The Latest on China and How Lighter Tariffs Will Affect Your Wallet with Fred P. Hochberg

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3:16Well, we have had some good news on tariffs slowly trickling in after a whirlwind of some not so great news. On April 11th, President Trump paused reciprocal tariffs on Chinese electronics. Now he's apparently thinking about making significant cuts to tariffs on Chinese goods pretty much across the board. All of this revolving door of policy has implications, of course, on all of us and how we should be saving and spending. So to help me follow the money trail and bringing in Fred Hochberg, he is back on Money Rehab. Not only has he helped scaled major businesses in the private sector, he's also worked at the intersection of business and public service.

3:52Fred was the president of the Export-Import Bank of the United States in the Obama administration. He was also the acting administrator of the Small Business Administration under President Clinton, so he's maybe the best person in the world to be talking about this stuff. Today we talk about what tariff policy should be in order to benefit Americans, what will happen to the economy if tariffs don't change, whether rolling back Chinese tariffs will have a negative impact on American industry, and what we already know about the cost of Christmas presents this year. Here we go. Fred Hochberg, welcome back to Money Rehab.

4:30Excited to be here. So much to talk about. So much to talk about. You are the man to break all of this stuff down for us. Holy smokes. Just like, how are you feeling about this? This feels like maybe you're super bold. This is a very stressful time because I think everything many of us believed in about how our economy works, how we work with the rest of the world, who our friends are, who's not so friendly to us, feels like it's all been turned upside down. So it's very hard to sort of keep your head straight and people to make plans, particularly small business owners who need to make plans.

5:09It's hard to do it in this environment. For sure. Everything is changing by the day we're talking Thursday, April 24th. This episode is going to come out tomorrow. Even with a one day turnaround, there could be significant news or tweets or whatever that come out about U.S. China tariffs. This is all an active conversation. It seems like the president is now the latest news is he's strongly considering lowering tariffs. The numbers are unconfirmed, but right now they're floating around 50 to 65 percent. What do you think about that? Do you think a 50 percent tariff on Chinese goods is going to be better at achieving some of these goals?

5:47China is a different beast. Well, one, a tariff is a tax. It's nothing more. It's a fancy word, but it's a tax. So a tariff is always a tax. And the tax is generally paid for by the people who consume it, ourselves. So if it's clothing or sweatshirts, and interestingly, women's clothing is at a higher tariff rate than men's clothing. Not cool. Often called the pink tariff. So that is a burden on working class Americans and particularly on people who are trying to pay their bills week to week, day to day. It's a real challenge on them. But companies are the ones that are paying for this, right?

6:27But that assumes they're not going to pass it on to you. Why would they not pass it on? I mean, if you may remember a few years ago when gas prices were very high and you sometimes you took a Lyft or an Uber, there'd be a fuel surcharge. Why? Because the cost went up and they had to pass that on to consumers. So, yes, the tariff is first paid by the importer if you're importing things from China or Vietnam or any of these countries. And then the importer has two choices. They could either absorb it or pass it on to the consumer. And in some cases, they're able to go back to the supplier overseas and say, hey, I need a little relief here.

7:08We can't absorb all of this. Now. you know, you could probably absorb five or maybe a 10 % tariff because you could say, well, listen, maybe my supplier, they will cut their cost by two or 3%. I'll have a little less profit margin and the consumer may pay a few more percent. So we spread the pain. But not with 125 or 145 % even a 50 percent tariff is much more than anybody can sort of eat and particularly on short notice. I think part of the challenge we have in our economy right now in general is it's very hard to respond so quickly to these dramatic changes. So right now, it seems like China has a lot of leverage.

7:57They're saying, hey, we're not even talking. What are you guys talking about? Like, come to us when you have no tariffs. How do you think the U.S.-Sino relations are playing out since you were part of the administration? They've only gotten worse. I would say it started under President Bush in the early 2000s and then continued by President Obama. We would meet with the Chinese once a year. Once a year, they'd come to the United States, and then the other year, we'd go to Beijing. Did a lot get accomplished? There's some, not a lot, but at least we were talking on a regular basis. We all knew each other a little bit.

