Afford Anything - The Real Story Behind These New Tariffs

Episode Date: December 7, 2024

#564: Our economy just gave us two big surprises that shape how we'll do business and invest in 2025. Our job market is going through major changes. Sure, we added 227,000 jobs - way more than anyone expected. Healthcare and hospitality are booming. But here's what you need to watch: our unemployment rate just climbed to 4.2%. When you look at how many people are joining or leaving the workforce, you'll spot some interesting signals about where we're headed. You've probably heard about these new trade proposals making waves. They're targeting our biggest trading partners - Mexico, Canada, and China. Let's talk about what tariffs really mean for your wallet. Some industries win, others lose. Your grocery bill? That might change. Your job prospects? That depends on your industry. We'll help you connect these dots. This matters because you need to know how these shifts affect your money, your job, and your business decisions. Our markets are changing. Our policies are evolving. But when you understand what's happening, you can make smarter moves. Join us as we break down these economic changes into practical insights you can actually use. For more information, visit the show notes at https://affordanything.com/episode564 Learn more about your ad choices. Visit podcastchoices.com/adchoices

Our economy just gave us two big surprises that shape how we will do business and invest in 2025, because we are going through some economic transition right now. Our job market is going through some big changes. We've added new jobs, but our unemployment rate has also climbed and people are leaving the workforce. We'll be talking about that today, and then we will also deep dive into tariffs. What are tariffs? What are the pros? What are the cons?

What are the consequences? Let's take a deep, informed, research-based, analytical look at the world of tariffs and what these might mean. Welcome to the Afford Anything Podcast, the show that understands you can afford anything but not everything, the show that is obsessed with opportunity costs and trade-offs. We cover five pillars, financial psychology, increasing your income, investing, real estate, and entrepreneurship. It's double-eye fire. I'm your host, Paula Pant. I trained in economic reporting at Columbia, and on the first Friday of the month,

I bring you a monthly economic update, a synopsis of what's been happening in our economy over the past month. So welcome to the December 24, first Friday economic update. Let's begin by talking about the big economic news that dropped this morning, which is the November jobs report. The economy added 227,000 new jobs in November. Now that beat analyst expectations and it beat what we've recently been doing. Job growth has averaged 172,000 per month over the past three months. And remember in October, it got particularly beat up because of the hurricanes and the Boeing strike. Analysts were expecting that in November we would add 200,000 new jobs.

So at 227,000, we have beat those expectations. But what makes this more interesting is the context. The Bureau of Labor Statistics revised the reports from September. and October. October had an initial estimate of 12,000 new jobs gained due to, of course, the hurricanes and the Boeing strikes. That revision actually pushed the job growth in November up to 36,000. Now, on top of that, the September report also got a boost of an additional 32,000 jobs

that were previously not reported. So September's numbers, their revised numbers, are 255,000. So what that means is across September and October. October, the U.S. created an additional 56,000 jobs that we didn't know about before. That's the equivalent of a small city's worth of jobs that were initially missed in the initial count. So we have good news on the job creation front, but we can't be satisfied with just one number, because here's where things get interesting. The unemployment rate is holding at 4.2%. And while that sounds great at first glance, remember that a year ago, unemployment was at 3.7%.

So we've been seeing a gradual uptick in unemployment, which tells us that something is shifting in our labor market. How do we make sense of that? How do we make sense of the fact that we're creating new jobs at an average rate of 172,000 jobs per month over the last three months? So we're creating these new jobs, yet unemployment is ticking up. How do we make sense of those two seemingly contradictory pieces of information? Well, the answer can be found by looking at the difference between the establishment survey and the household survey. So the Bureau of Labor Statistics actually conducts two different surveys every month. And those two surveys tell slightly different stories about our job market.

This headline number of 227,000 new jobs that were created in November, that comes from something that's called the establishment survey. And that's where the BLS surveys businesses to count new payroll positions. But there's also a different survey, and it's called the household survey. That is used to calculate the unemployment rate. And that shows something very different. That shows, buckle your seatbelts, hold on to your hats because this is going to shock you. The household survey shows a decline of 355,000 jobs in November. What the what?

