What’s next for Trump’s tariffs?

Katie Martin (0:10)

The era of Trump 2 and his beloved trade tariffs is upon us, and hoo boy, it's quite the ride. So far, it has tangled up Colombia, Canada, Mexico, China, maybe the EU and the UK are next, we'll see. Today on the show, join us for a game of What the hell is actually going on here? And why do we care? This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a slightly frazzled markets columnist here at FT Towers in London. And exciting times, I'm joined today in person by the alarmingly young and clever Aiden Reiter from the Unhedged newsletter in New York. He's in London having briefly escaped the clutches of Rob Armstrong's reign of terror. Aiden, how are you doing?

Aiden Reiter (0:58)

I'm great, it's great to be in London and away from towering, imperious Rob.

Katie Martin (1:02)

Yeah, yeah, I'm much smaller than him. I'm a lot less scary. So Aiden, one thing we like to do with this pod is answer questions that people really want to know the answers to, but are too afraid to ask for fear of looking silly. There is no such thing as a silly question on this podcast.

Aiden Reiter (1:19)

Absolutely.

Katie Martin (1:19)

Heaven knows I've asked enough of them myself. So just briefly, what are trade tariffs? Why does Donald Trump like them so much?

Aiden Reiter (1:27)

Well, unclear why he loves them so much, because he's really obsessed with them and has been since the 80s. But a tariff is essentially a tax. Essentially, you're saying when a good or something comes into the United States or another country, there is going to be an extra duty on top of that good, whether that's 10% or 20% of the price. And it just fundamentally changes the price for whoever's importing or exporting it. It could make it more expensive than a domestic product. It could make it more in line with the domestic product. So the basic idea is you change the economics and the calculus for domestic firms about what they want to import versus export.

Katie Martin (1:59)

Yep, so if you want to import this stuff from China, it's going to cost you, there's already tariffs on China, and there's going to be an extra 10% on...

Aiden Reiter (2:08)

Across the board, which is unprecedented, at least in the past 20 years in the US and China.

Katie Martin (2:13)

And that means if you're a US consumer effectively, you pay somewhat more. So this is something that confuses people, right? Who pays the tariffs?

Aiden Reiter (2:21)

And it's case by case. Sometimes if there's enough margin and whoever is the US firm or foreign firm wants to keep their competitive advantage or their market share, they might choose to take on the cost of the tariff and not let it be reflected in the price. Most of the time, especially for low margin companies, low margin businesses, a lot of cheap goods, which is often what we get from China, that will be passed on to the consumer. Whether or not that's quote unquote inflation is a much bigger conversation we don't necessarily need to get into. But at the end of the day, somebody has to pay that tariff.

Katie Martin (2:50)

Yeah, so it's not always necessarily the case that if you put a 25% tariff on Mexican or Canadian goods, which is what Trump was saying earlier this week, that the consumer ends up paying 25% more.

Aiden Reiter (3:03)

Not always.

Katie Martin (3:04)

It can get smoothed out. But the point is, broadly speaking, Canada and Mexico don't pay this, or China doesn't pay this. The bill is footed in the US.

Aiden Reiter (3:13)

It could be footed by a Chinese, Canadian or Mexican firm, but that's generally unlikely.

Katie Martin (3:18)

And so the idea for Trump, like you say, he's been talking about tariffs since the 80s. This is something he's loved for, I think, longer than you've been alive.

Aiden Reiter (3:26)

Far longer.

Katie Martin (3:28)

Don't rub it in. And the idea is, if you make it more expensive to import stuff, then US manufacturing will catch up and you'll make these things yourself, and you will make America great again by renewing your exporting industry and your domestic consumption industry.

Aiden Reiter (3:45)

To a lot of people in the United States, and there's definitely some good arguments for and against this view, when free trade was promulgated and NAFTA was put in and WTO was more standardized.

Katie Martin (3:55)

All these big trade bodies.

Aiden Reiter (3:56)

All these big trade bodies and big trade agreements were put in place. That resulted in a lot of manufacturing going to places where it was cheaper to do that. The US is a more developed economy with higher living standards. It's more expensive to pay people. It's also we have higher costs of doing many things in the US for good reasons and for bad reasons. So in Donald Trump's worldview and many people's worldview, we need to reset the clock. We need to change the calculus so that manufacturing is not always flowing away from the United States, it's flowing back to the United States.