The Tariff Announcement That Shocked Financial Markets

Joe Weisenthal (0:00)

Hello, Odd Lots listeners. This is Joe Weisenthal. You are listening to an emergency episode of the podcast. It was recorded at 10 a.m. Monday morning, February 3rd. The reason I am telling you this is because markets and news are moving very fast. And so by the time you listen to this, parts of it may already be out of date, but the context for the discussion was over the weekend, Trump announcing 25% tariffs against Canada and Mexico, 10% tariffs on oil, another 10% tariffs on China. Since we recorded this about a minute after we got out of the studio, Mexican President Claudia Sheinbaum announcing that the tariffs had been delayed on Mexico for a month. We're still waiting to hear if something similar happens in Canada. Other than that, take a listen.

SPEAKER_2 (0:56)

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Tracy Alloway (1:12)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (1:16)

And I'm Joe Weisenthal.

Tracy Alloway (1:18)

Joe, how many of these emergency episodes do you think we're gonna need to do over the next four years?

Joe Weisenthal (1:23)

Oh my God, you know, well, anyway, I don't know, but this is two weeks in a row. A week ago, you know, we had to rustle up a deep-seek expert last Monday. This time, a trade expert.

Tracy Alloway (1:35)

That's right. I feel like we might as well just preemptively convert the show into a daily, because I feel like there's going to be a lot of news flow. But anyway, as you mentioned, over the weekend, President Trump basically confirmed that the US would be imposing 25% tariffs on imports from Canada and Mexico, which are, of course, you know, massive US trading partners. He's also implementing a 10% tariff on China. All of this is being done via the International Emergency Economic Powers Act, and the tariffs are supposed to become effective as of Tuesday, February 4th. And, of course, you know, a lot of stuff can change. The news cycle is very compressed at the moment, it feels like, and we're recording this Monday morning. So we'll see what happens overnight by the time this episode comes out. But in the meantime, there are a lot of questions. And who better to ask than Paul Donovan? He is, of course, chief economist over at UBS Global Wealth Management, someone we've had on the show quite a lot, and someone who's been following the ins and outs of the tariffs, including some of the technicalities of how they actually work, where I think there is quite a bit of confusion. So Paul, thank you so much for coming on Odd Lots at short notice, too.

Paul Donovan (2:50)

No, thank you for having me on.

Tracy Alloway (2:52)

Why don't we just start with... I guess there's a question that a lot of people have been asking. There's a lot of confusion, as I mentioned, about who exactly is paying these tariffs and when. And the Trump administration initially seemed to suggest that foreign countries were going to pay and that they were going to set up this external revenue service to collect the income. Now, though, there seems to be a lot more talk about Americans having to accept short-term pain for longer-term gain. A 25% tariff on Mexican or Canadian goods, where is that money actually collected and who is paying for it?

Paul Donovan (3:29)

So the US consumer is paying. There is no question about this. We have over 4,000 years of economic history on tariffs. There are literally clay tablets from ancient Mesopotamia detailing this. Consumers pay tariffs. End of discussion. The point at which the tariff is collected, though, is very important. The point of entry when the goods arrive physically in the United States, that's when the tariff is paid. And that's why a 25% tariff does not fully equate into a 25% consumer price increase. 25% tariff would mean about a 10% consumer price increase.

Joe Weisenthal (4:08)

Explain that further.

Paul Donovan (4:10)

So, essentially, if you think about it, the goods arrive in the United States, your television has arrived from China in the Port of Los Angeles. That's the point at which you have to pay the tariff. So you pay it on the value of the television at the point of Los Angeles. But after that point, the consumers still got to pay for transporting that television around the country, for the advertising, for the wholesale, for the retail costs. Retailers take a quarter of your money to cover their costs and profit margins. So of course, all of those costs add up to about 60% of the consumer price. The import price on average is about 40%.