How does that make sense? Well, the answer comes from the fact that the household survey also tells us that the labor force, which means people who are either working or are actively looking for work, the labor force contracted by 193,000 people in November, which means that our labor force participation rate is down slightly, to 62.5%. Remember, when we talk about employment or unemployment, we're not talking about jobs relative to the entire population of human beings. We're talking about jobs relative to people who want jobs. In other words, the yardstick for good employment is, if you want a job, you can find a job. The yardstick is not, if you exist, you have a job.

So, labor force participation is down. And so this seemingly contradictory data helps explain why we're seeing the unemployment rate tick up to 4.2% even as businesses report adding jobs. So when we look at both surveys together, we get a more complete picture, which is that while businesses are creating new positions, in certain sectors, and we're going to talk about sectors in a moment, while businesses are creating those new positions, we're also seeing some people step back from the labor force entirely. And this type of detail matters because it helps us understand the full dynamics of

our job market. The labor market is really complex, and it can't be captured in a single number. So more jobs are being created while fewer people are working. I want to emphasize that these are not huge shifts. These are incremental numbers. And that's why we watch this month after month, because over the long term, we begin to see trends. And one of the things that we're noticing is that the type of long-term shift that is happening right now is the type that often happens during economic transitions. We are in a time of transition. And I'm going to add a third number that will really round out this picture. And it's the long-term unemployment situation, which is defined as people who are jobless, people who want jobs, who are jobless for 27 weeks or more.

And that is holding steady at 1.7 million people, which is up significantly from 1.2 million people a year ago. That's also a crucial metric because long-term unemployment can have huge, huge ramifications on both individuals and on the broader economy. Think about how much it would suck to want a job and not, be able to find one for 27 weeks or more. And so what this all means when you tie all of these numbers together is that we're seeing a labor market that's still growing, but it's becoming more selective. And that's how jobs can simultaneously be more abundant, but also harder to get. Now, how hard it is to get a job is going to depend on what industry you're in, because there's a lot a variation in where the jobs are being created. The powerhouse of job creation is health care,

which added 54,000 new positions in November. If you're wondering specifically what elements of health care, we saw 22,000 new jobs in ambulatory care, 16,000 new jobs in home health care, 19,000 new jobs in hospitals, and 12,000 in nursing facilities. The leisure and hospitality sector also showed enormous strength. It added 53,000 new jobs this past month, about 29,000 of which came from restaurants and bars. This sector, by the way, has been consistently adding about 21,000 new jobs per month over the last year. So the report out of November shows that growth here is actually accelerating. There is a hunger for travel, for face-to-face interaction. We were all cooped up in 2020 and 2021, and I think we're still feeling the effects, the pendulum swing,

given not only how strong this sector is, but how it continues to grow stronger. Government employment grew by 33,000 new positions with the bulk of that coming from state governments. And this is also a steady trend that we've seen throughout the year. Government job growth has averaged about 41,000 per month over the past year. And most of that has been at the state and municipal last. So those are the big winning sectors. Next, let's talk about the warning signs. What's not doing well?

Retail. Retail trade lost 28,000 jobs right as we entered the holiday season. And general merchandise stores took the biggest hit. They dropped 15,000 jobs. There are some analysts who think that this might be due to the later timing of Thanksgiving this year. Remember, Thanksgiving moves its date each year. It's always on the fourth Thursday of the month. This year, the fourth Thursday of the month, was pretty late into the month. So that might have had an adverse effect on holiday shopping and retail.

But it's unlikely that that would have accounted for all of the job loss in this sector. So retail is something to watch closely in the coming months. Technically, manufacturing saw a boost of 32,000 jobs, but this is actually a one-time factor. This mainly reflects workers that were returning from strikes rather than new job creation. On paper, we're seeing a figure that is technically classified as growth, but it's actually just a one-time step up of a return to the norm. Now, we've been talking about jobs, but wages overall are up quite a bit. Average hourly earnings rose by 40 basis points in November. So that's almost half a percentage point.

