Tariff Whiffs

Speaker 1

Welcome back to Happy Hour Econ, where a comedian and an economist walk into a bar. I'm Lou Perez, the comedian. So while so many of you were watching the Olympics and celebrating, I hope, the amazing victories on the side of the United States when it came to hockey, both men's and women's hockey, securing the gold, going wild, I know Phil was watching a different competition of sorts, and that had to do with

Speaker 2

I'm Phil Magnus, stay calm.

Speaker 1

tariffs, specifically tariffs in the United States, making it all the way up to the Supreme Court. And before we get into the nitty gritty of that game, why don't we talk a little bit about, you know, what are tariffs and you know, what impact do they have on the economy?

Speaker 2

So the basic level of tariff is a tax, but it's a tax on imported goods. So anything that's made abroad that comes into the United States, and you just slap a tax on it. It could be like 5%, 10%, 50%. It's just like a tax in that respect that you'd pay at the grocery store. But tariffs are also a slightly different category of taxation than typical consumption tax, because they have other effects. Not only do people pay them when they consume goods, they also divert consumption patterns in different directions. So if you are taxing a foreign good, that allows the domestic competitor of that same good to raise his or her prices, because they're now covered by the tax. And that's essentially what tariffs do. So they have a dual purpose, not only to raise revenue for the government, but also to distort the market in favor of a protected or politically connected industry in the United States.

Speaker 1

Does every country have tariffs? mean, is there a country out there that has really like a completely like open trade policy where it's like, hey, you come and trade with us, we're not going to tax you on, we're not going to tariff you on that.

Speaker 2

There are actually several countries that come pretty close to that. So Singapore is often put forth as one of the freest countries in the world. You know, it has tariff rates that are essentially inconsequential. And the other interesting thing is that most developed countries, even though historically they relied on tariffs because they were an easy point of taxation to collect, you know, we're going back to like the 1800s or 1900s, early 1900s, tariffs are easy to collect because they're taxed at the border. fixed point where goods are delivered. You don't need a giant network called the IRS internally to the country to collect revenue off of everyone's income earnings. So historically, they were the favored tax system. But because they have distorted economic effects, most countries have moved away from tariffs over the course of the 20th century and really up into the present day. So after World War II, was recognized and decided that part of the reason that we got into the mess of the Great Depression, why it was so bad, is because a giant trade war broke out right after the stock market crashed in 1929. We got the Smoot-Hawley Tariff, which is intended to protect the country through the Great Depression. It actually backfires and does the exact opposite. So after World War II, most countries in the Western developed world, so the non-Soviet Bloc, got together and they decided, well, we don't want to do this again. We're going to avoid repetition of that mistake. And we're going to coordinate together to liberalize trade across the world. So up until January 2025, this had been the trajectory of the world for the past 80 years. And weirdly, the United States, even though we moved in a trade liberalizing direction, We were among developed countries, kind of a bad actor in many respects. We had higher tariffs on average on most of the rest of the world than Canada, the European Union, Great Britain, Australia, our major trading partners had on us. Now, there are some other bad actors. You could say China, for example, had a slightly worse

Speaker 2

trade liberalization score than the United States going to this. But we tended to rank in the 60 to 70 range on if you were to add up all the countries of the world and rank order them from the freest to the least free and the least free is like North Korea, the freest is something like Singapore. The United States consistently was ranking around 60 to 70th place on trade freedom. and most of our allies were ahead of us.

Speaker 1

So do tariffs do more harm than good? And how do you measure that? How do you know when a tariff is working to your disadvantage?

Speaker 2

Almost all taxes have economically distortive effects. know that's true if it's tax on income, tax on land or property, tax on sales, or a tax on imports, tariff. And the question is, where does the incidence of that taxation fall? So almost every tax, no matter how you assess it, will have something we refer to as a deadweight loss associated with it. This is the economic inefficiency that comes about from imposing the tax on X, Y, or Z. It means that we as consumers in the economy, we have less money that we can spend because part of it's being siphoned off and taken to the government. And you don't get a one-for-one return of the tax money you pay to the government on many, many different margins. Part of it's that deadweight loss, just the inefficiency of it. It basically disappears from the equation. The other thing, the government has a track record of spending money much more poorly than the free market itself. They're wasteful, they're bloated, they're corrupt, they're responsive to interest groups. And part of that interest group responsiveness means that people will divert resources away from the productive economy and into bribing politicians with campaign contributions in order to get a favorable tax rate. So terrorists are very notorious for being susceptible to this type of behavior, the rent-seeking behavior. And we've seen that in the Trump tariff era. You the lobbyists have all descended on Washington, D.C., trying to get a carve out in the favor from the government with favorable rates or rates that penalize their competitors. Meanwhile, you and me and every other American that consumes anything is being taxed at a higher level. So we have less money in our pockets to spend because when we go to Walmart or the grocery store, some imported item or some domestic item that competes with a tariff response of good from abroad now has a higher price tag on it.

