Let's Talk Tariffs

Drew Thomas  0:19  
Okay, so we typically try to stay away from politics on the show, because honestly, there's really not much of a point in getting into too much politics here, right? I mean, we're, no, we're really trying to do education more than anything, right? But at the same time, we're trying to do financial education. And there's a lot of stuff happening in the world right now that is political, but is also financially confusing or financially different than what we're used to, right? Oh yeah. So, you kind of brought this up earlier today, and I thought it was a good idea. So, what are we, we're gonna talk about tariffs today. We're gonna talk tariffs today.

Jeff Matevish  0:57  
Talk tariffs today. Yeah, that alliteration, yeah.

Drew Thomas  0:59  
Yeah, oh, yeah, we're talking tariffs today. That's a good one. So, do you want to, let's start out with the basics here. So, obviously, tariffs have been in the news a lot, yeah, and...

Jeff Matevish  1:12  
And they're essentially just an import tax.

Drew Thomas  1:16  
Okay, so, so as I say, why don't you define what a tariff is.

Jeff Matevish  1:19  
So, a tariff is a tax that is placed on goods that, on goods that are imported into the United States or whatever country imposes that tariff, right? So, you know, they say that the other country, the country that is exporting that good, is paying for that tariff. But we are, we were finding out that, or that may not be 100% honest, I guess.

Drew Thomas  1:44  
I guess it's one of those things where, technically, speaking, yes, the United States is, you know, as you well, it's not really the United States that's paying it. If I, if I am a company and I'm importing something, I'm paying as the company I'm paying that right?

Jeff Matevish  1:59  
Walmart purchases something from overseas, they're paying that tariff. Walmart's paying that tariff, right.

Drew Thomas  2:03  
Right, right. But you know, and certain people would have you believe that you know that well the well, the company is paying it so it really doesn't affect you individually. And while that technically could be true, if the company was really just loving life and wanting to protect their customer, right? They could absorb that cost if they chose to, but chances are, let's be honest, most companies are probably not going to do that.

Jeff Matevish  2:04  
Oh right, right, they're going to pass that, that cost on to their customers, absolutely.

Drew Thomas  2:39  
So, what is the so, what's the purpose, I guess, is my, if this is, if this is going to raise prices, what's the, what's the purpose of a tariff? What is it supposed to do?

Jeff Matevish  2:47  
So, the tariffs were put into place that, at least to my knowledge, to kind of bring back manufacturing, or incentivize manufacturing in the US a little bit more. Having foreign companies opening new plants in the United States so that they don't have to pay that tariff and just bringing more jobs back in the US. Yeah.

Drew Thomas  2:48  
Yeah. Which, which sounds great. Yeah. I mean, it really does. It sounds fantastic. And I'm not necessarily saying that I am, again, we're trying to keep the politics out of this, right? But, you know, generally speaking, it sounds great to say, hey, you're going to employ more Americans. I think most Americans would like to have, would like to have a good job. Yeah, right. And we don't do as much manufacturing in the United States as we once did.

Jeff Matevish  3:35  
I mean, Johnstown, we were a huge manufacturing for steel. I mean, oh yeah, we're big, big in the steel industry.

Drew Thomas  3:42  
Yeah, absolutely, and now it's, you know, like Nippon, you know, in Japan and so forth. Yes, you know, Nippon steel is probably the biggest one in the world. However, you know, when you start talking about this stuff, you start thinking, well, if the incentive is to bring manufacturing back into the United States, does that happen overnight?

Jeff Matevish  4:04  
No, definitely not. Yeah, it's gonna, this is gonna take time, definitely, to just even build the factories and acquire the workers, and it's a long, drawn-out process, yeah.

Drew Thomas  4:14  
So, I again, like, this is, this is one of the things where there are positives and negatives. You know, the positive thing on a tariff is, like you said, I'm going to try to bring more manufacturing or more jobs back into the United States. I'm going to, I'm going to incentivize companies to build in the United States rather than building abroad, and then having to incur that tariff when they're bringing their goods or services back through and, but on the other side of it is, you know, how does that money that these companies are then spending to, to build these factories, to employ these people, like, how does that affect the cost of the product as well? Right?