It's four-tenths of a percentage point. And that might not sound like much, but that was just for the month. If we look at the year, wages are up 4% compared to last year. Now, the reason why this matters is that both the monthly and yearly numbers came in 10 basis points higher than economists expected. Now, for workers, this is great because this continued wage growth is helping workers maintain purchasing power and keep pace with inflation. In fact, over the past 12 months, that wage growth has actually exceeded the inflation rate over the trailing 12 months. But, but it is not distributed evenly. Because if we break this down further, there is a distinction between production versus non-supervisory employees.

So basically, if you think about frontline workers rather than managers, front line workers saw their hourly earnings rise by 30 basis points in the past month rather than 40 basis points. And if we look at the yearly trend, we also see depressed increased earnings for frontline workers as opposed to managers. People in managerial positions, on average, over the past 12 months, have wage growth that has kept up with, if not exceeded, the last 12 months of inflation. But frontline workers and lower paid workers aren't seeing those same gains. So we have some bifurcation here. We have a K-shaped recovery. These types of wage trends can give us some really important clues about both consumer confidence as well as the potential pressure on prices,

because when we see wages that are consistently rising, it typically means that consumers have more spending power. And in the U.S. economy, which particularly is very largely driven by consumer spending, that is significant for our broader economic outlook. It means that we're likely to see strong economic growth, it means that we are likely to continue to see high levels of employment slash low unemployment. But here's the thing. Robust consumer spending also has huge inflation implications. And this is where things get really interesting for market watchers. The Jobs Report has significantly shifted expectations for Fed policy. Financial markets are now pricing in an 89% chance of a rate cut at the Fed's December meeting. That's up from a 72% chance,

which was what the market had priced in before this morning's report came out. In other words, get rid of the numbers and summarize this, the probability that the Fed is going to cut rates at December's meeting just got bigger. It's more likely now than it was yesterday that the Fed is going to cut rates at their December meeting. Why? What's the thinking? Well, there was a bit of an uptick in unemployment, and there was some softening in the labor force participation rate. And that combination of those two things gives the Fed room and reason to start easing. Let's recap all of this. What we saw was that in November, job creation accelerated, but the labor force contracted.

227,000 new jobs were created, but the labor force contracted by 193,000 people. This suggests that we are entering a period of transition, and the Fed looks like it's ready to continue rate cutting, and that could reshape the employment landscape in 2025. Markets are already pricing in two or three rate cuts next year. With treasury yields falling based on this morning's jobs report, what we see is that our job market is showing a lot of resilience while simultaneously signaling some cooling. It's got enough strength to support consumer spending and economic growth,

but it also has enough weakness to potentially trigger a shift in monetary policy. Now, I know some of you might think, well, a weakness might be a strong word for that. Aren't we just talking about the Fed bringing interest rates back down to what they were? That is recency bias at work. Rates where they are right now is rates are historically normal. The Fed doesn't bring down rates to get it to some type of idealized normal, which is another way of saying the Fed doesn't have a target interest rate.

The Fed has a target inflation rate, but it doesn't have a target interest rate. So if the Fed lowers interest rates, it's not because it has a goal of bringing interest rates down. It's because it sees some softening in the economy and wants to spur the economy through that rate cut. And so those are all of the takeaways from the November Jobs Report, which came out this morning, the first Friday of December. We're going to take a moment to hear from the sponsors who make the show possible. And when we return, we're going to talk about tariffs. Fifth Third Bank's commercial payments are fast and efficient, but they're not just fast and efficient. They're also powered by the latest in payments technology built to evolve with your business.

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Try the season's hottest flavors from the PC Holiday Insiders Report. Please feast responsibly. Welcome back. We turn our attention to tariffs. We will answer the question, what are tariffs, What are some of both the benefits and the drawbacks of instituting tariffs? What statements have been made directly by President-elect Trump related to his plans to impose tariffs in the upcoming year? What effect might this have on U.S. consumers and U.S. workers?

