The Economic Truth About Tariffs & Trade Deficits

0:00 if you're going to get in the way of two people voluntarily exchanging you better have a really good reason hey there friends fans and foes of dad Saves America John paa here and I thought I would take this Friday to talk about trade because it's in the news and we are off to the races on a hot and cold trade war with President Trump and our nearest neighbors Mr President is there anything China Canada and Mexico

0:30 can do tonight to Forstall your implementation of tariffs tomorrow no nothing not right now no not a negotiating tool no it's not no it's a pure economic we have big deficits with as you know with all three of them and in one case they're sending massive amounts of fentol killing hundreds of thousands of people a year with a fentol and in the other two cases they're making it possible for this uh poison to get in number one and number two we have

0:59 big deficit and uh it's something we're doing now as of this recording president Trump has already sort of paused some of these tariffs and I expect this to keep changing on a daily basis he is an energetic president and the ground is changing fast but I think president Trump's fundamental posture here says a lot and it hasn't changed that much but let's keep watching it's a lot of money coming to the United States as you know

1:25 we have about a $200 billion deficit with with a Canada getting close to $200 billion it's they've treated us very unfairly with Mexico it's the same thing we have a $250 billion doll deficit and we have uh a lot of people coming into the border and now we've largely stopped that but we've stopped that ourselves for years and years we've suffered with millions of criminals coming into our country criminals people from jails from all over the world that come through Mexico

1:54 and they come through Canada too A lot of them come through Canada and a lot of fentanyl comes through this is an area where president Trump if nothing else has been really consistent going all the way back and I think a lot of people are tired of watching other countries ripping off the United States this is a great country they laugh at us behind our backs they laugh at us because of our own stupidity one of the reasons we

2:17 say we're doing it is because we've been doing it and that all previous presidents have endorsed doing it and I think by doing it here saying uh free trade I guess the kind of thinking of an entrepreneur is because somebody else said it was right doesn't make it right right Larry the country is losing $200 billion do a year 200 billion this country cannot continue to lose $200 billion Japan is one of the wealthiest machines ever created the United States

2:44 is if it were a corporation it would be bankrupt it's losing $200 billion do a year for years now it's been losing that what right do we have to go out and defend why aren't these countries these wealthy money machines paying us for the defense of their freedom in their Nations why aren't they paying us we are kind of the world's keeper are we not I don't believe we should be I think Japan should certainly make a contribution

3:08 Japan is is one of the reasons they're so successful is they don't have to worry about defense because why should they worry about defense when the United States will do it for nothing I mean it's crazy you can see that the uh the president hasn't changed his tune all that much what is he talking about this 200 billion he's talking about the trade deficit I think when you talk about sending money to defend other countries that gets into something else and as

3:32 president Trump often does he conflates a lot of different aspects of an issue and weaves them together in ways that can sometimes be a little hard to follow he's fundamentally talking about our trade deficits with different countries well what is a trade deficit a trade deficit is simply that we as a country the people of the country buy more goods from that Country Than That country sells to us one way to think about this

4:03 is I run a trade deficit with my grocery store in fact with all the stores I go and shop at I give them my money and they give me the goods I have never sold any videos to my grocery store well I guess technically that's not entirely true I did make a feature documentary together with Whole Foods Market so I guess in one sense I did actually sell my video services to my grocery store but in in general we all run trade

4:32 deficits with the stores that we shop at and that is what we're actually talking about we send our money to companies in China and Mexico and Canada and then rather than those country people in those countries buying an equal amount of us Goods they will sometimes instead buy from other countries and trade ends up always being imbalance in that those dollars actually come back to the US it's called the capital account Surplus

5:04 those dollars don't go out and just disappear they come back in the in in the form of investment and lending and and other things that's a short version of the trade deficit story we could spend an entire video just talking about that but that is the deficit that Donald Trump is talking about when he says 200 billion he's not talking about sending $200 billion in in taxpayer money out the door he's talking about the trade deficit it's not the same thing now that

5:32 being said when we talk about global trade and we talk about the politics of our International order I think Donald Trump has actually had pretty good points about the fact that the US has been a kind of global police state we've been Team America World Police for a long time and it's I think this has been something that's actually been really refreshing from the president and his incoming hopeful cabinet that they want to reevaluate that that has not on

6:01 balanced been great for us and you see that here you took out a full page ad in U major US newspapers uh last year criticizing US foreign policy what would you do differently Donald I'd make our allies pay their fair share We're a deor nation something's going to happen over the next number of years with this country because you can't keep going on losing 200 billion and yet we we let Japan come in and dump everything right

