How Trump's tariffs could impact San Diego's economy

S1: Welcome in San Diego , it's Jade Hindman. On today's show , how the Trump administration's new tariffs could impact our local economy. This is KPBS Midday Edition. Connecting our communities through conversation. Today , markets continue to see big swings in response to the Trump administration's commitment to imposing tariffs on countries across the globe. President Trump's latest tariff goes into effect Wednesday , and last week , Trump announced a 10% baseline tax on imports from all countries and higher tariffs on dozens of nations that run trade surpluses with the US. China retaliated with additional tariffs on the U.S. , and today Trump threatened a 50% tariff on China. The tariff announcement sent shockwaves into both the US and global economy. So how will San Diegans feel the impact ? I'm here with Daniel in Denmark. He's the chief economist at the San Diego Regional Policy and Innovation Center. Daniel , welcome to the show.

S2: Thanks for having me.

S1: So Trump has said tariffs can raise money for the Treasury , get more manufacturing back to the U.S. and and get other countries to the negotiating table.

S2: There are limited beneficial uses of tariffs. They are targeted. They are stable. They are tagged to reciprocity. And this is none of those things. Tariffs are a really inefficient way and a very regressive way of raising revenue for the government because essentially it becomes a sales tax. If I am a microbrewery in San Diego and I need to sell my beer in aluminum cans and there's a tariff on aluminum. Well , the people who make the cans , they buy the the aluminum from some U.S. company that imports it from another country , that that company is paying more for the aluminum. So they've got to charge more for the aluminum. And then the can companies got to charge the beer company more for the cans. And then the beer companies got to charge us more for the IPAs. And so really , it's just a very roundabout way of charging consumers for goods that they are used to paying less for. Um , and , uh , it is an incredibly economically destructive act because , uh , we benefit so much more than any other country as the wealthiest country in the world. Uh , from international trade.

S1: And briefly , in case you know , there's someone who's still trying to wrap their mind around what a tariff is , which , yes , a lot of people right now. Can you explain that ? Yeah.

S2: So a lot of people think that a tariff is some kind of charge that we levy on another country. That is not at all correct. Um , and I don't blame people for thinking that because the current administration really likes to encourage that viewpoint. Um , the truth is that a tariff is a tax charged by the US government on US companies that import goods from another place. So I explain this the other day to somebody who said , well , then why are other countries angry at us for putting tariffs if it's not a charge on another country ? Well , you can imagine if Vietnam produces t shirts and they sell them to us at $10. Uh , and then we , as we as Trump just announced , are imposing a nearly 50% tariff on Vietnam that that t shirt now costs $15 , right ? Because when the US company that imports that t shirt from Vietnam imports it , they have to pay the US government $5. And so what that does is it drives demand down for Vietnamese goods. And that does hurt Vietnam. But it hurts us too , because our goods cost more money and we have to shift toward some other option or we just have to pay more.

S1: Who wins when tariffs are imposed ? Nobody.

S2: There is no winning a trade war. Um , yeah. We. The econ 101 explanation of of international trade is country A sells apples to country B , and country B sells bananas back to country A , and the reason that that benefits everybody is because country B has gotten an environment that allows them to , to make bananas , and country A is , you know , better at making apples for whatever reason. And so they have comparative advantages in these two areas. And so both countries benefit. International trade is not. Countries buying goods from other countries it's people buying goods from companies. And so I buy coffee that's imported because we don't make coffee in the United States. Right. And partly that's because of the environment like that. That's just we don't have a conducive environment for growing coffee. And also it's just not what we have a comparative advantage in. Um , I buy burgers from In-N-Out because In-N-Out has a comparative advantage in making burgers. They're better at it than I am , right ? Mhm. Yeah.

S1: Yeah. Makes sense. I mean so but Trump is saying you know this is how we address a trade deficit. So how does a trade deficit impact a country's economy. Is that how you view it.

