SKEPTIC’S GUIDE TO INVESTING

Trump Puffery: Tariff Policy

Steve Davenport, Clement Miller

Please text and tell us what you like

This episode explores the concept of tariff puffery, delving into the economic realities versus the exaggerations perpetuated by political figures regarding trade policies. Hosts Steve and Glenn discuss the implications of tariffs on consumers and businesses, offering a critical insight into their effectiveness in today's economy.

• Definition of puffery in the context of tariffs 
• Examination of historical tariff impacts 
• Discussion on the automation of pricing and consumer costs 
• Analysis of tariffs on China, Canada, and Mexico 
• Implications of on-shoring and reshoring supply chains post-COVID-19 
• Market resilience in the face of tariff discussions

Straight Talk for All - Nonsense for None


Please check out our other podcasts:

https://skepticsguidetoinvesting.buzzsprout.com

Speaker 1:

kind of talked about next. Hello everyone, this is Steve Davenport and I'm here today with Glenn Miller and we're talking about 2025, trump puffery and for people that didn't listen to our other podcast, puffery is our term for exaggeration half-truths, half-things that we think are out there as grandiose ideas but have very little chance from an economic or investment perspective to alter what we're going to see. And so today we're going to talk about on this podcast, tariffs. So we've heard the word tariff thrown around for China, mexico, canada and Clem. How do you feel about tariff puffery? Is it not a chance of happening or is it just the level of exaggeration that we're most concerned about people getting worried about?

Speaker 2:

So I think that you know it was a big issue in the campaign tariffs and I think that you know Trump made this point, that you point that tariffs are good, that it's actually the companies in foreign countries that pay the tariffs and that there's basically no impact on no negative impact on US importers, us consumers, and may actually be helpful in terms of creating some protectionism for US industry. So that was his point and you know a lot of that is just plain-.

Speaker 1:

Also kind of reduced inflation isn't it?

Speaker 2:

Yeah, a lot of it is just plain economically wrong, right. But let's explore where he's coming from on this right. Today, 2025, we're in an economy which is largely services-driven, largely driven by technology, largely driven by automation and robotics in the manufacturing world. And when Trump talks about tariffs, you know he's talking about 1965. That's what he's talking about. He's talking about a time when the automobile industry was at its peak, when you had a great deal of tire manufacturing in the United States, when you had a lot of manufacturing of goods in the United States that were done by uh, with a high labor content, and that's what he's talking about. He's talking about an age, uh, where you know, which will never come back. It's never going to come back. So when he he says, make America great again, the again he's talking about is something like 1965. And that's where you have to understand where he's coming from.

Speaker 2:

Was true in 1965, right, that if you put on tariffs, you know you could create a protectionist system where you could develop an economy behind tariff walls. I mean, clearly, countries like Japan and Korea and others were able to do that in the 1960s and 1970s and 1980s, even, right. But once you entered into this world of the 90s and 2000s, it became largely irrelevant. You had the WTO, first the GATT, then the WTO, and then you had this spread of regional free trade agreements. You had the European Union, you had NAFTA and so on. These allow for relatively free trade in goods.

Speaker 2:

To make it clear to our listeners that trump is he's thinking about an era that no longer exists, of where tariff, where you can build economies behind tariff walls. And today, tariffs, you know, don't do that. We're. We're in a in an economy right now where, if tariffs are imposed, because of the way computer systems work and pricing systems work, those tariffs can be passed directly onto consumers in a matter of seconds, in a matter of seconds. That's how automated our pricing systems are. Think about, you know, if you go to Target or Costco or Walmart, you know, all those stores, it's all. It's all interlinked in terms of computer systems. You put a tariff on and it passes directly onto onto consumers. So that's, you know.

Speaker 2:

That's the issue. Now. I think you know, even if Trump doesn't understand that, I think some of his advisors do, and his advisors are going to, you know, they're not going to be able to change his basic instincts, but they're going to be able to narrow or perhaps sharpen these tariffs. So I think we're already seeing that and I think we're going to see I don't think, at the end of the day, we're going to see, you know, 20% across the board tariffs or 10% across the board tariffs. I just don't think we're going to see anything like that across the board tariffs. I just don't think we're going to see anything like that. I think we're going to see tariffs that are a little bit more ambitious than the kinds of tariffs that we've seen in recent years, is 60% China tariff going to happen?

Speaker 2:

Absolutely not.

Speaker 1:

Okay, is any of the tariffs we have on any of the goods going to even be at 60%, like is he basically taking one tariff and calling that our tariffs on China at 60% Because he's got one particular semiconductor, or something else?

Speaker 2:

Well, it could be. It could be that he's saying we're going to have a 60% tariff on China, but he's only referring to one widget, right?

