With David Payne, Staff Economist and Reporter for the Kiplinger Letter
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Steve speaks with David Payne to better understand President Trump’s imposition of tariffs on America’s trading partners. Payne is a staff economist and reporter for the Kiplinger Letter. Earlier, he was a Senior Principal Economist at IHS Global Insight and an economist at the Chief Economist’s Office of the U.S. Department of Commerce.
Trump’s Tariffs Impact All of Us
While tariffs sound pretty abstract, they’re not, and they impact almost every American, more so now that President Trump has imposed tariffs on steel and aluminum.
As Payne explains, Trump has been concerned about the impact of imports on American industry and decided to put tariffs on foreign steel, foreign aluminum, Canadian lumber, Canadian newsprint, washing machines, and solar panels. American presidents have generally avoided tariffs, with the last set of significant tariffs imposed in 2002 under President George W. Bush. Back then, tariffs did prevent the decline of steel jobs for a short period of time but adversely impacted users of steel who had to pay higher costs.
Understanding Tariffs
In any global trade—say steel, for instance—there are steel producers who sell to steel users. Without tariffs, users can buy their steel from the cheapest producer across the globe, for example, China. But tariffs imposed by the U.S. make Chinese steel imports more expensive and generally raise the price of steel for users. American steel producers, therefore, have more of a level playing field, but American users of steel suffer and often pass off added costs to consumers.
Producers Stand To Gain
Since Trump announced tariffs, U.S. aluminum, steel, and lumber producers have started re-opening shuttered plants and are hiring workers. Overall, Payne estimates that Trump tariffs will create about 11,000 new jobs, mostly in the Midwest, Pennsylvania, Ohio, and Indiana.
Users Will Lose Out
On the flip side, the users of tariffed products, such as appliance, car, or home builders will pay higher prices, some of which they may pass on to consumers. For example, the price of a new car will probably go up by between $200 to $300, new home prices could rise by about $5,000, while prices on washing machines and solar panels could rise even more significantly. This bump in price might not be enough, though, to stoke inflation.
Aside from the obvious examples, Payne believes U.S. airplane makers and the defense industry could also be seriously impacted.
Has Steel Lost Its Sheen?
While steel and aluminum production was the bedrock of the American economy for decades, it isn’t all that important anymore because American companies would rather import raw materials at the cheapest global price and competitively sell finished goods in the U.S. and abroad. In addition, technology is a bigger driver of our economy relative to steel and aluminum, which have lost their sheen.
Today, America’s comparative economic advantage stems from specializing in the technology and service sectors, not from the production of steel or aluminum.
More Jobs Lost Than Gained
While trade protections have their importance, Steve sees Trump tariffs as a backward step, with little value in trying to resuscitate fading industries. For instance, although Trump tariffs will add jobs in steel, aluminum, and the sawmill industry, they will likely cost more American jobs than they create.
Political Retaliation
Companies that use basic materials in the U.S.—such as metal stamping for autos—have a greater incentive to source from overseas or to move out of the country entirely and then ship finished goods back to the U.S. to skirt tariffs. America might also face potential retaliation from foreign producers or foreign countries who may decide to impose their own tariffs on American exports, targeting politically relevant products such as Florida oranges (because Florida is a political swing state), Kentucky bourbon (because Mitch McConnell is from Kentucky), or Wisconsin cranberries (because Paul Ryan is from Wisconsin).
It is important to encourage fair and balanced trade across all of America’s trading partners and punish the rule breakers, but Trump’s tariffs could hurt the American economy more than help.
Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital. Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions. Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances. The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.
Steve Pomeranz: My guest is David Payne. He’s both staff economist and reporter for the Kiplinger Letter. He was a senior principal economist at IHS Global Insight and an economist in the Chief Economist’s Office of the US Department of Commerce. He’s a certified business economist. And I’ll tell you why I’m telling you his complete bio, because he’s joining me today because I’ve asked him to talk to us and to help us understand this idea about what’s going on with the tariffs.
Now, don’t change the dial, tariffs are going to affect us all, and we need to know how and how this is all going to shape up, so David, thanks for joining us and welcome to the show.
David Payne: Thank you for having me.
Steve Pomeranz: So, tariffs sound pretty abstract, but they’re not, right, they’re going to pretty much touch every American.
Especially with this idea that now President Trump has signed recently to put tariffs on steel and aluminum. Take us through that a little bit.
David Payne: That’s right, President Trump has been concerned about the impact of imports on American industry. And so, he’s put tariffs on foreign steel, foreign aluminum, Canadian lumber, Canadian newsprint, and on washing machines and solar panels.
Steve Pomeranz: How does this differ from the kind of tariffs that we’ve had in the past because tariffs are nothing new?
David Payne: That’s correct. Generally, we have avoided tariffs; the last time we have had a significant tariff program was in 2002 and 2003 when President Bush put tariffs on steel as well.
And that has had an impact on, or had at that time, an impact on users of steel. Although it did prevent the decline of steel jobs for a short period of time.
Steve Pomeranz: Well, that’s an interesting outcome. So, there’s two players here. There’s the producers of steel, which I guess would benefit, and then the users of steel, which are going to experience higher costs.
So to what degree are the producers of steel going to benefit with regards to jobs and higher profits?
David Payne: Yes, producers of steel will; they have said that they will benefit. They’ve already started putting up some plants that have been closed. I believe US Steel opened up a previously closed plant and hired 500 employees.
There’s an aluminum producer that in the US that has expanded a plant, hiring 300 employees. So overall, I expect that the steel and aluminum industry in the US will probably add about 10,000 employees because of the tariffs. And also US lumber mills will probably hire about another 1,000 employees, because of the Canadian lumber tariffs.