And how clearly can we distinguish between knowledge and speculation? Let's start by answering the question, what are tariffs? A tariff is a tax imposed by one country on goods imported from another country. Tariffs are an important tool in the regulation of foreign trade. Let's walk through an example. Let's say hypothetically that there is a blanket 25% across the board tariff on all goods that are imported from Mexico. Who pays that? The importing company that is based here in the United States, the company that is bringing

those goods from Mexico into the United States will pay that 25% tariff. That money would go to the U.S. Treasury. That contains a variety of consequences. Number one, it increases revenue for the U.S. Treasury. Number two, it incentivizes the importing company to turn to domestic production and domestic manufacturing as an alternative whenever possible. For example, if you run a clothing company, an apparel company, and you are currently having that clothing made in Mexico or in Canada or in China, then from your point of view as the owner of that importing company, it's a simple math equation to decide if that tariff is sufficiently high enough, if it's onerous enough, for you to stop using the services of the overseas. company and instead start using a domestic manufacturer. And if you crunch the numbers in the spreadsheet says, yes, it's worth paying that added tax, it's worth paying that added tariff.

All right, that's your choice as a company owner and the U.S. Treasury collects that added revenue. But by contrast, if you, as the U.S.-based apparel company owner, decide, you know what, that tariff makes it cost prohibitive, it would be cheaper for me to use a domestic, a U.S.-based manufacturer, well, that's a U. then that tariff has had the effect of spurring job creation inside of the United States. So that is the advantage of tariffs. It can bring a boost to U.S. production and it can bring a boost to those homegrown made in the U.S. goods. The disadvantage, however, is that if the importing

company is paying those tariffs, then that means higher prices for those companies, for those importing companies, which leads to higher prices for U.S. consumers. Because if imports are more expensive and therefore the cost of imported goods are higher, then those prices have to get passed on to the consumer. The importing company can take some of the hit, but they only have so much margin that they can eat. Remember, their employees are expecting wage growth and their own costs of everything from software to the rent on their warehouses has gone up.

So at a certain point, there is just no more. profit that they can lead, and the only way for them to be able to stay in business would be by raising those prices. So tariffs can have a positive effect in that they spur job creation domestically, and they can also have a negative effect in that they lead to higher prices for consumers. Now, you'll recall when we talked about the November jobs report, as you remember, manufacturing didn't see any new job growth in November. The 32,000 jobs that it reported mainly reflected workers that were returning from strikes rather than new job creation. Tariffs are intended to address that issue.

Tariffs are intended to boost domestic manufacturing. And that's precisely why the leaders of many foreign nations are quite concerned about this. As importers are incentivized to turn to domestic production to avoid paying higher costs, exporters that are based in China or based in Mexico or based in Canada might cut their prices in order to stay in business. In other words, those exporters will take a hit to their profits in order to stay alive. And this would harm the economies of the exporting countries. It could significantly harm the economies of Mexico or Canada. And that's one of the reasons why Justin Trudeau, the Prime Minister of Canada, made a trip to Mar-a-Lago a few days ago to plead with President

elect Trump not to impose these blanket tariffs. Trudeau was the first foreign G7 leader to meet with President-elect Trump since the election. Turning our attention for a moment back to the U.S., we'll talk more about Mexico and Canada and China in a moment, and there's a reason that I'm highlighting those three nations. But turning our attention back to the U.S., we have spoken so far about tariffs in a monolithic manner. But all conversations about the economy are sector-specific or industry-specific, and there are some industries that benefit from tariffs more than others. steel and aluminum, for example, sugar producers, and the auto industry, these historically have benefited quite a bit from tariffs.

What's interesting about the proposals for how tariffs would be implemented in 2025, what makes them a little unique in a historical context, because tariffs have been around since the 19th century, tariffs have often been assessed in an industry-specific manner historically, meaning that certain industries were targeted with tariffs in order to selectively protect specific types of domestic producers. Now, what's notable about President Elect Trump's proposals is that he is proposing across the board tariffs in which the variation is based on source country rather than industry. And there are a few particular countries that he has singled out. I'm going to quote directly from a couple of posts on truth social.