S2: If I could go back in time and whoever named trade deficit , I would stop them and say , don't call it trade deficit because that makes it sound like something's wrong. We have a trade deficit with the country of Lesotho , which is a landlocked country in southern Africa. The median income , the mean income , the per capita income is about $3 a day in Lesotho. Okay. We have a trade deficit because they make jeans for Levi's. Um , and then they sell them to Levi's , and then Levi's sells them to us. Right. So we buy these jeans from Lesotho. And that's great , because in Lesotho , the most profitable thing that a person can do with their time is to make jeans. If they weren't making jeans , they'd be doing something else that earned them less money. But the amount of money that they make , making those jeans is is a wage that no American would agree to work at. And so we get the jeans for cheaper and they get to have employment that pays them more than they would otherwise make. Now the idea that we would slap the highest tariff rate of any country on Lesotho , which is what the Trump administration has done , is not just absurd , it's cruel because we are putting all of these women who work in garment factories in Lesotho out of a job , and they're going their next best employment option is worse , but it's also making our jeans more expensive. And of course , we have a trade deficit , if you want to call it that , with Lesotho , because they can't afford to buy our things , they make $3 a day. Are you going to sell an iPhone to them ? I mean , come on , get real. So it's not a bad thing to have a trade deficit. Again , I have a trade deficit with in and out because they I buy their hamburgers. They don't buy my services as an economist. But in the time that it takes me to eat lunch in and out , I make five times as much as the lunch costs me working as an economist. So I have a comparative advantage in working of an economist. They have a comparative advantage in making burgers , and we both win. Now , if you taxed that burger. Who would that help ? Hmm.

S1: So as of now , it's a mutually beneficial agreement. So when we look at these tariffs I mean are is this historically high. I mean how should we be looking at this.

S2: It's outrageously high. You saw this cardboard poster that Trump was waving around and it says tariffs from other countries. And then it has numbers that are not at all the terrorists that those countries are charging. Like not even close. In fact , what they're presenting is a weird formula that no serious economist would use , which is trade deficit divided by U.S. exports. And what that means is , um , say we sold $50 worth of stuff to another country , and they sold us $100 worth of stuff. Well , $100 -$50 divided by $100 is 0.5 , so 50%. So now Trump would say that country has a 50% tariff on American goods. No it doesn't. It just sells more stuff to us than we sell to them. Like listen to. Because they sell us jeans and diamonds and they don't have enough money to buy our stuff. So it's based on a fiction and it's outrageously high. Before these tariffs came into into in a place that the average what they call trade weighted tariff rate , which is kind of the average tariff rate for the United States , was 2.2%. Now the baseline is 10% and going up to 50%. Mexico's trade weighted tariff average was 4.1% , Canada 3.2% , EU , 2.9% , Japan 2.1%. These are all low numbers even you know. Do you remember that scene in Ferris Bueller's Day Off where the boring economics teacher was talking about Smoot-Hawley Holly terrace and how they deepened the Great Depression. The Smoot-Hawley tariffs , which are kind of like the classic example of a terrible , terrible policy that really worsened the Great Depression. Those peaked at under 20%. They peaked at 19.8%. Now we're talking about 54% tariffs total on Chinese goods. That's outrageous. There is no one else who we're trading with who is treating us this way. Right. And so we are just by creating these totally out of scale tariffs. We're really pushing ourselves out of the global economy. Global trade will continue without us , but it will continue without us.

S1: Companies across the country. You know , I mean , they're bracing themselves.

S2: Um , so we'll experience that. That will be devastating , uh , particularly for low income families. In addition to that , we're going to see the San Diego economy suffer because , you know , the traditional explanation for international trade that I gave earlier is like country A sells finished goods to consumers , and country B and vice versa. But in the San Diego region and the Cali Baja region , in this binational region , we engage in something that's less like selling finished products to consumers and more like co-production. So the regional EDC says that a single component in an automobile or a medical device can cross the border 6 to 8 times , with value being added at each stage in this supply chain. And so we work very closely with manufacturers in Mexico to co-produce things like medical devices and heavy equipment and aerospace and all that stuff. And what makes that work is that we can freely trade things across the border. When you if you tax things every single time they cross a border , you are destroying that opportunity. For San Diego and Tijuana to work together to produce things that are that are high quality and low price.