Speaker 1:

That's my point is that I want people to understand the mentality behind this. You've given us the history, but the mentality is I can just say things and people are not going to fact check and they're not going to look at the reality.

Speaker 2:

So one legitimate use of tariffs is to level the playing field for a US company, right To level the playing field for us manufacturer. And so if you've got a, a Chinese company, to take that example, uh, that because of government subsidies, uh is able to, you know, charge a, uh, you know is able to call, have a cost base that is, you know, very, very low, right, it's perfectly legitimate for the US government to apply a tariff that is pretty high in order to level the playing field. Now, that being said, it's still at the expense of US consumers to do it. Ed HARRISON Correct.

Speaker 1:

I think we all agree that the real impact is going to be different than what's being portrayed. But I guess I'm just going back to our term of puffery, that 5% and 10% tariffs being called 60% tariffs and showing what strength and influence he has over China are just another example of a trend here.

Speaker 1:

If we have Puffery, in our international renaming the Gulf of Mexico and Greenland. We're going over here to tariffs against China and we start off with they're the highest tariffs. We're going over here to tariffs against China and we start off with they're the highest tariffs, and so are they the greatest form of puffery in the tariff world. Or is our good trading partners with Canada and Mexico, where we might have 5%? We're talking about 25%, but now it's in reality more likely going to be 5%. So which one is greater puffery? Now it's in reality more likely going to be five.

Speaker 2:

Which one is greater puffery, well, greater puffery. I think talking about any kind of tariffs with Mexico and Canada is puffery, really. You don't see anything that we can do, uh, mexican or us content in order for to, you know, to have to be eligible for tariffs. You can't have chinese parts and mexican assembly and and that qualify for us tariffs can't do that, uh. So I think that you know the only situation where or you know primarily I, I guess the only situations involving Mexico and Canada that justify any significant tariff is where China or somebody else in Asia would try to take advantage of the North American Free Trade Agreement in order to access the US market. I think that's where higher tariffs on Mexico and Canada would, I think, legitimately come into play, michael.

Speaker 1:

KRIGSMANN. So instead of China sending the goods, they send the goods to a subsidiary. China sends the goods to a subsidiary in Mexico and that subsidiary sends it to the United States, implying that it was actually assembled there, but in reality it was assembled in China.

Speaker 2:

Well, it was manufactured in China but then assembled in Mexico. So it's not necessarily a question of mislabeling, it's a question of content. If you've got a car that is exported from Mexico to the United States and 75% of the value of that car was manufactured in China, then the US has a legitimate right to apply a tariff to that. That's, in my opinion, right, and the same thing would apply with regard to Canada as well. So obviously there's going to be some tariff kicks in at 75% content. Then you know China the parties to that deal might lower the Canadian, the Chinese content to 73%, right, they're not going to have it apply. So there's going to be some tariff management involved in that.

Speaker 2:

But you know, I think you know, I think you know there's really two legitimate justifications under the current world trading regime, which is the WTO three, two, um, section two, three, two of what I forget. But section two, three, two, uh, where, uh, and that that has allowed in the past for the U? S to apply tariffs on steel, for example, because steel is considered a uh, uh, a national security type of good right, because you need steel to to build warships and the like, and um. And then there are these protective tariffs. Uh, and I think that you know protective the the degree to which you apply protective tariffs is the degree to which you um, you know, reflects the degree to which you investigate the potential um violations and extent to which you investigate potential violations and extent to which there are violations, and so maybe there's going to be greater enforcement of that. But clearly you can't justify any kind of across the board tariffs when you're simply doing a leveling the playing field for individual items.

Speaker 1:

Right. I mean I find the whole discussion about tariffs kind of like. We've got many different levels where you know how do the economics work? Does it help inflation, does it hurt inflation, does it hurt consumers? I think we all agree that there's not, you know, it's not economically given to be a status that tariffs are the solution. If they were the solution, wouldn't we have already done them? I mean, wouldn't it already be a part of what we do? And somebody else would have said this is a great idea? We got more income in the United States.

Speaker 2:

Well, it hasn't gotten lost on economic historians that the reduction of tariffs, the substantial reduction of tariffs under GATT General Agreement on Trade and Tariffs and the World Trade Organization, plus free trade agreements agreements, has coincided with a dramatic increase in world trade and a dramatic increase because of that in world GDP, that is, the world economy. So free trade has been overall good for the economy. Now, yeah, it goes without saying that it leaves some people behind, right?

