Trump's contradictory trade policies

0:00NPR.

0:11President-elect Donald Trump wants to have more stuff made in America. And to do this, I'm sure you've heard, he's promising more tariffs. I think tariffs are the most beautiful word. I think they're beautiful. It's going to make us rich. Tariffs are attacks on imported cars, barbecues, laptops, fridges. I mean, really anything. And the idea is to protect American companies from overseas competition. Trump has also, at times, demanded a weaker dollar. Because a weak dollar is good for American exporters. It means people overseas can more easily afford stuff from the U.S. Now, on the surface, these make sense, right?

0:49You've got two policies that help make things in America. Well, not really. There is one problem with this plan. Tariffs actually strengthen the dollar. This is The Indicator from Planet Money. I'm Waylon Wong. And I'm Darian Woods. Today on the show, we explain tariffs and currencies through the story of one bag manufacturer from New Jersey. And we look at how its experience illustrates how Trump's goals are contradictory.

1:41over 10 ,000 companies, Zendesk AI makes service teams more efficient, businesses run better, and your customers happier. That's the Zendesk AI effect. Find out more at zendesk.com. In 2008, Kim Veccarella was on a vacation in the Jersey Shore when she got frustrated by her beach bags. Things were falling into the sand and getting lost, like keys, and I needed a better beach bag. Kim thought, what about a tote bag, but made like Crocs, you know, those rubbery sandals. I was inspired by the material for sure and just thought that the material would lend itself to the best beach bag ever. Kim wanted to produce these Crocs meats, tote bags locally.

2:23I had made a few phone calls, you know, in the States to see if there was anybody that has that type of machinery and I was not successful. So she went where everyone else seemed to be going, China. And she's visited the factories there a couple of times. The machines are moving, the people are moving. And even though they're machine made, they're handcrafted at the end because they come out almost like a wobbly with an umbilical cord, you know, and they have to be set. So China became, I guess, the midwife to her creation. And she named it the bog bag. Oh, yeah. I've seen these around. They're like pretty sturdy bags.

3:01They have the holes in them. They come in a bunch of colors. Yeah. I mean, they could be inspired by high-end handbags. Who knows? Which might be the case because they're not cheap. They're not like a tote we would just give away for, I don't know, like a public radio pledge drive or something. Canvas or death for us. Is that what Patrick Henry said during the Revolutionary War? Anyway, back to our trade explainer. Kim pays the factory in U.S. dollars and the factory owners presumably convert it to the Chinese currency, the renminbi, later on. This will be an important link in the chain when we talk about how exchange rates are affected by tariffs.

3:40Now, this was before Trump's first term, before the trade war with China. Even back then, Kim had to pay some tariffs, but they were manageable. She says between maybe 15 or 20 percent of the bag's value. I really didn't understand fully the tariffs. It was just added to the bottom line or expense. After Trump came into office in 2017, those tariffs went up a lot. Some of them have gone up to 40 percent, you know, essentially doubled. Now it's a substantial cost. The way the tariffs work in her case is that the factory sends its shipment of bags out of southern China. The ship full of bog bags makes its way to the ports in Los Angeles or Miami or Baltimore.

4:21The logistics company she's hired makes a declaration to Customs and Border Protection about the wholesale value of those bags and provides Kim's bank account details. If they're worth, say,$50, then a 40 % tariff means she has to pay the government$20 per bag. Then, after about 30 days or so of the bog bags arriving into the U.S., Customs and Border Protection gets the money. It comes right out of your checking account, which is super fun. Automatically. I paid$800 ,000 today. You paid$800 ,000 in tariffs today? Yes. Wow. I don't want to know what the overdraft fees are when something goes wrong.

4:58Whoops, I forgot to have that in the bank account today. For reference, Spog is a big company, about$100 million a year in revenue. But those tariff payments, leech shipments are already costing Kim real money. This is where you can start to understand how tariffs strengthen the U.S. dollar. When those tariffs increased last time, Kim tried to figure out how to make that work financially. You have to eat some as the business. the consumer has to pay a little bit more. And when American consumers are faced with higher prices, they will buy fewer bags. That means less of those U.S. dollars going to the Chinese bag factory and being converted to the Chinese renminbi.

5:37Less demand for renminbi weakens the Chinese currency. In comparison, the U.S. dollar gets stronger. Basically, less American spending in China, less demand for the Chinese currency. There's another mechanism here as well. Kim says when tariffs are raised, she also tries to share some of the pain with the factory. I mean, there's only so far you can go. You can't go and recoup all of it by way of the consumer. So there was some times where we were able to negotiate with the factory as well and say, hey, we may not have an option but to pull out. You know, meanwhile, knowing in the back of your head, it's not that easy.

6:16In our particular case, where there's multiple molds, I mean, we own hundreds of molds. To remold everything at a new factory, you know, it's just it's a lengthy and expensive process. So Kim was like, I'm going to take my molds and go. And she's like, wait a minute, I can't do that. Yeah, but they didn't need to know that. Well, you know, the bluff worked. When Kim was able to agree on lower prices from the factory gate, that again meant less U.S. dollars being sent to the Chinese factory, which then would again mean less demand for renminbi and a weaker Chinese currency relative to the U.S. The side effect from tariffs is the opposite of what Trump wants.

6:56A stronger dollar is bad for U.S. exports. If you're an American selling, say, powdered milk into China, that powdered milk is going to look more expensive from the Chinese side, so they'll buy less of it. This is why Trump has railed so much against the strong dollar. It makes life harder for American farmers and manufacturers. So this is the tension. The key pillar of Trump's economic agenda, tariffs, is likely to strengthen the dollar further. And that's actually what we saw in the days after Trump's election. The dollar strengthened significantly, likely in anticipation of new tariffs. Now, there are a couple of caveats here.

7:35There will be a ton of new policies and circumstances happening all at once over the next few years. Some will strengthen the dollar, some will weaken it. So what we've just run through is what economists call ceteris paribus. It's Latin for other things equal. So in an imaginary world with everything else frozen, this is what would happen. But in the real world, currencies are notoriously difficult to predict. As for Kim, she's doing what she can ahead of any new tariffs. Production is maxed out. And she's looking at factories in other countries like Vietnam, Sri Lanka and Cambodia. We need to diversify in general, right?

8:12You don't want to have all your eggs in one basket. You don't want all your factories in one bog bag. Exactly. Exactly. Did that idiom reversal work well? How many factories can you fit in one of these bog bags? You sound pretty roomy. And look, this time she may not be bluffing. Dun, dun, dun. This episode was produced by Cooper Cats McKim and engineered by Jimmy Keely and Kweisi Lee. It was fact-checked by Sarah Juarez. Cake and Cannon edits the show and The Indicator is a production of NPR.