Insights@Questrom Podcast

Tariffs and Their Economic Implications

• Boston University Questrom School of Business • Season 3 • Episode 3

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In this episode, JP Matychak and Mark Williams, Master Lecturer in Finance, discuss the complexities of tariffs, their implications for the US economy, and the recent changes in tariff policy announced by President Trump. They explore how tariffs function as a tax on imported goods, the burden they place on consumers, and the potential economic fallout, including inflation and recession. The conversation also delves into the long-term risks of relying on tariffs as a trade tool and suggests more constructive approaches to address trade imbalances.

Key Takeaways

  • Tariffs are essentially a tax on imported goods.
  • Consumers ultimately bear the cost of tariffs.
  • Recent tariff changes have led to significant market declines.
  • The administration's goal with tariffs is to protect local industries.
  • High tariffs can lead to inflation and reduced consumer spending.
  • Stagflation poses a significant risk to the economy.
  • Tariffs can trigger retaliatory measures from trading partners.
  • Long-term reliance on tariffs can harm global trade relationships.
  • Constructive trade policies should be incremental and strategic.
  • Monitoring financial markets is crucial for understanding economic trends.
Mark Williams:

The tariffs are going to bring in short-term, more funds to the Treasury, but at a cost, because of course it's a transfer tax, so consumers are going to pay the difference. We're feeling it already and that's why the stock market has crashed, has dropped since the February high by over 10 percent.

J.P. Matychak:

Hello everybody and welcome into the Insights at Questrom podcast. I'm JP Matychak. This week we're talking tariffs yes, those often misunderstood levers of trade policy that are making headlines once again, and just two days ago President Trump announced sweeping changes to US tariff policy, increasing rates on a wide range of imported goods across the globe and against various countries. It's a move that has significant implications for businesses, consumers and the global economy. And to help us unpack what all of this means is Mark Williams, master Lecturer in Finance at Questrom School of Business and nationally recognized expert in global markets and risk management. Mark, great to have you with us. Williams, master Lecturer in Finance at Questrom School of Business and nationally recognized expert in global markets and risk management Mark, great to have you with us.

J.P. Matychak:

Yeah, jp nice to be here, so let's just start with the basics. I think these are often misunderstood as to what are tariffs, right? So what exactly is a tariff, and what is it meant to do as a lever that governments can pull when it comes to the economy?

Mark Williams:

Sure Tariffs themselves are really attacks, and that is, they're attacks on any goods that come into a country, and the thought of putting a tariff is to create a wall, that is to protect local manufacturers or other industries in particular, to give them the opportunity then to build and make and produce things locally.

J.P. Matychak:

So there does seem to be some confusion around this. So you know who actually pays for this tariff. So you know a tariff gets levied, who's actually paying for that?

Mark Williams:

Sure. Well, the president had stated that actually China would pay for it, or Mexico or Canada are three largest trading partners but in reality consumers pay for it. So technically what happens? Goods arrive in the US and customs. The customs agent then charges the tariff. That tariff is paid to the treasury, but the person who's bringing in the goods tends to pass that cost on to consumers, and that's why we're seeing an increase in inflation here in the US.

J.P. Matychak:

So in other words, if I'm an auto manufacturer and I'm here in the United States and I'm bringing in parts that I need to manufacture those, when those come into the country, I'm the one that's paying that tariff right.

Mark Williams:

Yes, ultimately. And what's interesting about these tariffs and I'm glad you used automotive, you know, in the US in particular, because labor has been so high, we tend to actually Ford and GM in particular we actually have manufacturing plants in Canada and then also Mexico, and because of cheap labor there, it allows then for these cars to then be re-imported to the US, put in dealerships and sold to US customers at a cheaper price.

J.P. Matychak:

So this past week President Trump did announce new policies, if you will, that were a significant shift from where I think the market really thought that the tariffs were going to land. I think those on Wall Street thought that maybe we would see a 10% tariff, but in effect, when he introduced reciprocal tariffs and we could talk a little bit, maybe about what reciprocal tariffs are, it looks like the effective tariff will actually be around 25%. So what do we know so far about the tariffs that have gone into place or will go into place here soon, and how the market is reacting to those?

Mark Williams:

Sure, and actually the run-up to these tariffs has been a lot of PR about it and back and forth, and that uncertainty, of course, is risk and that's how the market's responding at this point and it's not responding well. The market is off over 10%. There's been $5 trillion of lost wealth right now. So the tariffs themselves have been placed on various countries large trading partners that we have against Mexico and Canada, for example, training partners that we have against Mexico and Canada, for example, Cars and auto parts are taxed at 25%, but China in particular, which is a large importer to the US, they've been taxed at 34%.

Mark Williams:

And China, of course, last night, late last night, came back and did a reciprocal saying if you're going to charge us 34%, we're going to charge you for anything you try to sell to us. So this back and forth is really a game of it's a game of thrones and that's the challenge we have with tariffs. It's not a unilateral thing. If you're trading with something with another country, they're going to work very hard to try to actually protect their own turf.