President-elect Trump wrote, quote, On January 20th, as one of my many first executive orders, I will sign all necessary documents to charge Mexico and Canada a 25% tariff on all products coming into the United States

and its ridiculous open borders. This tariff will remain in effect until such time as drugs in particular fentanyl and all illegal aliens stop this invasion of our country. Both Mexico and Canada have the absolute right and power to easily solve this long-simmering problem. We hereby demand that they use this power, and until such time as they do, it is time for them to pay a very big price. end quote. So that was what he said about specifically Mexico and Canada, our neighbors.

And it has elicited a strong response, both from Trudeau, who we just talked about, as well as Mexican President Claudia Shinebaum, who issued a rather scathing rebuttal. But in addition to Mexico and Canada, President Trump is also targeting the other major world power, China. I will quote him directly. He wrote on Truth Social, quote, I have had many talks with China about the massive amount of drugs, in particular fentanyl, being sent into the United States. But to no avail.

Representatives of China told me they would institute their maximum penalty, that of death, for any drug dealers caught doing this, but unfortunately they never followed through. and drugs are pouring into our country, mostly through Mexico, at levels never seen before. Until such time as they stop, we will be charging China an additional 10% tariff above any additional tariffs

on all of their many products coming into the United States of America. Thank you for your attention to this matter. End quote. Now, after he said, that, he issued another warning, and I won't quote this one directly, simply because I don't have it in front of me at the moment, but it pertains to the BRICS countries, BRICS, which is Brazil, Russia, India, China, South Africa. China, of course, which he had previously stated that he would charge them an additional 10% tariff. China was included in this grouping of BRICS

countries in a follow-up statement in which President President-elect Trump stated that if the BRICS countries continue a cross-border payment rail system, then he would impose a 100% tariff on all of those nations. If you listened to last month's first Friday episode, we talked about this. And if you listened to our interview with Tatiana Kaufman, we talked about this in that episode as well. cross-border payment rails are networks that allow for the transfer of digital money between countries and between continents. So they connect financial institutions and serve as the underlying infrastructure for international payment methods. Now, the reason that the BRICS countries are trying to develop this system is because they want to develop a method of payment that is a competitor to the U.S. dollar.

The U.S. dollar is currently the World Reserve currency, and they are trying to compete with that. they're trying to develop an alternative World Reserve currency. If you listened to the last First Friday episode a month ago, we discussed this entire attempt, and I gave my take on it, which is that I don't think they'll be successful at doing so. And now, with this newest development, which is that President-elect Trump is threatening 100% tariffs

on the BRICS nations, if they continue to even attempt to do so, they are hugely disincentivized from making an attempt that I think many, myself included, would characterize as a Hail Mary attempt. What's interesting about the idea of U.S. tariffs on the BRICS. nations is that, generally speaking, the tech sector historically has not really been impacted by tariffs.

Not in any major way. The impact of tariffs can be very sector-specific, and tech, which, of course, relies heavily on digital products and services, has generally been pretty insulated. So if you think of software, cloud services, digital platforms, these elements of the tech industry typically aren't subject to traditional tariff regulations. But there are segments of the tech industry that heavily depend on physical components. We're talking hardware manufacturers, semiconductor producers, electronics makers.

This is where we might see some tech sector impact because Malaysia has warned that any U.S. tariffs on BRICS. nations could impact semiconductor supply. Malaysia, I should add, has applied to be part of the BRICS block, but that application has not yet been accepted. The BRICS block is attempting to challenge the world order that is dominated by Western economies. That's a big part of the reason why they are attempting this de-dollarization effort. I should also add, and I want to give a little bit of broader context, the whole conversation that we've had, even my definition of tariffs, has been rooted in what is happening today. So we've been talking entirely about import tariffs. just to be absolutely clear from a, not that this applies to what's currently going on, but just from an academic perspective, there are different types of tariffs. There are import tariffs. There are export tariffs. There are revenue tariffs where the goal is simply for the Treasury to make more money.