Speaker 2

And economists estimate basically over the last year, the average family in America is probably about $1,000 poorer in income because we've had to incur the various burdens and costs of these tariffs that Trump put in place.

Speaker 1

And where do we see the tariffs being imposed? it on like particular industries? Are there specific products? if for example, if there's somebody out there, and I know we have a lot of foreign listeners, thank you so much for for listening to us from wherever you are. But say they're looking to get into a business into a field, and they kind of want a tariff friendly industry to get into. They're like, okay, I'm going to be able to trade with the US and I don't have to worry about the US, you know, tariff make? What are the products, the industries?

Speaker 2

Yeah, that's the problem that we have at the moment because there are really two types of tariffs that Trump has used. One of them is more conventional, traditional for presidents to impose, and that's industry specific. So the major ones there are steel, aluminum, lumber. Trump has extended and expanded tariffs on those items because he's used them as strategic products. And, you know, steel, aluminum, lumber, these go into almost everything. It's building materials, it's new cars, it's your new toaster oven. Anything that has metal in it or wood in it is... There you go, we're waiting for the deodorant tariff. So that's certainly taking place and it means that all these products that are used as components of building things are more expensive now.

Speaker 1

Deodorant has aluminum in it.

Speaker 2

And that transfers into the price. means if aluminum and steel are more expensive, those go into things like car engines and the frame of your car often has a lot of aluminum in it. The engine obviously has steel in it. That means your car is now more expensive because all of its component parts were more expensive. So that transfers to consumers. But Trump has done something slightly different than most presidents, starting in around March and April of 2025. You may remember he waived that giant chart and he declared it was our tariff liberation day. Now he subsequently revised that chart, but what the chart did is it imposed a tariff on almost every single country on earth. It even imposed a tariff on this uninhabited penguin island off the coast of Antarctica.

Speaker 1

A tariff on cuteness, basically.

Speaker 2

cuteness and maybe ice or something that they're icebergs that they're exporting to the United States. But he put a tariff on every country on earth and the rates varied, but that means any and every good that comes from abroad has some sort of a tariff assessed on it. And this is what the Supreme Court was considering was this broad sweeping array of tariffs that he had posed on everybody. And what we know is, you know, they're still finishing the accounting numbers for the last year, but it's estimated it's probably about $175 billion in new taxes were collected from the American public out of these tariffs over the last year that were struck down by the Supreme Court.

Speaker 1

Which branch of government is responsible for levying taxes? you bring up Trump, the executive, and isn't it supposed to be Congress? I know Congress is supposed to do quite a bit that they don't actually do.

Speaker 2

That's why there's a Supreme Court case on this that was just handed down. The Constitution is unambiguously clear. It says they're writing Article 1, Section 8, that the Congress shall have the power to levy taxes, duties, excises, and imposts. And these are all like 1700s terminology for fancy forms of taxation. And an impost is a tariff. That's what they used in the 1700s. It means a tariff. So Congress alone has that power and they're supposed to pass it through bills and this is what they conventionally done. Now over the decades and centuries, Congress has delegated some portion of that power to the executive branch to deal with certain exigencies. So they've said, we set the tariff schedule But we're going to allow the president to temporarily vary the rates on certain goods. If, for example, national security were invoked, or if we found that China was behaving badly in the international arena and was doing something to disrupt our trade, the president has the authority to basically retaliate against them. I don't think that's a very effective policy, but he does have that authority. And what Trump did after he came back for his second term in the spring, he decided he wasn't going to rely so much on those usual delegations of power. He invented a new power for himself by reading it into the statute called the International Emergency Economic Powers Act, or IEPA, is how it's referred to. And what IEPA was, it was an old law from the 1970s that allows, the government, the president, to basically put sanctions on countries that are behaving badly. North Korea is trying to build a nuclear bomb. We can put sanctions on them. Iran is attacking its neighbors and sponsoring terrorism. We can put sanctions on them. That was IEPA. Trump said, well, IEPA also allows me to just declare an emergency, and I'm going to use that as a pretext to do whatever I want in the international arena.