J.P. Matychak:

So what is the administration trying to achieve with this move? And I know that you know you've talked a little bit about the magical economic, you know thinking here a little bit. So what are they really trying to achieve when they're putting these massive tariffs in place?

Mark Williams:

Well, publicly, the statements are tariffs are good and tariffs will make America wealthy again. But the reality is that we are two thirds of our GDP. The US GDP is based on consumption, and so our economy, which is the largest in the world, grows when we consume. However, for any good, if it increases in price, consumers are going to buy less of that product and, as a result, the economy already is shrinking, was supposedly, we will put tariffs and it will protect our turf, the US, which then will give some flexibility for manufacturers then to produce products locally.

Mark Williams:

But that's flawed logic, because let's just take, for example, car manufacturing. The reason why we're doing a lot of manufacturing to the north, in Canada, and to the south, in Mexico, as I mentioned earlier, is labor is a lot cheaper. So if we bring manufacturing back to the US, we have to site plants, we have to actually build plants, we have to find labor, we have to train labor and we also have to actually then produce the product and get to full capacity. That could take anywhere between four and five years. So there's a lot of financial pain for the next four or five years if we're going to have these tariffs and consumption is going to decline and already we're seeing cracks in the economy and it looks like we're moving closer and closer to a potential recession.

J.P. Matychak:

So you talked about, you know you brought up recession and obviously you know the last several years have been, you know, on this sort of bubble of recession and whatnot, and the Fed had already started to make moves to lower interest rates. And now we move into territory where we could start to see interest rates rise again, right, and at the last Fed meeting they decided to hold interest rates steady. So let's talk a little bit about this. So, as these tariffs go into place, it does contribute to larger global economic factors, right? So how will these affect things like inflation, interest rates, supply chains, all of those different types of things? And then there's another word that keeps getting talked about out there stagflation. Now, with a little bit slowing of the economy, slowing of job growth, more people in unemployment, we start to throw around stagflation a little bit. So can you talk a little bit about how these tariffs are going to interplay with all of these different economic factors?

Mark Williams:

Sure, and I think the big picture is that we are. That is, the US is the largest buyer consumer in the world and, as I mentioned, two-thirds of our GDP. Our economy is based on consumption and a lot of what we buy is manufactured elsewhere, and the top five trade partners are Mexico and Canada, china, japan and Germany, and we buy lots of products from them and we also sell some products to those countries as well. So the fact that we're buying more than we're producing in these tariffs, in reciprocal tariffs from countries like, for example, canada and in China you mentioned earlier that's going to increase our costs here in the US and so that's going to increase push inflation up significantly. Already. The Atlanta Fed came out with a recent estimate and it was looking specifically at GDP growth and it looks like GDP growth is going to drop to negative 2.8% for the first quarter. So that's an ominous sign. So really, the logic is this that as inflation increases, people consume less. As we consume less, the economy shrinks. If the economy shrinks for two consecutive quarters, of course, then that becomes a recession and that could happen potentially as soon as June. So that's of concern.

Mark Williams:

And you mentioned the Fed, which is really a very important lever here in our economy. The Fed hasn't reduced interest rates since December and it was hoping to reduce rates by three or four more cuts this year. Right, right, but inflation has reared its head through these tariff policies and it looks like inflation could be at three or four percent at year end. So the Fed has two mandates. One, of course, is to fight inflation, and they do that, of course, by managing interest rates. Higher rates help break the back of inflation, but in this economy, which is now incredibly fragile, if the Fed were to increase interest rates, fight inflation it could actually kill jobs. And now the challenge is, of course, the word that you mentioned stagflation is really creeping into the daily conversation and for your listeners, stagflation is the worst of both worlds it's high inflation and lots of unemployment. So if stagflation comes and that's a very significant challenge for economists and for the Fed, because how do you eradicate inflation in an economy you do it through high rates, and that doesn't spur economic growth and new job creation.

Mark Williams:

So, really, in summary, these tariffs, the way in which, the haphazard way they were put up, and the size of these tariffs and the reciprocal tariffs that are now coming from our trading partners, which President Trump now calls our trading enemies, has really created potentially a global financial crisis. In particular, we're seeing, for example, about 80% of products that Mexico sells, it sells to the US. That is those products they produce. Canada about 75% of the products they produce they sell to the US. That is those products they produce. Canada about 75% of the products they produce they sell to the US. So if we slow down on our consumption, we could actually throw very quickly Canada and Mexico into recession, which could trigger a global recession and could potentially pull us into recession as well.

J.P. Matychak:

You know, the estimates are that the tariffs will bring in quite a bit of revenue to the US government, which, if you're only looking at that, could be a wonderful thing. But it truly does play a greater impact on the global economy when we are the largest economy and, as you said, two thirds of our own GDP is based on consumption.