There are protective tariffs. So there's all kinds. But what we're talking about in this context are not export tariffs. There's no discussion of that. And there's no discussion of revenue tariffs. The goal is not for the Treasury to make money. The goal is to influence the behavior of other nations and to bolster domestic production. So these tariffs, the ones that we're talking about, the tariffs that are likely to go into effect in some form or fashion to some extent or another in 2025, will these tariffs benefit those of us who live inside of the United States? As consumers, no, but as workers, yes, in certain industries, as long as there are no retaliatory tariffs, which we'll talk about in a moment. As consumers across the board, there are no benefit to tariffs and there are often drawbacks. The nonpartisan Peterson Institute for International Economics estimates that a 20% across-the-board tariff and a 60% tariff on China, would cost the typical U.S. household, one that is in the middle of the income distribution,

that household would face additional costs of more than $2,600 per year. Another study that was done by the Budget Lab at Yale estimates that tariffs would raise consumer prices by somewhere between $1,900 to $7,600 per household. Now, most of this would be at the grocery store, because much of the money. of our produce is imported, 60% of fruit and almost 40% of vegetables. But outside of the grocery store, we would also see higher prices on items like clothing and furnishings. The U.S. International Trade Commission found that in 2021, the tariffs that we've had in place, and actually I'll talk about that in just a second, but the tariffs that we've had in place increased prices between 1.7% to

7.1% in the 10 most affected sectors, and those sectors include apparel, car parts, furniture, and computer equipment. Now, when we talk about the tariffs that we've already had in place, we are referring to tariffs that were instituted during President Trump's first term, which were then held in place by President Biden, who kept or increased the majority of President Trump's tariffs, particularly on China. Going back to the core question, right, question, are tariffs, quote-unquote, good or bad, is not really an applicable question. Because as people who live in the United States, we are both consumers and workers. There is widespread agreement that tariffs result in higher prices for consumers.

That's been unequivocally demonstrated. But, no pain, no gain, in exchange for that burden of higher prices, we also, as workers, get more jobs, there's a bigger boost to manufacturing. We revive more industries and communities. We reduce trade deficits. We also, in many economists point this out, we re-shore our supply chains, and that could enhance domestic safety,

particularly in specific key industries where there's a national security interest in maintaining a domestic supply production. So we arguably may or may not have greater national security. as it relates to the supply chain, our discussion so far has not really covered the topic of retaliatory tariffs, and that's where we really start playing 3D chess. Woo, that's where things get interesting.

So so far what we've talked about is what happens if we raise taxes on imports that come into the country. What we've covered in the last, what, 15, 20 minutes, however long this has been, what we've covered are the effects of that, just that, which as you can see and here, that alone is quite nuanced, complex, and wide-ranging. But what happens downstream? What happens when our partner trading nations impose their own retaliatory tariffs, we're going to take one final break to hear a word from the people who make this show possible. And when we come back, let's unpack that, because that's where things get really fascinating.

Welcome back. Let's talk retaliatory tariffs, because this is where we go from playing checkers to playing chess. One thing I should clarify before we get started earlier, I talked about the BRICS nations, which I defined as Brazil, Russia, India, China, South Africa, which is what BRICS stands for. But then I mentioned that Malaysia had applied to join. And I realized that probably created a question in many of your minds because you were probably going, wait a second,

how could Malaysia join? Would that be Bricksum? Or M-Bricks? No, actually, great question. Glad you asked. Bricks is actually a block of nine countries. Back in the day, you really want the history of this, back in the day, Bricks was Brick, singular. It was Brazil, Russia, India, China, and it was this group of four emerging markets.

And if you were an emerging markets investor, you could buy a brick ETF and call it a day. Over time, more countries joined that block. So South Africa joined and they went from Brick, singular, to Bricks, plural. And now the BRICS alliance also includes Egypt, Ethiopia, Iran, and the UAE. Those are the nine countries that have been accepted into the BRICS alliance. But there are, in addition to Malaysia, there are a total of about three dozen countries that have applied to join. In Southeast Asia, in addition to Malaysia, Thailand, Vietnam, Indonesia, and moving into South Asia, even Bangladesh, have expressed interest in joining. Bangladesh, by the way, has a thriving economy.