8:38And I think that provided some support. Once President Trump came into office in 2017, that ended. President Biden did not pick it up. So we've had a long period of time where there is not a regular dialogue between people in the United States at the government level and the people who are running China. Obviously, companies are because you have different companies that are operating, American companies in China or selling to China. But on the kind of the official back and forth, that's ended. So I think that makes things really hard because it's very easy to misunderstand a move like you just said.

9:16China said, well, it's up to the United States to make the first move. And President Trump says it's up to President Xi Jinping to call me first. Probably what will happen is some lower level employees, some mid-level employees, below the level of the president, they'll start some kind of dialogue and say, well, conversations have begun without indicating who called who first and who started the conversation. And ultimately, we have to get to a point like that. Yeah. I mean, it's all playing out on the national stage. This is like a lot of drama. I've not seen anything like this before. I'm assuming you haven't either.

9:53It sounds like, too, you know, the president's walking back of these tariffs comes after meeting with CEOs of Walmart and Target and Home Depot and Lowe's. Do you think it's possible for the U.S. and China to even strike a deal? Do you think you will be better or worse off? How is it going to affect America? Well, in 2020, before the election, in January of that year, President Trump signed an agreement with China. mostly about buying a lot of our agriculture and commodity exports, you know, soybeans, wheat, things like that, that we were selling a lot to China. China didn't really follow through on those purchases.

10:35So if I was to guess, my guess is we will find some way to agree with China that they will buy more of our goods, commodities, soybeans, and so forth. We will continue to buy some things from China, we will reduce the tariffs. But the big issue between both countries has always been, we don't like them stealing our intellectual property, like stealing software that Microsoft and other companies make. So we are concerned about that kind of theft of our intellectual property and the things that really innovate our economy. And they don't like the fact that there are certain goods that we will not export to China because of national security or their high-tech products.

11:17So what they'll say is, we're not going to do a lot until you can sell us anything we want. We'll never agree to that. And they're probably not going to agree to not stealing our intellectual property. So at some level - But you mean chips and stuff like that. Yes. And well, even if you're a company and you're operating, I mean, when I was visiting China more frequently, even if we were making, say, medical equipment there, I would say most manufacturers did not put the latest technology into China because they were afraid of losing it. So it might be one, two or three generations older x-ray machines, MRI machines and so forth, where they were less afraid of losing what made their products unique.

12:01So where do you think this thing is going to land? And what's the difference between what we send to China and what they send to us? So we certainly have what's called a trade deficit with China. We import more things from China than we export to China. And there are a number of reasons. We're much more of a consumer economy. We are driven by the American consumer. The consumer is like 80 percent of our economy. That's not the case in China. China, it's really It's an export-driven economy where they push out the exports. One way to keep all those over a billion people employed. And so they are often exporting far more than they can consume.

12:46And also China, unlike us, at least unlike us up to now, would prefer to not import anything. We are much more open. We would like to export more. And as you know, that's how we met. I was running the export credit agency under President Obama, but we're also open to importing things, whether it be fruits and vegetables. You know, one of the things I often talk about is bananas. You know, we don't grow bananas in America, but we consume more bananas per capita than any other fruit or vegetable out there. Oddly, 27 pounds per person. That's a lot of bananas every year. Well, that's bananas. So I can assume 27 pounds of bananas.

13:28That's a lot of bananas. That is right. So where this ends, I think that we will find a way to de-escalate a little bit. We can find ways that we will sell more to China. They'll sell more to us. We can find some way to reduce some of the tariffs. I think they're not going to go to zero. And it's hard to know, Nicole, what is President Trump trying to do? So we've heard one thing about high tariffs is it will bring more companies to manufacture and make things in America. So that, okay, we want to have more things made in America. We've also heard we actually want other countries to negotiate with us and reduce their tariffs.

14:07So are we trying to reduce tariffs or keep them high? And are we trying to use tariffs so we don't pay income tax? So we're getting a lot of mixed messages, which I think is why the market keeps going up and down, because it's trying to understand where are we going with this thing? It's not clear. Yeah. And a lot of investment banks have come out and talked about how these crazy tariffs and China's 125 percent retaliatory tariff. First of all, are you surprised with how tough they've been in the negotiation? no i'm not and you know what we always have to remember and i is you know even though it may not it's not a democracy in china but he has to be accountable to people in the political party the communist political party and it's not like he can back down and lose face donald trump doesn't want to lose face xi jinping doesn't want that's why all this silliness i'm sorry to say but who's going to pick up the phone first.