6:22 into our markets and everything it's not free trade if you ever go to Japan right now and try to sell something forget about it o just forget about it it's almost impossible they don't have laws against it they just make it impossible they come over here they sell their cars their VCRs they knock the hell out of our companies and hey I have tremendous respect for the Japanese people I mean you can respect somebody that's beating

6:42 the hell out of you but they are beating the hell out of this country I really am tired of seeing what's happening with this country how we're how we're really making other people live like kings and we're not the Japanese did beat us up and for good reason because American cars sucked and Toyotas and Hondas were better they're also better than the German cars which Drive Great for about 10 minutes and then they break and cost

7:04 a fortune competition from the likes of Japanese car manufacturers like Toyota and Honda helped us manufacturers improve Ford is a better car manufacturer today because of the competition from the likes of Toyota so we weren't getting screwed by Toyota selling us great cars I think that this is where Donald Trump conflates the nation in the international trading system with individual companies he even said it you know if the US was a was a

7:36 company we'd be getting screwed we would not be doing good deals but the US is not a company it's a country and the American people are not all employees of Uncle Sam we are sovereign individuals that I believe should by and large be allowed to buy from pretty much whoever we want if you're going to get in the way of two people voluntarily exchanging like me and my Toyota dealer you better have a really good reason now I'm going

8:05 to dig deeper into that but I ALS I want to point out something that's um an interesting distinction in rhetoric from another former president probably the closest president in our lifetimes to Donald Trump in in many ways and that's actually Ronald Reagan here's a good old Ronnie talking about free trade Contra Donald Trump we too often talk about trade while using the vocabulary of War in war for one side to win the other must lose but Commerce is not Warfare

8:35 trade is an economic Alliance that benefits both countries there are no losers Only Winners and trade helps strengthen the Free World yet today protectionism is being used by some American politicians as a cheap form of nationalism our peaceful trading partners are not our enemies they are our allies we should beware of the demagogues who are ready to declare a trade war against against our friends weakening our economy our national security and the entire free world all

9:06 while cynically waving the American flag strong words uh this clip was making the rounds on X and for understandable reasons it sounds like Ronald Reagan um excoriating a a a then present and now current Donald Trump as a demagogue waving the American flag there's a couple problems with this one is that was Reagan's rck and he was on balance a free Trader but he wasn't a perfect free Trader so a

9:37 friend of mine um Sheldon Richmond wrote an article back in the late 80s sort of reviewing Ronald Reagan's trade record and found a couple things that are you could say flag waving nationalistic demagoguery in his words for example uh the administration's first major protectionist move was pressuring Japan into accepting so-called voluntary restraints on exports of Autos the80s was a time when as you heard from Donald Trump at that point the great worry was that Japan was going to overtake the US

10:08 and buy up all our land and we were going to lose and so President Reagan actually instituted a 100% tariff on select Japanese electronics and this should sound familiar quote the health and vitality of the US semiconductor industry are essential to America's future future competitiveness we cannot allow it to be jeopardized by unfair trading practices said Ronald Reagan sounds like Donald Trump in

10:40 2025 so it's easy to talk a big game on free trade but when you're in American politics and when you have a public and special interests that are clamoring for protection it's hard to stick to your guns Senator Rand Paul offered one example of why this kind of protection isn't always so obvious who it's protecting and who it's hurting so the best way to look at tariffs is the seen and the Unseen you can see the steel

11:10 workers you might help but you don't see the 80 workers who buy steel for every one worker making steel that suffers from higher prices without question tariffs raise prices and aren't good for trade as a as leverage a negotiation of course the president was the ultimate negot Ator he did get Mexico to send some troops and he got Canada to step up their patrols so as a negotiating weapon absolutely they have value as long as we

11:37 never enact them when they are a disaster for trade and for the consumer we the people we individual American citizens have a couple things we're concerned about that when it comes to tradeing tariffs are often at odds with each other one is we don't want to lose our jobs we don't want to have our plant or our business closed down because cheaper foreign competition put us out of business that sucks in fact uh when President Reagan talked about it's a

12:07 win-win for everybody I think he's underplaying the pain of that there are no losers Only Winners and trade helps strengthen the Free World there are no losers Only Winners in the aggregate I think that is unquestionably true over time but in the short run there are losers if your plant gets closed down you you lost that sucks when you have massive disruptions when you have big shifts in our economy like the opening up to China that happened with the World