Pay attention to how much of your clothing says made in Bangladesh. Just start paying attention. Now, they are facing some big, big challenges right now. Their currency got absolutely hammered after their former prime minister stole a bunch of money from the central banks and then fled the country. That's the whole other saga for a whole different day. When you wonder why people put so much faith and trust in the U.S. dollar,

and in the U.S. central banks, it's because some of the stuff that happens elsewhere is just unimaginable. There's this concept in psychology. It's called your assumptive world. It refers to these core beliefs, the core ideas that you have about the way the world operates. That's the difference in the type of assumptive world that we live in here in the U.S. versus the type of assumptive world that others live in. And that's the reason why there's so much faith and trust in the U.S. dollar. All right, I will get off of my Bangladesh tangent. We can talk about that on a different day because it's an incredible, tragic, fascinating, morbid, heart-wrenching story. I insert adjective here. But all of that that's happening in Bangladesh now came on the

heels of decades of incredible economic growth in South Asia. They grew to be the second largest economy in South Asia, after India, of course. Their economy has grown at an annual average of 6.25% for the last 20 years, and they cut their poverty rate by more than half over the span of a dozen years between 2010 to 2022. Both of those stats come from the CIA World Fact Book. So being from Nepal, a country that's also in South Asia that's not doing nearly as well as Bangladesh, it's been amazing to watch their story. One can only hope that one day Nepal will do as well as them.

But anyway, thank you for indulging me as I went off on that tangent. Back to the Bricks countries. I guess Bangladesh is a good example of countries that are doing relatively well in their home region. Bangladesh, Indonesia, Malaysia, Vietnam, Thailand, and then heading east from there, Turkey, Algeria, Nigeria, these are all nations that have applied to join the BRICS block. There are also many countries that have been invited to join, but either have not responded yet, such as Saudi Arabia, or that have declined the invite, such as Argentina. And if you want some really interesting listening,

listen to Javier Malay, the president of Argentina, listen to his interview on the Lex Friedman podcast. Fascinating stuff. And that's also a different topic for a different day. We could do a whole podcast episode, just unpacking the economic story of Argentina. But let's get back to the episode of today, which is tariffs. And we are now in the section where we're talking about the impact of retaliatory tariffs.

The U.S. Department of Agriculture, the USDA, conducted a big report on the economic impacts of retaliatory tariffs in January 2020. Specifically, of course, the report was about its impact on U.S. agriculture. But as we previously stated, much of the impact that U.S. consumers are going to feel, on import tariffs will be felt at the grocery store. And what we've seen in the past is that many of the retaliatory tariffs have also had a disproportionate effect on food producers. So pork, for example, was quite specifically targeted by retaliatory tariffs passed by China. But I'm getting ahead of myself. In 2018, the U.S. imposed tariffs on steel and aluminum imports, and we also imposed tariffs on a much broader range of imports from China.

In response to these, a group of countries including China, Canada, India, Mexico, Turkey, and the EU imposed retaliatory tariffs on many U.S. exports. And specifically, those retaliatory tariffs targeted a pretty big range of both agricultural and food products. the impact on individual product lines ranged anywhere from 2% to 140%. That is a wide range. So 2% to 140% was the range. And these retaliatory tariffs increased the price of agricultural exports in the home markets of those countries relative to other alternatives that were either produced domestically or that were imported from other international sources. And by the way, that is important to note because if the

U.S. does impose 100% tariffs on China, for example, it's entirely possible that many of those producers will route their goods through other nations. So there are really two things that happen. One is that high tariffs imposed on certain countries simply make exports from other countries more attractive. High tariffs imposed on Mexico, China, Canada, and the nine block of Bricks nations will make imports from any country that isn't one of the ones that I just named more attractive by comparison. So it offers a competitive advantage to, let's say, imports that come from Chile or Peru. Now, to be clear, President-elect Trump has suggested 10% across the board tariffs on all imports coming from any country.

