NerdWallet's Smart Money Podcast - Tariff Talk: What Trade Policies Could Mean for Your Budget

Episode Date: December 4, 2024

Learn how tariffs affect prices, inflation, and manufacturing, plus tips to prepare for potential new economic changes. What are tariffs, and how do they affect your wallet? What would President-elect Donald Trump’s proposed tariffs mean for consumers, the economy, and inflation? Hosts Sean Pyles and Anna Helhoski dive into the complexities of tariffs, unpacking their potential impact on prices, supply chains, and domestic manufacturing. They begin with a breakdown of what tariffs are, why they exist, and how they’ve historically influenced U.S. trade policy. Along the way, they share insights on navigating rising costs, understanding the global supply chain, and the inflationary effects of tariffs. In the second half of the episode, Sean and Anna cover the latest money headlines, including trends from Black Friday and Cyber Monday spending, predictions for a potential “Santa Claus rally” in the stock market, and a new survey revealing Americans’ views on financial success.  8 Last-Minute Christmas Vacations to Book in the U.S. https://www.nerdwallet.com/article/travel/christmas-travel-destinations  In their conversation, the Nerds discuss: what are tariffs, how tariffs work, tariffs and inflation, Trump tariff plans, supply chain tariffs, inflation and tariffs, trade policy impact, tariffs on imported goods, global supply chain issues, consumer price increases, manufacturing tariffs, economic impact of tariffs, U.S. trade policy, Black Friday spending trends, Santa Claus rally stock market, tariffs on Canada Mexico China, global trade tariffs, tariffs and manufacturing, economic inflation causes, tariff history in the U.S., import taxes, Trump trade policies, price increases on goods, supply chain disruptions, manufacturing challenges, economic recession fears, holiday spending trends, U.S. exports, and international trade. To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Like what you hear? Please leave us a review and tell a friend.

Welcome to NerdWallet's Smart Money Podcast. I'm Sean Piles. And I'm Anna Helhosky. And this is our weekly money news roundup, where we break down the latest in the world of finance to help you be smarter with your money. We'll go deep into a single topic, then leave you with the latest money headlines. Today, we're taking a closer look at tariffs, what they are and how they ultimately affect you. That's right. And we'll explain President-elect Donald Trump's big plans for enacting new tariffs once he steps back in the Oval Office in January. We touched on Trump's tariff plans during our election series in October and in our post-election episode on November 13th. So feel free to check those out. Sean, why don't you kick us off with an explanation of what tariffs are?

A tariff is, essentially, a tax on imported goods when they enter the country. It's usually a fixed amount or a percentage of the price of the import. Tariffs are used for a few different reasons, to raise revenue, to protect domestic interests from foreign competition, or as a foreign policy tool. So here's why tariffs are in the discourse right now. Trump has promised to levy all kinds of new tariffs when he's president again, including 10% to 20% across-the-board tariffs on all imported goods, up to 60% tariffs on goods imported from China, and 100% to 200% tariffs on automobiles produced in Mexico. Then last week,

Trump also said he would levy a 25% tariff on all imports from Canada and Mexico. Those are the top two exporters of goods to the United States. He also promised to levy a 10% tariff above any additional tariffs on China. They're the third biggest exporter of goods to the United States. He said on Truth Social that the reason for those threats are due to the rise in fentanyl smuggling. Presidents have levied all kinds of tariffs over the years, either on a country or for a particular good. So it's not a new thing. But throughout the campaign, economists expressed concerns about the extent of Trump's tariff plans and the potential impact on the economy. Now, not all campaign promises bear fruit. However, Trump has been bullish before on tariffs, and it's likely he'll have a similar approach in his second term.