Jeff Matevish  4:53  
Yeah, so there would be more, there's an upfront cost. So, you would think that they would pass that on to the customer as well for the time being.

Drew Thomas  5:00  
Yeah, plus, you kind of pointed this out too. A lot of times, most of the time, labor costs, things like that overseas in some of these countries, whether you agree with it or not, is lower than it is in the United States, and that helps to keep the cost down. And sometimes customers, you know, sometimes people their, it depends on what their goal is. If their goal is to buy American then they're, they're most likely willing to, to, to potentially pay a higher price in order to do that. If their goal is to just find the absolute least expensive product, maybe that's not always something built or made in the United States, right? Sure, yeah. So, let's so I was trying to get my head around some of this stuff for people, because tariffs, there's a lot of politics involved here, and a lot of, a lot of numbers being thrown around in the news about, you know, percentages and...

Jeff Matevish  5:53  
Yeah, wildly high percentages, you know, you don't normally think of when you think of a tax or a tariff, yeah.

Drew Thomas  6:00  
Yeah. I mean, I think one of the taxes, or one of the tariffs, was like 145% or something like that, for some of the certain, for certain, like Chinese goods, was like...

Jeff Matevish  6:08  
125% I think it was, right now, yeah, oh, maybe 145% I don't know. Yeah, okay, um.

Drew Thomas  6:13  
Which is a like, if somebody said to you, like, well, listen, we're gonna raise your taxes by 145%, I'm not electing you.

Jeff Matevish  6:13  
Yeah, I'm moving, yeah, yeah.

Drew Thomas  6:25  
So, you know, and tariffs have been around a long time, right? I mean, you found some history on tariffs and stuff, right? I think, yeah. Before we get into some of the details, yeah, let's talk about like, like, where the like, this isn't a new thing either, right? Tariffs are not new.

Jeff Matevish  6:38  
So, according to, this was, I think, PBS, before the federal income tax was established in 1913 tariffs were a major revenue source for the government. From 1790 to 1860 tariffs accounted for 90% of federal revenue.

Drew Thomas  6:54  
Wow, yeah, that's that. That's crazy. So, that's pre income tax.

Jeff Matevish  6:57  
That's pre income tax, right? All right. So, we're not new to tariffs, but so tariffs fell out of favor as global trade grew after World War II. The government needed vastly bigger revenue streams to finance its operations, so that's when your federal income tax came into play.

Drew Thomas  7:11  
Okay. So, and we could, you know, we could get into a whole other maybe we'll do that someday, is a whole discussion about income tax and how that that works, okay? But it sounds to me like, you know, you know, if tariffs were the only thing and I wasn't paying income tax, then I'd probably be willing to pay a little bit more for my goods and services, right? So, I'm being taxed twice. Really, I'm being taxed on my income, and then I'm being more than I buy my stuff.

Jeff Matevish  7:37  
You're being taxed more than twice. But we'll, we'll stick with twice, yeah.

Drew Thomas  7:43  
So I, I guess the thing, the thing for people to keep in mind here is that because there is such a politically charged atmosphere right now in the United States, we tend to, we tend to politicize even what a tariff is and, and make it either a good thing or a bad thing, depending on what side of the political aisle you happen to sit on. But at the end, at the end of the day, tariffs are not new, no, you know, definitely not. And so, I started thinking about this, and I started trying to think about this in a way that maybe tried to put things into a perspective at, at our level. Because honestly, I am not an economist by any stretch of the imagination. I mean, I know we do this podcast, and we talk finance, but we talk finance at your level and my level of being able to manage our household income and, you know, deal with things like that. I mean, neither, neither one of us is running a country anytime soon. At least I'm not.

Jeff Matevish  8:34  
I wasn't planning on it.

Drew Thomas  8:35  
Yeah, you're not going. You're not running for election or anything?

Jeff Matevish  8:38  
I, you know, I'll skip this one. Yeah. Okay, yeah.

Drew Thomas  8:41  
So, I was like, okay, well, let's put this in perspective of a lemonade stand and just try to really make this as, as A and B, simplified as we can, right, right? So, you and I decide we're gonna, we're gonna open a lemonade stand, right? Yeah, all right. So, what I did was I went out and I did some pricing, and I rounded for the sake of the argument of this podcast. And I know that you're still like, well, I'm, there's a lot of numbers here, but...