15:06Nobody wants to feel like I'm calling because I need help. So they say, no, you call me. No, you call me. We've all been around. At some point, somebody has to sort of stand up and say, you know, we got to move forward here. So a lot of iBanks are now saying and the IMF are slashing growth forecasts saying that, you know, there are higher chances of recessions because of all the tariff drama. So if nothing changes, do you think there's going to be a recession? Do you think the writing's on the I think it's highly, highly likely when we're when people are unsure about the future, they cancel vacation plans.

15:47Maybe they say we'll go out. Let's maybe go out to dinner one last night a week. Maybe we'll take a vacation. We'll drive to the beach versus fly someplace else. So I saw already this morning, American Airlines cut its forecast for the year because of concerns about of people pulling back. I spoke to a friend of mine who's got this eight-year-old car. She said, you know, I think I'll wait till next year. Do we really need to buy a new car this year? So those things begin to cause a recession because it feeds on itself. People say, well, gee, maybe I should consume less or buy less. So what happens?

16:23Companies start having layoffs, as Stellantis did, which runs Chrysler. They had a layoff because they're concerned about demand drying up. So that becomes a concern. If airlines pull back, then all of a sudden, they delay orders from companies like Boeing. And that also then causes layoffs. So it has a ricochet effect. It feeds on itself. So when people are confident and optimistic, they spend money. When they're concerned, nervous, and anxious, they save money. That is for sure. And I think that people, you know, and the markets are just having whiplash every single day and really craving some certainty.

17:05China, of course, is dominating a lot of the news. And, and I think people realize that so much of our stuff does come from China. And so the trickle down is serious. And the talks are just escalating. But a lot of other countries have come back to the table, which I'm sure you're not surprised by. What about Canada and Mexico? I mean, these are our homies. What do you think about our long-term relationship with them? Mexico seems to have, instead of putting retaliatory tariffs in, is trying to find a way that the president of the White House feels like they've won without giving away too much.

17:44Canada has taken a more strident approach. I live in Florida. We've already seen a reduction in Canadian tourists coming to Florida, which helps drive our economy. A large part of the foreign visitors to places like Florida and Disney World are from Canada. And we forget, Nicole, that services, whether it's airplanes, foreign visitors, buying meals, going to Disney World, spending money on hotels, that's an export. The export is a service. It's a meal, a hotel, an Uber ride, you name it. So we often just keep talking about tariffs on goods and we forget so much of our economy is services. It's like, well, this podcast, for example.

18:34we are a great service to America as a matter of exactly. So do you think tourism from Canada, from where else is going to get a factor? Oh, I think from Europe, I think, you know, right now, we're not the most part. You know, if you think about it, if you're in Canada and Toronto or Montreal or you're in Europe and you say, you know, we're thinking of going to America for a vacation, people are going, why look what they're doing to us. So, you know, even that little bit of pushback, well, maybe we'll go next year. Maybe we shouldn't go this summer. So again, these things all, you know, you have a few less tourists.

19:10Next thing you know, hotels have need for less bellmen, less chambermaids, less people working in the restaurants. It all feeds on itself. But also the perception. I mean, Fred, you are one of the most dapper gentlemen I know and such a good diplomat around the world for many, many years. What do you think the perception now of the U.S. is with all of this? How has that changed? And how has that affected? Well, it's hard to hear. It's not doing great things for the dollar either. Right, not doing great things. I was with the Gallup people, Gallup poll, just the other day. And it's hard to get such fresh data just this quickly.

19:54Generally speaking, foreign views of America have been higher under Democratic administrations than Republican, which surprised me. I mean, they just tracked and looked at foreign perceptions of the United States over a 20, 30 year period. And they just graphed it when it goes up or down. It tended to go up when there was Democrat in the White House, tended to go down when there was a Republican in the White House. So that there's a certain ebb and flow to that. And those numbers always bounce around. I think right now, I think it's a it's a without question of concern. You know, I wouldn't be surprised if some countries start requiring visas from Americans just to make it a little more difficult.

