Moneybeat: New tariffs on China

MARY REICHARD, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

It’s time to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. He’s head of the wealth management firm The Bahnsen Group and he’s here now.

David, good morning!

DAVID BAHNSEN: Well, good morning good to be with you.

EICHER: New tariffs on China. That seems to be the economic story of the week. President Biden doubling down on a policy of the former president, President Trump, who imposed tariffs on China during his term in office. Biden in this case hitting Chinese EVs, electric vehicles.

The New York Times proclaiming the end of an era for cheap Chinese goods, saying Biden’s move is an effort to protect strategic manufacturing sectors from low-cost competition predicting consumers might not like it.

Big story, isn’t it?

BAHNSEN: Yeah, I think there's actually a few different stories and some of them are sort of political. You know, it's hard to say that it's a big story, that he put 100% tariff on something that United States doesn't really import much, which is Chinese made electric vehicles. They're trying to do more, and use the backdoor of finishing the manufacturing in Mexico to avoid some of the tariff. But I think the big story is, you know, first of all, just anecdotally, on the environmental side, I don't know how President Biden can claim that the world is about to end and we must do anything possible to get to net zero, and then say, oh, but I'm going to put 100% tariff on someone making electric vehicles. There's a conflicting message in there that I suspect may hurt him a little bit politically with younger people.

But what I think is fascinating about this politically, is President Biden has been incredibly critical of President Trump for his tariffs. And at this point, that criticism is off the table. You basically have two candidates, they're running on the basis of higher taxes of things coming into the country. And President Biden has made the case before, and I happen to think he was right, that these tariffs are paid by American consumers. And he can't make that case now, when he himself has done it. It wasn't merely on electric vehicles, it also touched batteries, and solar panels. So it's obviously part of the overall dynamic with China.

I don't agree with The New York Times that the era of cheap Chinese goods is over in the sense that these tariffs were going after a specific industry, a specific sector. But I think the concept of trying to protect an American industry using tariffs, which is essentially, in my estimation, and having studied this for many, many years, it's hurting an American consumer to try to help a different American producer. And in this case, it gets more complicated by the fact that you're targeting another country who is an adversary of the U.S., but you're targeting them, and then putting the cost on to Americans.

So President Biden has done something that from environmental to the past criticism of President Trump, to the overall economic policy itself to his dynamic with China on about four different levels, I think he's cornered himself in and this is going to be problematic for him.

EICHER: One of the arguments business makes against a foreign tariff policy, David—and one that you mentioned a moment ago—is that the cost of the tariff is ultimately borne by the consumer. not the business. But with that argument alone. Why does the business care?

BAHNSEN: Because the consumer will buy less. In other words, if you're gonna put an extra 50% cost on, you can say, Okay, well, I'm gonna pass it on to the consumer, but you're also not going to get the sales, the sales will go elsewhere. And so you end up, you know, hurting the overall marketplace. A lot of times with protective tariffs, the idea is some country is cheating, they're subsidizing an industry and they call that cheating. And so we have to put a tariff on to offset the fact that the American manufacturer can't compete. For 20 something years, the argument has been Chinese wages are lower, American wages can't go that low, so, they're cheating. So if we put a tariff on it, it will result in a more even playing field, the American product will have a fair price point relative to the Chinese import. And of course, the issue there is what you now have is two products that cost more and so who hurts there? Perhaps the business isn't the one hurting. At that point it is clearly the consumer.

But to your overall point, businesses oppose tariffs because if it's going to put a some price increase into the system, it's going to lower margins and it's going to damage their overall marketplace, and consumers vote with their wallet.

EICHER: I know you’re very much opposed to the tariffs—regardless of who levies them, Biden or Trump—but what is the argument for them, especially when, as in this case, China’s government subsidizes this stuff and undercuts American companies—or even intellectual-property theft, or human-rights concerns? Dig into that a bit.

BAHNSEN: Well, look, the argument that is made by some that I think is well intended, but is a little misunderstanding history, is that the Founding Fathers advocated for tariffs and Alexander Hamilton believed in it. So why shouldn't we let either President Trump if you're on that side of the political aisle, or President Biden, if you're on that side of the aisle, because they're both on the same side of this issue now? Why should we let them do it if it was good enough for the founding fathers? But of course, the difference then was tariffs were being done as a means of funding government. Now, they're being done as a means of picking one sector over another, picking one economic actor over another. And we didn't have a federal income tax. So they were using a tariff as a means of funding government.

Today, we have a means of funding government that some of us would consider rather substantial, called an income tax system. So the tariff becomes an "and" tax, not an "or" tax. And I think that that's a major difference. And when it's being done, as what we call a protective tariff, that we're trying to protect jobs in Ohio versus another country, then that's an argument to be had. But the question is, does that even work? And there's absolutely no evidence that it does. That when, you know, this comes down to what we call the Law of Comparative Advantage.

There are some countries that have a lower cost structure that are going to be able to manufacture things cheaper, they have different natural resources that some countries do not have. And taking advantage of different country’s relative comparative advantages, is what Adam Smith based his entire anti mercantilism on. And so I do not believe in what we call industrial policy. But the reason I don't is not because I disagree with the arguments about human rights and intellectual property theft. Those arguments I agree with, I just believe they can be dealt with in a far more clear way.

EICHER: I think for this week’s “defining terms” it seems there’s an entire glossary of terms around tariffs and foreign trade, but you mentioned “industrial policy.” So talk more specifically about what that is and define “industrial policy” for us this week.

BAHNSEN: Yeah, I used the term a moment ago, "industrial policy." And that is directly connected. Industrial policy is a term for the United States using tariffs, and using restrictions on commerce with foreign countries or foreign companies to try to impact positively some domestic company or domestic industry. And what's called protective tariff, which the word tariff just literally means tax, a tax on products coming in the country from another country. That's what the term protective tariff refers to. And so if you're an American company that does a lot of trade all over the world, you find tariffs very problematic. And if you are a local company that doesn't do any business around the world, then you would like to see a tariff potentially helping your business.

But the thing we have to remember is it's not ever just the tariff, like, oh, let's do industrial policy that's going to help America by implementing a tariff. Well, then the other country retaliates, and so then there's a whole trickle down effect from that. But then the bigger thing I want to say about industrial policy, and I'm beyond, at this point, merely defining the term, but I'm editorializing. What you really do with industrial policy is you enable bad behavior, because you don't ever get to the heart of the matter. Maybe - just maybe - some companies were moving activities offshore because they were being taxed too much or regulated too much. But when we go to industrial policy to say, hey, let's put tariffs so that it will protect these industries, you're never getting to the heart of the matter. You don't need to put tariffs on Mexico or China or Canada. Why don't you just tax this company less to begin with?

And so I'm using that analogy as a very simple kind of summary. But I think that that's really what industrial policy is, is using the federal government to try to set up a policy framework to benefit particular companies or sectors and in so doing, you get an awful lot of unintended consequences.

EICHER: Ok, David Bahnsen is founder, managing partner, and chief investment officer of The Bahnsen Group.

Check out David’s latest book Full Time: Work and the Meaning of Life at fulltimebook.com.

Have a great week, David!

BAHNSEN: Thanks so much.

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