Jeff Matevish  9:09  
There's a lot of numbers that you rattled these off to me, and we're recording this after lunch, and they were going over my head already, but yeah.

Drew Thomas  9:16  
We'll put them up on the screen or something like that for you, for those of you that are watching the vodcast. But I said, okay, let's, let's pretend, let's, let's do some basic numbers here. So, a five-pound bag, let's say I need a five-pound bag of lemons, and I need sugar, and I need water. I mean that, that's pretty much what you need to make lemonade, right? So, a five-pound bag of lemons, about five bucks. Okay, okay, and you get about 20 lemons in a bag, and a 10-pound bag of sugar. Say, 10 bucks. Okay, right. So, it's about $1 a pound, okay, right?

Jeff Matevish  9:49  
So, you have 15 bucks, right?

Drew Thomas  9:51  
So, so, right. So, so, right now I'm sitting at $15 in expenses. And you know, there's a lot of different recipes online out for lemonade. But let's, let's, for the sake of making this simple, let's say it's 10 lemons, which is half of my bag, okay, right? To make, to make a one-gallon pitcher of lemonade, okay? And about a pound and a half of sugar, okay, right? So, so it's $4 right? So, so now we're $4 into making one gallon of lemonade, right? Now, if you, if you ask a conversion table, they'll tell you there's 16 cups in a gallon, right? But we're probably using red solo cups or something like that when we're selling this. So, let's pretend that I'm getting 10 cups.

Jeff Matevish  9:51  
We want repeat customers. We want to give them a little bit more.

Drew Thomas  9:58  
Give a little more for their dollar. So, so we're using red solo cups, so we're, so let's say we're getting 10 cups of lemonade out of my, my one gallon of lemonade, right? Okay, so, so we've spent $15 we're spending $4 to make one gallon of lemonade, right? And, and say we sell it for $1 a cup, right? So, I'm making how much out of my gallon?

Jeff Matevish  11:00  
Six bucks.

Drew Thomas  11:01  
Now, well, making six, I'm getting 10. It's, I'm selling it for $10, right? I'm selling my gallon of lemonade for $10 one, one cup at a time. But you're right, it's a profit of six bucks, right? Yeah. So, so this is, this is, like, basic capitalism, it's what it comes down to, right? You're trying to sell whatever it is you're making for more than what you paid.

Jeff Matevish  11:22  
Yeah, that's how it works.

Drew Thomas  11:24  
Okay, yeah, yeah. And, and we all, we all just, you know, there's skill involved. I mean, I don't have to make the lemonade. If I make it and you don't, yeah, right, right. So, there's the convenience of me being able to just pull up and take a couple lemonade off of my table and whatever. Now, let's pretend that there is, that we're buying our lemons overseas, okay, all right. And there's a 25% tariff on lemons. So, instead of me buying my lemons from, I don't know where lemons come from in the United States, probably Florida, Florida, California, yeah, yeah, probably California, yeah. But instead of me buying them there, I'm gonna buy my lemons from Mexico. Okay, right. And there's a 25% tariff on lemons coming in from Mexico now. We're under the Old North American Free Trade Agreement; it would have been zero. Now it's 25%, right?

Jeff Matevish  12:12  
So, you're paying what? $5.25?

Drew Thomas  12:16  
Well for a five-pound bag it would be $6.25. $6.25, yeah. So, so now my lemons went up by $1.25 a bag. Okay, yeah, right. And let's say it's a 50% tariff on, on sugar, right? And please, you know, I guess, please understand like these are not real tariff numbers. I'm just trying to illustrate what these are, right? So, say there's a 50% tariff on my sugar that I'm getting from overseas. So, now my 10-pound bag of sugar that was $10 is now $15. Yep, right. So, now if you do all the number crunching and all the math, you find out that instead of $4 a gallon, it's $5.50 a gallon for me to make my lemonade. Okay, right? So, if I sell it at $1 a cup, like I've been I'm still making money.

