

Trump said we will raise so much money from these tariffs that we can cut all kinds of taxes. Many parts of the Tax Cuts and Jobs act is expiring soon, and according to some estimates, extending it for another decade could cost as much as $5 trillion. Trump says these new tariffs will pay for that.

[Darian Woods]

And he wants to go even further than just extending those tax cuts. He wants to end taxes on TIFs, end taxes on overtime pay, end taxes on Social Security benefits, or even ending federal income tax entirely. And to help pay for this, you guessed it, it's those sweeping tariffs.

[NPR Host]

We would be putting tariffs on pretty much everything that comes into the United States. But here's the thing. Even with these massive tariffs, we still couldn't raise enough money to replace income taxes.

[Unnamed Respondent 3]

Yeah.

[Darian Woods]

So income taxes bring in $2 trillion a year, and all those tariffs would bring in a minuscule amount by comparison.

[NPR Host]

Yeah. I spoke to Erica York. She's a senior economist and research director at the Tax Foundation.

[Erica York]

You just can't squeeze $3 trillion of imports hard enough to get more than $2 trillion of tax revenue out of them. Like, at most that you could like, the revenue maximizing level would be somewhere around $500 billion.

[NPR Host]

The upside of tariffs, even at the extreme, is going to be pretty limited. But the downside could be pretty significant. So back to the cookie again. Remember, half of its ingredients are from the US and half are foreign made ingredients.

[Darian Woods]

Yeah. The blended heritage cookie.

[NPR Host]

And this is where it gets complicated.

[Kyla Scanlan]

Erica says tariffs are going to increase production costs here in the US Due to the parts and ingredients import to produce things here. For that cookie, for example, we make the butter here in the United States, but what about the feed that comes from Brazil for the US Cows who.

[NPR Host]

Produce that US Butter?

[Erica York]

So, like materials that US Companies use in their own production processes or their capital goods and equipment, that directly increases the cost of doing business here in.

[NPR Host]

The US and those increased costs of doing business, they end up hitting American consumers and businesses in three ways. Higher prices, lower wages, or reduced business operations. Because the bakery is trying to cut costs anywhere it can, sometimes all three.

[Darian Woods]

Now, the other side of this is Trump claiming these tariffs will bring back U.S. jobs. Here's what he said on his recent interview with Joe Rogan.

[Unnamed Respondent 1]

Due tariff. It's so high that they will come and build their chip companies for nothing. In other words, Joe, you put a big tariff on the chips coming in. I say you don't have to pay the tariff. All you have to do is build your plant in the United States. We didn't have to give them the money to build a plant.

[NPR Host]

Erica doesn't think a domestic manufacturing boom will happen and says bottom line, these broad tariffs are a recipe for disaster for US Businesses.

[Erica York]

When they see this tariff will be like, how do I deal with this increased cost of doing business? Am I able to pass that on to my own consumers? Can I ra my prices? Do I have to eat that cost?

[NPR Host]

She says that will put US Businesses at a competitive disadvantage on the global stage. Not to mention other countries could do retaliatory tariffs, meaning they charge US Companies a tax to import into their countries. Or they could just choose to not send their vanilla or cocoa into the US at all.

[Darian Woods]

Basically, the average family could end up paying thousands more per year in higher prices. Some estimates place it as high as $4,000. You'd have to cut taxes a lot to get back that $4,000. But Trump and his team must have run these numbers too.

[NPR Host]

Yeah, that's what I thought. A lot of people are just hoping this is campaign smack talk, right? Like maybe it's a negotiation tactic. Erica doesn't think so.

[Erica York]

We look at the first Trump administration and all the tariffs that were imposed there and some of Trump's other advisors and their very serious support of the universal baseline tariff idea, I think that's where things are headed.

[Kyla Scanlan]

There are already reports of businesses and regular Americans stockpiling products from China and beyond. They're trying to prepare for these potential tariffs.

[Darian Woods]

Darian well, for now we have cookies.

[NPR Host]

We do have cookies and that's a good thing.

[Darian Woods]

This episode was produced by Julia Richie with engineering by Valentino Rodriguez Sanchez. It was fact checked by Sara Juarez. Cake and Cannon edits the show and the indicator is a production of npr.

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