In 2018, Trump levied tariffs ranging from 10% to 50% on goods mostly imported from China. That includes solar panels, washing machines, steel, and aluminum. President Joe Biden also expanded some of those tariffs. Back in May, he increased tariffs on steel and aluminum, semiconductors, electric vehicles, batteries, medical equipment, and solar cells. One thing I want to note as well is that any new tariffs would be added to the tariffs that already exist. So as you said, Sean, tariffs are nothing new, but it's the scope of Trump's plans that have some economists concerned. One concern that consumers might have is that tariffs tend to make the stuff you buy more expensive, right? Yeah, they do. But I want to step back and consider how that stuff is made and distributed. In other words, the supply chain.

The U.S. is not siloed, as in we don't make everything here that we consume, and we don't consume everything that we make. The supply chain is global, and that means we have a network of companies across the world that supply not just completed goods that you buy, like a car, but the raw materials and components used to make that car, too. So when the supply chain is disrupted through war, natural disasters, or, say, a global pandemic, there's not enough supply of a product to meet consumer demand. And as we know, when that happens, prices go up. So we have a better sense of the global supply chain and how it works. Let's bring it back to tariffs. How do tariffs affect the supply chain? Ah, so now it's time for the washing machine example. In 2018, while Trump was first president, he enacted a 20% tariff on all imported washing machines, and that increased to 50% later in the year. Researchers and economists at the University of Chicago and the Federal Reserve analyzed the

effects of those tariffs and found that, as a result, the price of washers rose by nearly 12%, and dryers also rose by the same amount, even though there was no tariff on dryers. That's because the two are usually sold together. So overall, it was an increase of about $92 in 2018. So we know that tariffs can have an inflationary effect, and economists say that if Trump levies the tariffs he has promised, it could be or would be inflationary. Last week, after Trump announced his plans for tariffs on Canada, Mexico, and China, Goldman Sachs published a note saying that they would likely increase inflation by 1%. I've seen some economists on the left, the center, and the right who all seem to say the same thing. Trump's tariffs don't make sense from an economic standpoint, and it's likely

to fuel inflation as costs are passed on to U.S. consumers. Tariffs make things more expensive for nations to export, which makes it more expensive for suppliers and manufacturers to get the parts and goods they need, and that cost is passed on to the consumer. There's one other element that I mentioned before, and that's the threat of retaliatory tariffs, which would mean the U.S. exports would cost more as well. I want to back up and look at the reasoning behind Trump's tariff proposals. He says his plans would increase revenue and spur domestic manufacturing. Ana, is any or all of that realistic? All right, so there's a lot to unpack. First off, yes, economists say that tariffs will raise revenue. The Tax Foundation says that a 10% universal

tariff would raise $2 trillion, while a 20% universal tariff would raise $3.3 trillion. But the revenue raised by those tariffs wouldn't offset the revenue losses that we'd see if the expiring provisions of the 2017 Tax Cuts and Jobs Act are made permanent. There's some other context that's important. Tariffs haven't been an important source of federal revenue, according to the budget lab at Yale University. In fiscal year 2023, the U.S. collected just $80 billion in net customers' duties. That's about 2% of total federal revenue in that period. So how about manufacturing? It's not what it used to be in this country,

even if it's still one of the largest sectors of the economy. Do tariffs increase manufacturing? Yes and no. The U.S. doesn't have the capacity to produce everything that the country needs. As I said before, the U.S. is part of a global economy, so manufacturers at home still rely on imports from other countries as part of production. A 2019 paper by the Federal Reserve Board that analyzed the effect of Trump's 2018 tariffs on the U.S. manufacturing sector found that import tariffs could protect some U.S. manufacturers from foreign competition. But it also said that any gains are offset by increased costs that could hurt U.S. manufacturers' ability to compete. The Federal Reserve Board even found that Trump's 2018 tariffs led to a, quote, relative reduction in manufacturing employment,

as well as increases in producer prices. Now, some companies like AutoZone, Columbia Sportswear, Stanley Black & Decker, and Walmart have already said that their prices will likely rise as a result of Trump's proposed tariffs. There's a lot of crystal ball reading here, but if that's the case, should people make purchases now before Trump imposes tariffs? This is tricky because, as you said, you have to make a fair number of assumptions to make a decision like that. But the main assumption is that Trump does indeed enact most or all of the tariffs that he has said that he will. That's what remains unclear and likely will remain unclear until he's officially president again. The hard part for all of us is that we don't know exactly what's going to happen, tariff-wise.