Jeff Matevish  12:20  
Yeah, just not as much money.

Drew Thomas  13:03  
I'm not making as much, right. So, instead of me making $6 on my, you know, gallon of lemonade, now I'm only, now, I'm only making $4.50. Okay, so the thing about the tariff is that it's not that, it's not that, that people won't be able to make money. It's not that it's necessarily going to go up in price that much, but at the end of the day, there's a pretty good chance that I'm not going to want to sell my lemonade for $1 a cup anymore, because I want to, I want to make back the profit I'm losing.

Jeff Matevish  13:42  
Yeah, so, it's inflation, yeah.

Drew Thomas  13:45  
Well, yeah, I mean, it's a little bit of inflation, but in this case, it's just, I'm just trying to make up the difference in my profit, right? So, so now maybe I have to sell my lemonade at $1.25 a cup, right? As opposed to $1 a cup, you know? And you know, $1.25 a cup still doesn't sound that bad, but at the end of the day, maybe, you know, maybe whenever I'm driving past with my kids in the car and I see a sign outside that says $1.25 a cup for lemonade, maybe I'm like, Well, you know, $1 would have been easier, because I got five bucks and I got five kids in the car, it would have made it easy. But now I need, now I need to have change in my cup holder, yeah, right. Or I need to have another dollar in my wallet.

Jeff Matevish  14:25  
Or you go to the grocery store, and you spend $2 less than that gallon of homemade and you buy something that was made in a factory that, you know, was even local factory is even cheaper, you know. Oh, yeah, yes. Do you want to buy something homemade and support local or, yeah by big factory and...

Drew Thomas  14:44  
Country Time lemonade, yeah, for sun porch sitting. If Country Time lemonade wants to send us a little thing of lemonade, that's fine, sure. But no, I so I think that that's the point. I think the point that a lot of people are making with these tariff conversation in our country right now is that, you know, will companies really just absorb the cost of these tariffs, or are they going to pass it on to the consumer? Right?

Jeff Matevish  15:14  
They're going to pass it on, most likely, I would say, yeah.

Drew Thomas  15:17  
I mean, I probably would say too. I mean, like, we're a capitalist economy. So, you want to continue to keep your profit margins high, you're going to pass that right on to the consumer, right?

Jeff Matevish  15:26  
So, if you're, you know, a publicly traded company, you got to have better profits every, every quarter, every quarter, you know, yeah.

Drew Thomas  15:33  
You got to keep the shareholders happy, yeah. So, I don't know, what do you think? I mean, do you think these are a good idea, a bad idea? What do you...I mean...

Jeff Matevish  15:42  
I'm on the fence. I think it's a bad idea. I guess I think it would be a good idea if we, if the US exported the same amount of goods that we import from other countries. So, yeah, be a little bit even match. But I mean, we what, like, 90% probably of the stuff that you use every day is from a different country, a lot of it, so for sure, we're getting the raw end of the deal on that.

Drew Thomas  16:07  
Yeah. And some would argue that, well, if we have these tariffs, then we're gonna, we are gonna bring more manufacturing in house, which means we would have more ability to export, theoretically, yes, yeah. But I think that goes back to what we started saying before, was that you need time to build it like, okay, let's use the lemonade example, right? I can't just decide tomorrow if I'm, if I'm, you know, buying my lemonade or my lemons, right? I can't just decide tomorrow, well, I'm gonna buy domestic lemons if nobody's growing them, right, right? Somebody's got to plant the trees. You got to wait for them to grow. You got to pay people to tend the field. You got to, pay people to harvest them. You got to bag them up. You got to ship them off. Like, so it's not like you can just make lemons appear out of nowhere tomorrow to offset the fact that I don't want to pay a tariff today.

Jeff Matevish  16:56  
Yeah. Car, cars is another good example. You know they say, like, there's no truly 100% fully made US car like we get, yeah, we get, like, Ford engines from Canada. We get, you know, engines from China, from Japan, and stuff like that. So, to be able to even make a fully American made car, you're, you're taking components that were normally made in 5, 6, 7, you know, N number of countries, yeah, trying to make one factory or a handful of factories in the US today, you know, that would support all that. And it just doesn't happen in the blink of an eye.