Speaker 2

You can see like any president rubbing their hands together, Dr. Evil style villain. And I say, you know, this isn't unique to Trump. Imagine a future president AOC or Gavin Newsom with the same power instead of doing tariffs, AOC may be declaring it's an international climate emergency and therefore I get to ban gas cars from coming into the country. But Trump said he was going to declare an emergency around our trade deficit and thereby personally rewrite the entire tariff code of the United States and put new rates on everybody. And that's what got challenged in the Supreme Court. The Supreme Court said last week, nope, we aren't going to allow you to do that. This is outside of your congressional power. The Constitution is clear that Congress alone can do this.

Speaker 1

So with that, is the president looking to now kind of go to Congress to get this passed? Because when it comes to, I mean, taxation in general, seems like that always gets approved. Taxation and spending just seems to always just be there. So is that going to be the next route taken?

Speaker 2

There's the weird thing on this because tariffs, there's a reason why he used the emergency declaration and that is when he came into office he realized he did not have the votes for this agenda. Tariffs are weird because they're an issue that actually has fairly significant opposition in both political parties right now. Even though tax Hikes normally pass with whatever the party that's in the majority does it. The Democrats do it when they're in power. Republicans do other types of taxation. It's not a pretty mix and it's very partisan. This isn't a point to wrap against any particular party. But right now, of course, the majority of the Democrats are pretty strongly against Trump because they're in the opposition. And there's also a minority of the Republicans. who have defected from the White House on this. And I think about six of them have gone on record so far, although there's rumors that it's much deeper than that. But those six that have gone on record, because the margin in the House of Representatives is so narrow, that's enough to lose the vote. And they actually have held a couple votes just before the Supreme Court decision, like a week or so before that, where tariffs got defeated in the House of Representatives. And it was a rebuke to Trump. So if he went to Congress and said, well, the court has ruled against me, doesn't allow me to do tariffs anymore. I want you to pass this as law. Congress would probably look at it and say, sorry, we vote against you on this. We don't have votes for your agenda. So it's a dead issue in that sense.

Speaker 1

do find it interesting just how much the United States is sort of dependent upon whoever the executive is, where it's sort of like you said, if you took the same situation, you had a president AOC and she declared climate change an emergency ergo, we gotta get rid of gas guzzling cars. It does set us up for. you know, strange times where it's like so much could be so much can can just be thrown out of whack depending on who's the president. I remember years ago, I did a short documentary about about Sweden. And this isn't an argument that the United States needs to model itself on Sweden. But one of the things that I found talking with

Speaker 2

That's exactly it.

Speaker 1

you know, with the pundits and the historians over there is that for the most part, the Swedes kind of know what they're getting year to year. You know, it's kind of standardized. It's like, okay, it's going to be more of the same where in the US it seems almost like, you know, we're kind of like on the edge of revolution one way or another. And I just wonder, you know, what does that do for an economy, you know, for investment? Because one of the things if you look at, say like South America in particular, if a socialist dictator is coming into power, that's usually a big warning sign of, probably not a good place to invest. Get out of there, exactly.

Speaker 2

Exactly. Like we saw in Venezuela, the oil industry packed up and left because they had a socialist government coming in place. Well, tariffs are a problem internationally and domestically for the economy for all the reasons that we just outlined. You know, there are attacks. They drag on the economy. But even worse than that, this particular round of tariffs has been infused with uncertainty from the beginning. Mainly because President Trump, used a legally dubious route to impose them. So we knew from the outset there was probably going to be a lawsuit challenging them. And that lawsuit ended up being a very strong one. Basically for the last nine months, we've been in limbo economically waiting for this case to play out in the Supreme Court. And from the political class, it's like, well, the Supreme Court rules, there you have your answer. But if you're a shipping company or you're an importer or you're a car manufacturer or something that you use in your factory or your product comes from South America and now has a tariff on it and you don't know what the tariff rate is going to be tomorrow because Trump keeps changing it and you don't know what it's going to be six months from now because the court may invalidate it. What does that do to you? It means you delay your orders, your processing decisions. the volume and amount that you import. It basically puts everything on pause. And we've seen that now for the last nine months. It's just economic turmoil every time something happens in the tariff arena. And we finally got to a point where the Supreme Court struck down Trump's current tariffs. And now companies are going to courts and asking for a refund of that $175 billion that was illegally collected over the last nine months. So FedEx filed a lawsuit right after the decision. Costco already had a lawsuit pending before the decision that was basically on pause and said, once the Supreme Court decides that lawsuit will proceed. The original lawsuit at the Supreme Court sought refunds. And now those are going to be handed down in some

Speaker 2

for more than enough.