Mark Williams:

Right. So the challenge here and I'm glad you brought up that point the tariffs are going to bring, in short term, more funds to the Treasury, but at a cost, because, of course, it's a transfer tax, so consumers are going to pay the difference. That's right and we're feeling it already, and that's why the stock market has crashed, has dropped since the February high by over 10% and again lost $5 trillion. Now the challenge we have is the US economy is massive it's $30 trillion. The second largest economy is China, which is under $20 trillion, and Japan and Germany are roughly $4 trillion each, and then India, which is $3.6 trillion.

Mark Williams:

So we are the center of the global economy, and so these actions that we're taking have ripple effects throughout the globe, and I think they've been very irresponsibly implemented, which is really frustrating because we have a lot of economic history. We can go back to 1930, in the middle of the Great Depression. The Smoot-Hawley tax tariffs were put in, and they proved to be disastrous. Not only with these high tariffs, but they extended the length of the Great Depression. So many economists shake their heads. We have plenty of evidence that what Donald Trump was doing and has been done would harm the economy in the way it's actually played out has been done would harm the economy in the way it's actually played out.

J.P. Matychak:

So let's talk a little bit about that then. So what are some of the long-term risks of relying heavily on tariffs as a policy and a trade? What I'd say is a tool to combat trade imbalances?

Mark Williams:

Sure, well, I think everyone could agree that tariffs themselves, if managed appropriately, could help balance trade between two trading partners. But what happens is when you have a unilateral approach and you say that you hold all the cards and you make all the decisions, your counterparties actually get very upset and actually respond to that and do countermeasures, and that's what we're seeing. That's why I mentioned earlier the Game of Thrones. So everyone loses in that environment. The economies themselves around the globe shrink because of the fact that Pricing has increased, consumers are spending less and the economy is slowing down, and then, of course, that kills jobs and then that moves us into potential recession.

Mark Williams:

So there is tariff policy, which is useful especially to police, you know, breaking of rules and actually, as President Trump likes to call it, cheating in the trading environment. But the reality is that we need Mexico. Roughly 30% of our vegetables and goods that we rely on in the US are actually those goods are imported from Mexico. So by increasing those tariffs, I mean I don't think we're going to be making or growing more lettuce. Maybe in regard to fruits like avocados, for example, maybe we'll be eating less, right in regard to bananas, we don't have the climate to produce bananas or mangoes. So we're going to be challenged specifically on how to fill. We're either going to consume less and less variety of products or we're going to pay more for them.

J.P. Matychak:

So are there more constructive ways?

Mark Williams:

to address trade imbalances or protect our domestic industries and companies.

Mark Williams:

Yes, strategically, and that's various governments, whether it's the Biden administration, stock markets, bond markets, don't like uncertainty, and when you have sudden moves in uncertainty then that actually causes these erratic movements and stock collapses. So I think probably now it's sort of that the toothpaste is out of the tube, that the toothpaste is out of the tube. But ideally if we could roll back to, let's say, december, after Trump was elected, and if he would have implemented, saying we're going to have across the board a 5% or 10% or we're going to strategically target those trading partners that we would like to have a more balanced import-export relationship with, then I think the markets would have been much more favorable to such an approach. But what was done was a manner in which isn't how trading works. It was someone coming to the table saying we control, you know all the chips and we can decide how much to tariff, and the reality is that you know, just like trade, it finds new markets and so these tariffs actually, in the long run, could hurt the economics of the US of the U?

J.P. Matychak:

S as our main suppliers of goods, to find new buyers and maybe won't come back Very, very interesting. So I want to wrap up with with one final question that I like to to to do with anytime we have the show. Is you know whether it's a, a business leader listening, or a student, or even the everyday consumer? What, in your mind, is the one thing that listeners should be watching as this tariff story unfolds over the next weeks, months, years to come?

Mark Williams:

Well, it's very important to look at the financial markets. Stocks are leading indicators. The fact that stocks are correcting dropping is an indicator of perceived risk in the market. We also have a bond curve. The yields now are starting to get inverted. That means that the short end is higher as a percentage than the long end and inverted yield curves is higher as a percentage than the long end, and inverted yield curves nine out of 10 times reflect that we're moving towards recession. So these are the things to think about, and if we are moving to a slowing economy and a recession, then it's important to rethink your budgets and actually, cash is king in these environments.

J.P. Matychak:

Excellent. Well, Mark, thank you so much for joining us and bringing some insight to this important topic. I really appreciate you taking the time.

Mark Williams:

Sure.

Mark Williams:

Well, thanks for having me.

J.P. Matychak:

Well, that's going to wrap things up for this episode of the Insights at Questrom podcast. I'd like to thank my guest again, mark Williams, master Lecturer of Finance at Boston University, questrom School of Business. For more on this episode's topic, previous episodes and additional insights from our Questrom experts, visit us after the show at insightsbuedu. So long,