Drew Thomas  17:32  
Yeah, yeah. Well, and you bringing up the car manufacturing idea, you know, a lot of vehicles are still manufactured in Michigan and the parts that are used, the rubber that comes in for the tires, the steel that comes in for the for the cars, the fiberglass, the parts, sometimes they go back and forth across the Canadian border, a number of times, because they're going, they're being shipped along the Great Lakes, and so sometimes they get, so you're paying a tariff just because you're trying to move a part from one part of Michigan to another, and it happens to have to go through Canada, yeah, it's, it's...

Jeff Matevish  18:07  
Or you're getting the raw material, and you're sending it away for processing. It's got to come back after the processing is done. Yeah, yeah.

Drew Thomas  18:14  
So, so, yeah, even if it is made in the USA, as far as the vehicle goes, the other big thing that you always see manufacturers do is, they assembled in the USA. Yeah. Right, yes, assembled in the United States. But the parts come from somewhere else.

Jeff Matevish  18:30  
At least part of it is done in the US. Yeah, yeah, right.

Drew Thomas  18:34  
And again, I look, I am all for US manufacturing. I've always been a made in the USA type of a person. I mean, if I can buy domestic, if I can buy something made in the US, all things being equal, I would prefer to do that.

Jeff Matevish  18:47  
Yeah, just tends to be a little pricier. Yeah.

Drew Thomas  18:47  
And that, I don't think, I guess, I guess that's the thing is that that's probably not likely to change exactly with tariffs, no. Because, and you kind of brought this up so, I'll let you make the point, but you had said, well, okay, it's still going to cost me more to make that stuff domestically now too. So, maybe in my lemonade example, it's still not going to be $4 for me to do a pitcher lemonade. It might instead of $5.50 with the tariffs, maybe it's five if I do it domestically, once all that infrastructure is put in place, but it's still not $4.

Jeff Matevish  19:23  
Yeah, yeah.

Drew Thomas  19:25  
You know, so, I don't know. I think this is, I think this is, this is a more complicated conversation that I think a lot of people want it to be. I think people are trying to simplify this in the news because they have some sort of a political agenda, whether it's, you know, a particular news outfit, or maybe, maybe it's a particular campaign or a particular political party, whatever it is.

Jeff Matevish  19:49  
It's confusing. I mean, that's different percentages for different countries. It's, there's exclusions for certain products, okay, this product's not going to be, not, there's not going to be a tariff on cell phones. So, they say, you know, or there's not going to be a tariff on, you know, some, some other product, so it's difficult to keep track of sometimes.

Drew Thomas  19:49  
Yeah, well, that's a really good point, because and even pieces of those things. So, if you're putting a tariff on microprocessors, for example, you know, microprocessors are used in laptops, they're used in phones, they're used in cars, and they're used in cameras. They're so, okay, so I'm not, I'm not putting a tariff on a car, but I'm putting a tariff on a microprocessor that's used in the car.

Jeff Matevish  20:35  
Yeah, yeah. Are we going to revert back to, you know, COVID-19 days, where it was hard to get cars because the microchips were difficult to get?

Drew Thomas  20:43  
Yeah. I mean, that's a good point. Look at what happened with prices. The prices were insane.

Jeff Matevish  20:47  
They said what, like, $3,000 to $8,000 is going to be the, the average increase in new cars. And then how, what does that do with used cars? Nobody's going to want to buy new cars, and used cars are going to go up in price because they're going to be in higher demand.

Drew Thomas  21:01  
Yeah, I mean, and then, you know, we can, we've kind of talked about this in the past, and we could, we could maybe revisit it at some point. But, you know, interest rates are different too, you know. So, your new cars are obviously much more expensive than a used car, typically, in terms of the sticker price, with the value, but if I'm paying, say, 8% or 9% interest on a used car loan, versus one of these times where the manufacturer says, hey, you know, come out at the year like the year-end sale, you know, 0.99% interest on whatever so is my, my payment could be significantly different. Even though the cost of the car is higher being new, I still might actually get closer to that used car price, because my used car price has an 8% or 9% interest rate on the loan, yeah, as opposed to a 1% or 0%.