Steve Pomeranz: So about 11,000 all told. With regards to steel and aluminum, where are these plants mostly located?
David Payne: Mostly in the Midwest, Pennsylvania, Ohio, Indiana. So that’s the primary areas that will benefit.
Steve Pomeranz: So, let’s take a look at the other side of the coin, the users that would be kind of the rest of us, who buy cars and appliances. What do you think the effect of higher steel and aluminum prices are going to be on the consumer?
David Payne: Well, I think we won’t see large effects, but we will see some small effects over a wide range of products.
So, for example, the price of cars will probably go up about 2 to $300. The price of houses will rise about $5,000 for new construction, and most of that is lumber, but there’s also steel element to that as well.
Steve Pomeranz: Mm-hm.
David Payne: The impact on washing machines should be fairly significant, as well as solar panels.
So these are all things that we run across every day, and we may not notice the fact that the prices are going up on some of these items, but they will affect most of us.
Steve Pomeranz: Well, you’re an economist, do you think that the rise in prices will show up in the inflation numbers?
David Payne: I don’t think it will be a bump that people will be able to point to, so much, so it’s probably going to fly under the radar. But it will have a marginal impact and will provide an extra padding on inflation.
Steve Pomeranz: I can see the items that we’ve talked about,
it’s pretty obvious there’s a direct line between steel and lumber—between those and houses and cars and so on, but what other industries and purchases, let’s say, that we’re all going to end up making, are going to end up costing us more due to the ripple effects of these higher prices do one go?
David Payne: There are other industries that are also affected that we may not really recognize. For example, plane construction uses a lot of metal of course; the defense industry uses a lot of metals. A lot of these things don’t show up in the consumer price index, but they will have a small effect in the economy at large.
Steve Pomeranz: President Trump made the point of emphasizing that tariffs would benefit these steelworkers during the ceremony when he was signing, and he called steel and aluminum production the bedrock and backbone industries of this country. Is steel and aluminum production the bedrock of and backbone of our country?
David Payne: Well, steel and aluminum production have had a long history in the United States and helped to jumpstart the American economy.
But they’re not so much, I might say, a bedrock anymore, in the sense of our economy has shifted over to importing much of our raw materials and items that we need to produce with. And then using that material to make products for both the American market as well as exports.
Steve Pomeranz: So, it seems in my mind that other industries are more important especially in the technology area. How does that-
David Payne: That’s right.
Steve Pomeranz: How does the technology area compare in size and importance to the steel and aluminum area?
David Payne: Well, there’s many more people employed in the technology field in the United States today than in basic products.
And that’s what’s happening to the American economy is that we’re shifting to a service economy as well as to a more high technology economy. And that’s the comparative advantage of the United States is that we specialize in high tech and in services. And those things are what are primarily driving our economy at this point.
Steve Pomeranz: Yeah, so is this a backwards look at a 1950s, 60s economy, and trying to somehow resuscitate something that really has less impact than it used to in your opinion?
David Payne: I think that to a certain degree that’s true. I’m not saying that we should ignore anything that any foreign producer does because in different cases trade protection is needed.
Steve Pomeranz: Okay.
David Payne: But I think we tend to be a bit shortsighted when we focus purely on basic industry and not on the entire economy. So, for example, it’s often the case that tariff protection, while it saves jobs, and I’ve already talked about the fact that it will add jobs in steel and aluminum and sawmill industry, it will likely cost more American jobs than it creates.
And that happens in three ways. First of all, companies that use the basic materials in the United States for their own production have a greater incentive to source from overseas or to move themselves out of the country entirely. I’m thinking specifically of the metal stampings industry for that provides or supplies the American auto industry. Also there’s a potential retaliation from foreign producers or foreign countries. And they tend to pick products that have political significance in United States.
Steve Pomeranz: Yeah.
David Payne: So, for example, we might, put tariffs on Florida oranges just because Florida is a political swing state or Kentucky bourbon because Mitch McConnell is from Kentucky or Wisconsin cranberries because Paul Ryan is from Wisconsin.
Steve Pomeranz: Yeah, once you get politics involved, then it gets very, very messy. And the whole idea and the message can be lost. But you’re saying basically that users who are going to experience these higher costs may move abroad so they can continue to access cheaper materials. And yeah, but if they are then shipping back to the United States, they’re going to be subject to tariffs, aren’t they?
David Payne: Not in the form of finished products. So for example, if you’re supplying the auto industry with stampings, for example. Your stampings are not, there is no tariff on the stampings themselves. There’s only a tariff on the basic metal.
Steve Pomeranz: Okay, all right. So, as you go up the line of production, there are no tariffs.
So in your opinion, the positive effects may be somewhat localized, as you mentioned the Midwest and other places. But some of the larger unexpected effects will be, they could affect the whole country, possibly more negatively.
David Payne: That’s correct.
Steve Pomeranz: My guest David Payne is both staff economist, and reporter for the Kiplinger Letter.
Senior Principal Economist at IHS Global Insight as well. David, thanks for trying to make this a little bit clearer for us. We really appreciate your time.
David Payne: You’re very welcome, thank you.
Steve Pomeranz: To hear this again, listen to the full show, get a full summary of all the vital lessons that we learned here today.
Don’t forget to go to stevepomeranz.com and sign up for our weekly update where we will send you everything that we’ve talked about here in audio form, transcript form, and summarized form for your convenience.
Steve Pomeranz: So you can read it on the weekend. Thanks for joining us. David, thank you very much.