Speaker 1:

Well, my whole point on this whole thing is that we've had a period where there's been an event the COVID that caused us to question whether we should use international suppliers, just like there are suppliers in the US, because if there's a crisis, we'll all behave and cooperate together. And the realization came from COVID that hey, there were some points where ventilators and other things that are critical weren't available to the US and therefore we need to onshore more things. That led to the semiconductor and the Inflation Reduction Act and things to try to solve the problem. This is another solution, but it's a solution with so much hair on it I think we probably don't need to give it more credit than it's worth. And it really is a legitimate discussion, because on many levels it isn't a legitimate discussion because there there obviously are things that you know could be done better. But if it was easy.

Speaker 1:

I got to think that other people would have done.

Speaker 2:

So there's this. You keep hearing these buzzwords from policy circles on-shoring, re-shoring, friend-shoring, and there's probably some other shoreings too that I'm not forgetting about. But what people don't realize, what the policy people don't realize, is that in the real world it takes a long time to rebuild supply chains. It's not a tactical response to a supply chain problem. You couldn't just react right away to COVID or to anything else for that matter. These are strategic planning decisions. It takes three, five, seven years to build supply chains. Think about some of the most expensive and time-consuming projects are the building of semiconductor plants.

Speaker 1:

projects are the building of uh of semiconductor plants and so and so you know that takes years and years and years to uh to, yeah, I think they said 15 years minimum.

Speaker 2:

Yeah, so it's just. You know the the idea of being able to um, you know if there's, if there is on shoring, it was never going to happen. You know the shoring, it was never going to happen. You know the Inflation Reduction Act it was never going to happen to any great degree under Biden's administration and I think any that any tariffs walls that that Trump puts up are not going to result in any significant on shoring within the Trump administration either. It just doesn't happen. It's not practical for it to happen on a speedy basis.

Speaker 1:

Right, but I also noticed that Biden kept most of the Trump tariffs against China because, you know, in his mind the same inequality exists in terms of their treatment of our chip.

Speaker 2:

Right. Well, at the end of the day, despite all of his rhetoric, under the first Trump administration, they eventually settled on a situation of leveling the playing field. Yeah, I mean Huawei and some of the other things. Well, yeah, those things when you talk about Huawei, those are more like export controls, right, and investment restrictions, and so those sort of fall outside the realm of tariffs. They're more in the realm of national security considerations. Ok, of national security considerations.

Speaker 1:

So if we were to wrap up the discussion on puffer and tariffs again, we list the things that are the most the puffiest and the least puffy, I guess I would say China is one for most puffy, and then Canada is two and then Mexico is three. Is that how you would put it?

Speaker 2:

uh, I, you know, I, I put, I put actually, I kind of reversed that a little bit I, I have canada and mexico, uh, as uh, did you call the most puffy or least puffy? Um, least puffy? No, I think canada and mexico, I think, are going to have, um, you know, if they have any tariffs, any new tariffs at all? I think I don't think they're going to be that significant. I think, if anything it's going, they're going to try to negotiate higher content requirements US and and local content requirements and try to squeeze China out of those markets in terms of content. So I think that's what's going to happen there. So, but I think that that there is some significant possibility that there'll be some pretty large tariffs in China on specific goods, tariffs in China on specific goods. But the whole idea that there would be this huge tariff wall keeping out Chinese goods, I think is just total puffery.

Speaker 1:

All right, you heard it here first skeptics. So puffery China. 60% not likely to happen. So maybe some of the investments that you have in Hong Kong or other Chinese companies that we think have been beaten up pretty badly because of this talk about more tariffs and trade war, maybe some of those names will get a bounce here. What do you think?

Speaker 2:

About that? What do you think About that? You know, if you look at the composition, see here, this is a mistake that people and investors often make. They often think that, oh, the Chinese companies that are in the China index are largely dependent on US trade, and that is a fiction. Uh, the companies that are most dependent on us trade are either not traded at all or government enterprises that you know that that aren't traded.

Speaker 2:

So the, the companies that make up the majority, majority of the market cap of the China index are really, you know, like uh, alibaba and Tencent, and you know, some of the other e-commerce companies, banks you know these are, you know these are companies that depend. You know they're more internal market focused and less focused on uh, on exports. So, yeah, I I don't think, I don't think uh, I don't think uh, whether there are tariffs or not, uh on Chinese goods has a substantial impact on what um is going on with the Chinese Chinese stock market. There are a lot of reasons to not invest in the Chinese market and you know we won't talk about them here. We've talked about them on other episodes, but tariffs is not really one of them.

Speaker 1:

OK, Well, thanks everybody and thanks for listening and please like and share Skeptic's Guide to anybody you know who's listening to podcasts and we enjoy talking to you and we enjoy giving you our insights on markets and what's going to happen in 2025. Thank you.

People on this episode

Podcasts we love

Check out these other fine podcasts recommended by us, not an algorithm.

Wealth Actually Artwork

Wealth Actually

Frazer Rice
The Memo by Howard Marks Artwork

The Memo by Howard Marks

Oaktree Capital Management