It might be a smart idea for folks to get something they know they'll need and is made in China or Mexico or Canada, like an appliance or a smartphone. But don't buy something you don't need now just because it might be more expensive later. Up next, a few money headlines from the last few days. Well, Anna, did you empty your bank account on Black Friday? Sean, I work a nerd wallet. Of course not. I'm a saver at all times and never spend money on anything. Just kidding. I got some deals on skincare for me, toys for my friend's kids, and the same two flannel shirts

that I buy for my dad annually. How about you, Sean? Sounds like you had a very productive shopping weekend. Oh, yes. I bought some stuff for myself that wasn't even on sale, but I did pick up a couple of things for folks on my list. So, you know, kind of a mixed bag there. Black Friday and Cyber Monday

definitely made my wallet a little bit lighter. And apparently it did for a lot of other Americans too. The annual MasterCard spending poll survey showed that retail sales were up 3.4% on Black Friday from last year's Black Friday. And a lot of us were doing that shopping online, even before Cyber Monday. MasterCard says online sales last Friday shot up almost 15%. In-store sales, by contrast, rose just 0.7%. The survey says popular items included jewelry, electronics,

and clothing. And footwear, according to MasterCard, is, quote, tracking stronger than last year at this time. Hey, never enough sneaks in the closet. Or maybe boots for the storms that hit the Midwest over the weekend. If you are sick of winter weather or you're just looking for a change of scenery, then I should let you know that our friends on the travel team just published a list of eight last-minute Christmas vacations that you can book in the U.S. You can find a link to that in today's show notes. Sean, with Thanksgiving behind us, it's time to turn to thoughts of stockings hung by the chimney with care and hopes that a Santa Claus rally might bestow itself upon the stock market. Santa! Yes, this is one of those stock market mythologies that has some element of truth to it. This is the idea that the markets like to rally as we head toward the end of the calendar year.

Barron's took a look at it recently and found some merit to that. Yeah, it looked at the Dow Jones Industrial Averages since the index was created back in May of 1896. It found that if you look at the two months of November and December, the index boasts an average return of 2.6%. Looking at two-month periods across the year, the average is just 1.2%. Yay, Santa! Barron's also looked at the impact every four years of a presidential election cycle, and in those years, the November-December Dow Jones average return was 3.3%. This is where we say that this is all in good fun, we are not professional crystal ball readers, and this is in no way a promise that either Santa or the Santa Claus rally will appear this month. And finally, Anna, do you believe that there is a secret to success?

Oh, definitely. Work hard, play hard, love hard, you know, bumper sticker philosophy. Okay, and how about financial success? Save more than you spend? I'll buy that, so to speak. For many Americans, the answer to that question lies in their paychecks. Research from the financial services firm Empower found that the average salary people consider to indicate that you're successful is, drumroll please, $270,000 a year and $5.3 million in overall net worth. If I had to live on that, then I guess I could. Unfortunately, only 37% of respondents to the research said that they feel financially successful, but a solid majority, 58%, say they believe it's possible to attain that success during their lifetimes.

The study found that of those who feel they're not hitting the mark for financial success, 35% say it's because of the economy, 30% say it's because of instability in their income streams, And I know what can help with that. Oh, become or stay a regular listener to Smart Money. And that's it for this week's money news. We always welcome your money questions and comments. Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD or send us a voice memo at podcast at nerdwallet.com. And remember, you can follow the show on your favorite podcast app, including Spotify, Apple Podcasts, and iHeartRadio to

automatically download new episodes. Today's episode was produced by Tess Vigeland and myself and edited by Rick Vanderkneife. Here's our brief produced by Tess Vigeland and myself and edited by Rick Vanderkneife. Here's our brief disclaimer. We are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. And with that said, until next time, turn to the nerds.