20:34There are a lot of ways people can retaliate and make everyday citizens feel it. And certainly, they're figuring this out. We're putting on our American farmers, things like bourbon and other American spirits that we export. There's a lot of concern about the kind of tasks we could do that could be imposed there by foreign buyers. Who do you think would impose visas? Oh, it could be. It could be some places. It could be in the EU. But, you know, for example, I just was in India and they certainly have a visa and a complicated visa process. It was very complicated. So, you know, we are as Americans are frequently accustomed to being able to just travel with our passport, no questions asked.

21:22That period may be drawing too close for a while. That's really interesting.

21:31Hold on to your wallets. Money Rehab will be right back. And now for some more Money Rehab.

21:44Just stepping back to the goal of all of this and bringing manufacturing back to the United States. In theory, this sounds amazing. You know, in practice, do you think it's going to work to help the middle class? And these are the goals. I mean, I think everybody wants to get behind that idea. But is it possible? Well, two things are, I think, one, if we're looking for better jobs for Americans, which we always want and we want more, we have our economy is twice the size of the European Union. And 15, 17 years ago, we were the same size. So we're growing much faster. Some of a number of those benefits aren't trickling down, aren't being felt by more working class Americans.

22:26We have a huge shortage of jobs in manufacturing already, something like 500 ,000 job vacancies in manufacturing. The problem is we say we want manufacturing. And then if you ask people or parents, would you like your son or daughter to work in manufacturing? It's like 75, 80 percent say no. So we would like manufacturing. We just don't want to do it ourselves. Why do you think that is? I think it's not seen as high level or uplifting work. Where we actually have a huge shortage right now is things like electricians, plumbers, carpenters. We need to build a lot more house. We need a lot more. And those jobs are more sophisticated, more difficult, more challenging.

23:14And you're in a good six-figure income if you're an electrician right now, if you're an auto mechanic right now. We should be encouraging more people to be taking those jobs. That's where there's a huge need and a real step up in income levels. You recently wrote, Fred, that as Trump doubles down on his America first rhetoric, he is at best ignoring the most crucial fact about the American economy. It runs on trade. Can you explain how Americans benefit from trade? I think we will. One, we're the second largest exporter in the world, second only to China. And a little over 20 years, we were the largest exporter.

23:57And I would say I my hunch is we may be the largest exporter when you include services again, because it's hard to track this. Like our travel to other countries. Right. Or their travel to here. Because my point is when foreigners come here or students come and study in American universities, that's a service export. They're spending money and getting an education. That's a service. So my hunch is we probably undercount some of that because it's hard to count. So that's part of the trade. So we are already, as I said, the second largest export in the world, but I believe we might even be number one.

24:38And that's like$3 trillion of exports. That's a large part of our economy. So that employs a lot of people and spreads a lot of goodwill because we have people working around the world. And frankly, entertainment is a huge service export. TVs, movies, music, live theater, sports. There's a lot more interest in American sports, basketball and so forth overseas right now. So those are things that, one, bring us closer together with other people and also generate a lot of income. The other advantage of trade is we are open to import. We get the advantage of, I would say, the cars we have in America today are far better than they were 25 and 30 years ago.

25:22You know, we had a lot of foreign competition. And frankly, you may you're too young. There was a time when you would get a car and you were afraid of getting a lemon, a car that was just always broke down. Yeah, there was that commercial. Yeah, you won't get a lemon. Right. So we've benefited, I would say, the American car industry. I know we face a lot of competition, but we also now make cars that are world class and desired around the world. So we benefit from a lot of trade. Boeing, one of our largest exporters at the moment, cannot export their jet planes to China. That's one retaliation.

26:03Those are really high paying jobs that are now in jeopardy. So we run on trade, both benefiting Americans by the kind of choices we have, whether I mentioned bananas, fresh fruits, avocados, many things that we don't grow here, and also the innovation that comes from learning about products overseas. You know, we all have an iPhone. The iPhone comes from like 43 different countries, whether it's the thing that tracks your steps, whether it's the thing that if you want to turn it sideways or a portrait, the rare earth, the rare minerals come from the Congo. So we benefit from that kind of trade.