country, but given that there are specific countries that are being targeted with higher tariffs, it makes those particular nations less competitive and, by contrast, other nations more competitive. So even though the 10% across the board would still be there, nations that typically may not yet trade as much with us would have a stronger shot. And by contrast, if those retaliatory tariffs are imposed on the U.S., what that means is that from the point, point of view of a company owner in Canada or in China, if those tariffs are applied on U.S. exports, it means that either domestic production in their own home country or exports from some other nation that doesn't have either any tariffs or as severe of tariffs,

those would become, relatively speaking, more attractive. Now, what this report from the USDA found was that as of October of 2021, many retaliatory tariffs were still in effect, with a few exceptions. Canada and Mexico's retaliatory tariffs were removed in May 2019. And China announced tariff exemptions for some products after the U.S.-China Phase 1 Economic and Trade Agreement was signed in January 2020. And then in October of 2021, the U.S. and the EU made arrangements as well, in which the U.S. lifted its tariffs on steel and aluminum imports. They replaced it with a tariff rate quota.

And in return, the EU lifted its retaliatory tariffs. And so the effect of all of that is that those retaliatory tariffs led to a significant reduction. I'm quoting directly here. Retaliatory tariffs led to a significant reduction in U.S. agricultural exports to retaliating partners. end quote. Now, on its face, that sounds like precisely what you would expect. The question is, by how much? And this report found that food exporters suffered losses totaling more than $27 billion

from the time period of 2018 through the end of 2019. Now, the bulk of these losses, 95% was due to China's retaliatory tariffs. China accounted for 95% of the losses, in part because they are such a major trading partner, particularly again in the agricultural realm, which is what this report covers. But again, I highlight this report because agriculture and food is where we expect to see the bulk of the impact. So the damage was $27 billion. Most of it was China. The report has some breakouts of how that breaks down in terms of soybeans versus pork, which I won't go into. But this is what's interesting. At the state level, losses were primarily concentrated in the Midwest.

Iowa suffered the most losses at $1.46 billion in annualized losses, followed by Illinois at $1.41 billion, and Kansas at $955 million. A quote, again, quote, the state-level losses were uneven and not directly proportional to the size of state-level exports. States that produced more of the commodities most severely targeted by retaliation, soybeans, sorghum, pork, and cotton experienced higher losses. End quote. And so this is a component of the tariff discussion that, is often not talked about in the mainstream media, which is that not only will tariffs impact households differently based on their household income,

and not only will tariffs impact industries differently, and we've spoken at length about sector specificity, but in addition to all of that, tariffs are going to impact states differently. And so while we can't predict the future, we know what has happened in the past, and specifically in the recent past, 2018 and 2019, and we know that it was the Midwestern states in particular that got hit the hardest.

What we know, at least from the past, is, as I mentioned earlier, technology and software is an industry that by and large is less affected by tariffs. Healthcare and pharmaceuticals is generally shielded by domestic production. Many medical devices and pharmaceuticals are manufactured in the U.S. or they are inside of trade agreements that protect them from heavy tariffs. Retail and e-commerce, there's mixed impacts. There are retailers that depend on a lot of foreign-made goods, such as clothing, electronics, various other consumer goods.

Those retailers do face higher costs because of tariffs. But as e-commerce grows, a lot of companies are able to adapt by sourcing products from companies located in countries that are either outside of the scope of tariffs or that have the lowest tier of severity of tariffs, the cheapest tariffs. Historically, it's been manufacturing and agriculture where we've really felt the impact. Farmers, you know, soybean farmers in particular, really rely pretty heavily on exports to China.

And historically, they saw a drastic, drastic reduction in sales due to retaliatory tariffs. So will we see that again? Time will tell. But that is the landscape that we are heading into as the New Year approaches. We will pause here. We will wrap today's episode in our end of the year episode, our New Year's Eve episode. We will resume this discussion and build on it.

we'll take a look back at the economic landscape of 2024, at what has happened in the financial markets, in the trading markets, and we'll look ahead to 2025 and get a sense of what's there. So we're going to have at the end of this year a doubleheader, our New Year's Eve episode, as well as our first Friday January episode, where we are going to really ground ourselves in research-driven, fact-based knowledge about the economic landscape of our times. Thank you for listening. Thank you for being part of the Afford- Anything community. If you enjoyed today's episode, please do three things.

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