S1:

S2: I try not to get out my crystal ball because it's easy to be wrong. But , um , a lot of business owners are going to cut production because they're going to expect that as prices increase , demand will decrease. That's going to lead to lower employment. The problem with this situation is that traditionally , you know , when you have a recession , inflation is low and joblessness is high. And in fact , inflation and unemployment are highly correlated , meaning that when unemployment gets high , inflation gets low. When unemployment gets really low , inflation gets high. The worst possible thing that can happen is what's called stagflation , which is where both unemployment and inflation are high. That's what happened during Jimmy Carter's presidency. And the problem with that is that the tool we use to recover from a recession , one of those tools is monetary policy. And monetary policy is primarily driven by changes in the interest rate. And you could think of the interest rate as kind of the cost of money in the economy. If the interest rate is high , then getting access to money is expensive. If the interest rate is low , money is cheap. And when unemployment increases , we bring down the inflation. We bring down the interest rate so that , um , money is cheap so that companies invest and are more willing to , uh , borrow money to hire new workers and increase production. Um , there's all kinds of positive benefits that help us pull out of that recession. But we also know that when we increase , when we decrease the interest rate , it creates an opportunity for inflation to increase. And so if you have stagflation where both unemployment and inflation are high , then there's no real monetary lever. There's no policy lever that we can use to try to pull out of that tailspin. Because if we bring down interest rates , then we get even worse inflation. But if we take up interest rates , then we get even worse unemployment. This is a real , real problem and it comes at a terrible time. And the reason it comes at a terrible time is because we've just recovered from about a very high inflation. And the biggest enemy , the biggest danger with inflation is expectations. If people expect that a dollar is going to be worth less tomorrow , then , um , then it may very well become less valuable tomorrow. It becomes a self-fulfilling prophecy if people expect inflation to increase. It's very hard to get back to a place where we've been for a long time of steady 2% inflation. We had this bout short lived bout of bad inflation , but if we go back to it , we could get to a world where American consumers simply expect high inflation in the long term. And that is the kind of problem that less economically successful countries have struggled with for a long time.

S1: Perception becomes reality. That's right. So bringing this to you to to myself. I mean , how how do people prepare for , uh , the economy to potentially turn that way ? Yeah.

S2: Um , I wouldn't go out and panic buy. I wouldn't go and stock up at Costco. Um , how do people prepare ? Unfortunately , what happens is people tend to not spend as much money when they fear a recession because they want to save their money for a rainy day. And then when people spend less money , that decreases demand , overall demand for goods and services , and that reduces the supply of goods and services , and therefore , you can actually create a recession by people simply not spending because there's a fear of a recession. Again , in the economy , sometimes expectations become reality. So I would say the way that you can prepare is to be prudent with how you're spending money , but also to make sure that you have a job that you like and maybe don't go out and buy something that feels frivolous. But , you know , I think just being prudent with your , um , expenditures. And I think one thing that people who are close to retirement need to consider is that this is having a really disastrous effect on the stock market. Um , and there's a concept called the sequence of returns risk , which is if your stock portfolio decreases in value early in retirement , you have to sell off more stock in order to bring in the income that you need to live , and that that decreases your overall nest egg , and it significantly decreases the amount of time that you can cover your income needs over retirement. So if you can avoid selling a bunch of stock while it's low , that will really stand you in better stead for the rest of your retirement. So if I were at a place where I was expecting to retire this month , and I had the option of continuing to work for a while , I might take that option. Because avoiding having to sell stock when it's low is is a good way to be able to to prolong your financial security and retirement.

S1: All right. I've been speaking with Daniel Newmark , chief economist at the San Diego Regional Policy and Innovation Center. Daniel , thanks for your insight.

S2: Thanks for having me.

S1: That's our show for today. I'm your host , Jade Hindman. Thanks for tuning in to Midday Edition. Be sure to have a great day on purpose , everyone.