Speaker 1

I was going to ask you know which company brought the original lawsuit like what what is the title of the Supreme Court?

Speaker 2

Yeah, it's a VOS Selections versus Trump. And then there was a second case that was merged into it as Learning Resources, Inc. versus Trump. And these are small import businesses. I think like one of them makes toys, another does wine importation. They're just small American businesses.

Speaker 1

I do remember during Christmas time the saying was, your kids don't need that many toys this year.

Speaker 2

Right? You only need one Barbie doll, not ten of them.

Speaker 1

So you have these companies who are looking to get a check cut for them for the money that they're owed. I don't think the government has that money anymore. That being said, you what about the consumers who bore the brunt of those costs? am I going to get am I going to see a few bucks, you know, put back into my into my bank?

Speaker 2

Depends if Costco decides to be generous. All joking aside, it is a real economic distortion on multiple margins. The answer is yes, the government has already spent that money. They wrote it into the One Big Beautiful Bill Act last summer. They were counting on tariff revenue to offset some of the spending in that act. So now there's a new $175 billion hole in the already existing deficit. that has been created by this decision. And I'm sitting here, I was like, I told you so. Last summer I was raising the alarm bells about this exact thing. And here we are. But the refunds have to be offered. So what it means is that the government will go deeper and deeper into deficit to issue those refunds. The party that is legally responsible for paying tariffs, there was some confusion about this because Trump claimed, well, tariffs are taxes on foreign nations. No, that's not the case at all. The party that's legally responsible is the company that imported it, the company based in the United States. So when Costco orders something from abroad and it arrives in a port in Los Angeles or Charleston or New York City, wherever it happens to be dropped off, they have to pay the tariff then and there to U.S. Customs. And that means they incurred the tax bill. But what they turn around and do, most companies that do this, they turn around and say, OK, we bore the tax bill to import it. That means we're just going to raise our prices on consumers down the line. Now, because some companies knew that tariffs were under court challenge and they thought maybe these are temporary, a company doesn't intentionally try to anchor its consumer base. You don't want to make your customers mad by jacking up prices because what do they do? They go somewhere else. So for a short while, several importing companies tried to absorb at least a little bit of the cost of this new tax hike that they got from tariffs. But they can only do that so long because, know, it's eating into your margins. And if the tariffs become a permanent fixture for several months or even years on end, that erodes basically your entire business margin.

Speaker 2

So they start passing it on through price increases onto customers. Although they get the refund as the party that paid the tariff, what they do with that refund is entirely up to them. So some companies may say, all right, the tariffs are gone. We can now justify lowering our prices again. We'll pass it back to the consumers. Others are going to say, we've been taking a beating for the last nine months from this new tariff. We're just going to try to recoup our losses from that.

Speaker 1

I'm just imagining the job that accountants have because tax season is coming upon us and it's like just dealing with how much we're losses, how much we're due to the tariffs, how much, you know, is the company possibly going to get back? And I don't know. It seems like it gets very complicated when you try to be a puppet master for something as complicated as really a global economy.

Speaker 2

proponents run into the exact same problem that socialists do, and that is they try to be central planners. Socialists say, right, well, we can have a five-year plan to order production of nails, screws, and bolts. And that's what's dictated by the Politburo or something from above. And it never works in practice because it's self-contradictory. There are no price signals. It's a giant bureaucratic mess. Well, TARF proponents are basically saying, we know the level of cars, toaster ovens, and... beams of lumber that need to be imported to the United States and we're going to set a tariff commensurate with that and plan the economy that way. So even though they're not socialist in the ideological sense, they are using central planning in a very similar fashion. And what does it do? It always breaks down because it's impossible to actually target and plan those things.

Speaker 1

I also wonder, you what does success, you know, victory look like? Say the Supreme Court case didn't happen, the tariffs were still in place. What would the measurement be used to say like, okay, these worked because it's like, did US manufacturing increase? Were more houses being built? how do you, you know, how would you measure that?