Jeff Matevish  21:48  
Yeah, a lot of these car dealerships right now are trying to liquidate their, their pre tariff inventory, you know? Yeah. So, they're, they're running deals and specials.

Drew Thomas  21:58  
Well and, and then you brought up with, with COVID, you brought up the same and it could be a similar thing where, you know, look at, look what happened with toilet paper and things like that in COVID, like people bought out the stores, and then you couldn't find cleaning products, you couldn't find toilet paper, you couldn't find a lot of things for a long time, not because, not because the manufacturers weren't making it, but because people started hoarding it.

Jeff Matevish  22:21  
Yeah, it was a fear, yeah. You know, yeah.

Drew Thomas  22:24  
And then for a longest time, like, people didn't buy toilet paper because they had already bought enough to get them through the rest of the year. Yeah, so, so the toilet paper is sitting on the shelf and nobody's buying it. I mean, it was...

Jeff Matevish  22:37  
I think that's, that's one thing that the media is doing very well right now, at least. I mean, I've been to local stores recently, and, you know, stuff's not, shelves are not empty, you know. So, we're not being told run out right now and buy every paper towel you can find, right? So, right, that's one good thing.

Drew Thomas  22:58  
Yeah, I don't know this is, it's a very, this is a, and I think this is a good conversation to have, and there is absolutely no way that in the 25 minutes or so that we have on this podcast that we can fully explore every nuance of what a tariff could mean or not mean. But I think just trying to wrap your head around the basics and try to take yourself out of the political arena and just understand what they are and how they can potentially affect you, is a thing. Yeah, sure. So. So, what do you, say, are you in the market for anything new right now?

Jeff Matevish  23:38  
I always say cars, but you know. Yeah, I just, this is the year I'm going to have to have a new car. Really, wife a new car, yeah, but.

Drew Thomas  23:49  
Yeah, what's, what's going on with the car you have?

Jeff Matevish  23:52  
Nothing, just older, higher miles and yeah, like, fear of tariffs. I'm yeah, everybody's saying, now's time to buy. Now it's time to buy. And yeah.

Drew Thomas  24:03  
Yeah, I just bought a, I just bought a refurbished laptop, or not a laptop, a desktop Optiplex online the other day, because I'm, I'm trying to build a network server, a Plex server, and I was like, you know what? I'm just gonna buy, I'm just gonna buy it now. And, you know, yeah, it's a refurb and, but it's just, I don't know what these things are gonna cost, you know, you don't, yeah. And, you know, it's, they say, you oh, it's 10%, 20%, but you put 10% of $1,000 is 100 bucks. I mean, like, that's, that's a pretty significant cost difference, you know, at least for me. Oh, it is, you know, yeah, I don't know about everybody that's listening or watching, but you know that I don't want to spend an extra 100 bucks if I don't have to. Oh, yeah, so.

Jeff Matevish  24:50  
You don't, you have to be able to buy your lemonade.

Drew Thomas  24:52  
That's right, I do, I like lemonade, it's summertime. Well, it's almost summertime. It's not really summertime. All right. Well, I think that, I think that at least covers some of the basics. If you guys, if anybody has questions, if they'd like to know more about this, there's tons of information on online. I don't know that we have anything necessarily at ameriserv.com in the learning library on tariffs.

Jeff Matevish  25:15  
I don't believe so.

Drew Thomas  25:17  
But maybe we can look into maybe adding some stuff there. But regardless, I mean, drop us a comment. If we have questions that show up in the comments, we'll be happy to maybe revisit this, because I don't think this is a topic that's going away.

Jeff Matevish  25:28  
Yeah, this is going to be an evolving topic. You know, we could probably do another episode on it definitely.

Drew Thomas  25:33  
Yeah, as things change and we see how some of the, the tariffs that are getting put into place now affect products and services down the road, we could, we could come back to this, but if you have questions, that's great, because then we can, we can utilize those questions to help structure and try to answer them for you, if we can, you know, yep. All right, here in the meantime, happy spending.

Jeff Matevish  25:53  
Happy spending. Thanks.

Drew Thomas  26:07  
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Drew Thomas  27:13  
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