Speaker 2

Trump made a number of claims when he put the tariffs in place to begin with. And the biggest one was he asserted that trade deficits, the balance of imports and exports of goods and services, he argued the United States has faced a trade deficit for probably the last, now 50 years or so was the last time we had a major trade surplus. That means we imported more goods and services than we export. which looks like, you know, it sounds like an intuitive economic term, but, you know, I always point out other countries and companies in other countries don't send us stuff for free. We have to pay them in return or else, I mean, that's just how economic exchange works. So what this means is the trade balance itself is not really an imbalance. It's like only looking at half of your balance sheet as a firm. and not paying attention to the money that's going in the other direction and what that money is being used on because it's eventually spent on something else, often reinvested in the United States economy. So this is a very simple way of saying that the large convoluted mess of accounting that constitutes our international accounting system is always a balance. We bring in goods and services, we pay for goods and services. Basically, balance is out to zero. You know, what goes in also comes out in a different way and vice versa. So the trade balance itself is a misnomer and Trump focused on that though as the justification is pretext for the emergency. So victory to him would look like a decreasing trade imbalance in goods and services, but that didn't happen. over the last nine months. In fact, we just got the numbers for December 2025. And the last year, our trade imbalance basically stayed about where it was before the tariffs. And in some cases, it actually over the last few months, it's accelerated. It's gotten worse than the previous year. So as any economist could have predicted and told him, this policy did not fix the thing that he sought to fix because it misunderstands the thing that he sought to fix.

Speaker 1

What are the next steps as far as, you know, dealing with, you know, country like China or the, I know there was a big back and forth. was like, okay, if you're going to tariff us, we're going to tariff you. It sounds like a curse. Go tariff yourself.

Speaker 2

Well, Trump's toolbox has been limited by the Supreme Court decision. So he has to use more conventional routes and he's already trying that. He's trying to reinstitute his tariffs by other declarations and those are probably going to face some lawsuits. The ones where he is probably more impervious to challenge are going to be these country specific and product specific tariffs. such as for national security reasons against China or retaliatory reasons against Chinese economic policies. So some would argue, you know, basically in Trump's first administration, he did deploy more targeted tariffs on China specifically instead of the scattershot against every country on earth. As a result, he was able to get those through and they basically stayed in place and survived court challenges. So one route, he could probably do that same thing. It's a legal route. I'm going to say it's not a very good economic policy because first off, it's pretty ineffective at getting China to stop its own bad behavior. Instead, it tends to go the other way. It goes in and escalation route. It's like, I'm going to tear off you, you're going to tear off me, I'm going to tear off you more, you're going to tear off me more, back and forth, which is kind of what we've seen over the last year. So it's not really an effective tool for that. And it's also just kind of bad economics. Like the old analogy is, why would a country

Speaker 2

blockade itself in a time of war. And that's essentially what a tariff is, it's an economic blockade. If your adversary is penalizing your trade to them, it's going to say, aha, I'm going to cut off my nose to spite my face. I don't like you. So if you're going to penalize The stuff, the goods that I'm sending to you, I'm going to penalize the goods you are sending to us. That's hurting your own domestic economy as a supposed act of trying to retaliate in the international arena. You know, it's been likened to dumping rocks into your own harbor because your enemy dumped rocks into his harbor to prevent ships from landing there. It just doesn't make economic sense. And yet, that's the tools that we're kind of left with as relics of law. So I would expect more Trump tariffs targeted at specific countries such as China, where he can at least meet the legal barrier of proving that they're engaged in bad behavior in the international arena.

Speaker 1

Well, during the Olympics, one of the controversial acts was an American born Eileen Gu, who decided to ski for China. And it turns out she was paid handsomely for that. I joke that it was the first time China has ever purchased a product made in the USA. So as far as trade relations go, I think when Eileen comes back to the United States, and especially I think she's a resident of California, I guess she can be expected to be taxed quite a bit on that sum. So maybe that levels things out.

Speaker 2

It's wild. And we joke about it. So weirdly, Trump has had this idea in his head that tariffs are a solution to everything. know, different presidents have different solutions to everything. Like Joe Biden, thought student loan forgiveness was a solution to everything and just kind of fixated on that. Trump does that with tariffs. So you get all sorts of very strange policy justifications to use these tools. And that's kind of why we're in this unpredictable, erratic myths of a policy scene that we've had for the last year or so.

Speaker 1

Well, I hope that the eradication of these tariffs puts a little bit more money into our pockets as well as the pockets of our listeners. And thank you guys for doing something that's priceless, which is listening to Happy Hour Econ every week. This has been another week of it. We'll see you next week.