12:38 Trade Organization you have a lot of disruption and it sucks and it's painful and there are losers there are people who will not ever recover the income level that they were at in their former profession so that's one thing we want our jobs protected we want a path for our careers to grow and when you have built skills and expertise and a network of relationships in an industry well that's how you make more money over time

13:07 that's how as you get older you make more money because you get better at your craft if your entire industry is destroyed like the textile industry in the United States for example you're out of luck so that sucks flip side of that though is that we all want lower prices and one of the other pieces of President Trump's campaign and the top issues for the American people heading into the election last year was inflation and the rising cost

13:36 of living everything is expensive everything especially housing but that is something that has hurt everyone and when senator Paul says that for every one person who benefits in the steel plant there's eight other businesses with employees losing because their costs have gone up and then the thousands of customers who have less money in their pocket because the cost of their vehicles and everything else that involves steel also went up that is true that is an example of what

14:09 economists like to say concentrated benefits okay you got your job protected and so that's a big deal that's a big benefit concentrated for you and dispersed costs cars might have gone up by a couple hundred dollars washing machines which experienced tariffs under the last Trump Administration might go up by a couple hundred and so if you kept your job making say $80,000 a year on the assembly line well that's a lot more money than a couple hundred extra

14:38 dollars on your car or your washing machine but in the aggregate for the society very often your 80 grand cost the rest of us 800 Grand I saw a window into this tension firsthand because my wife and I actually got into the manufacturing business about a decade ago I was working at Spike TV and I had a long commute home and Lisa had decided to stay home with our son and she had an idea for a business we were cloth

15:07 diapering our son Mato and she had a really cute idea for a design that she wanted to sell and let me play a little video because I think it it's pretty cute and again if you're a dad or a mom you will appreciate this [Music] how did you grow so big overnight how

15:39 did you get so smart and bright yesterday you were sleep in my arms today you're growing off the [Music] charts I'm so proud of you [Music] I'm so proud of [Music]

16:10 you gosh it was it was 15 years ago that's the product there it's a garment and we confronted the challenges of manufacturing in the United States along every Dimension trying to do this you can imagine that the typical buyer of cloth diaper ERS is a crunchy granola mom who happens to also be kind of a locavore and wants to buy local so having them made overseas where most garments are manufactured was

16:41 really frowned upon you wanted to be made in America the problem was that was really hard in fact we never quite got it we worked on this for years and never made a nickel it was a net loss we literally took home zero income as a family we ended up in 65 different stores we had other partners it was neat but we could never get the cost of production down low enough to ever make any money and this was the problem of

17:10 the constraints of these two forces so crunchy gonola moms that want cloth diapers that are made in the US and don't want to spend the amount of money it would actually take to manufacture them in the US we were in the aftermath of the Great Recession we had high unemployment we had slow economy and yet we talked to local manufacturers in places like New York New Jersey who said they were offering $25 $30 an hour plus

17:35 full health benefits on day one and couldn't get a single applicant to do the work so we folded we couldn't make a living the conflicting desires of the American Consumer played out for us and to devastating effect and I think this speaks to a bunch of the challenges we face with trade most of domestic Manu manufacturing and texti got shipped overseas where the labor was a lot cheaper and where there was also maybe customs of of textile creation

18:06 that made it possible to employ people that had you know developed skills so when an industry goes away all of the pieces of the puzzle start to unravel you don't have apprenticeship you don't have families that stay in the business for a long time you don't have a kind of structure of entering at the entry level and working your way up it all just goes away and you can't just recreate it whole cloth because there's a new

18:33 product you want to make I think that's one of the problems and challenges with free trade as it's come to be in the Modern Age there are products that we don't want to be cut off from in a time of Crisis and we don't want to have no ability to manufacture here in the US given that we're a large country not every country is Big right if you know you go to a any number of small

18:59 countries they have no hope of making everything for themselves that they need especially like island nations these countries are incredibly reliant on trade for just about everything but we have a big country we have a lot of Natural Resources you know energy agriculture Lumber we do in some sense you could say have everything we need but even that's not true because we all want cost to go down and there are things that are made Elsewhere for Less

19:30 that is the trade-off we face it's very real it's very difficult and I think we saw during covid that it can be a downright national security problem during covid several products including Baby related ones like baby formula went into short supply some critical medicines were in short supply because we had come to rely on Chinese manufacturing for these things we all are familiar with the fact that as President Reagan was worried

20:02 about back in the 80s semiconductors are manufactured overwhelmingly abroad increasingly by one company tsmc out of Taiwan which produces all of the chips for say Nvidia and Apple computer and and many others China could just blockade Taiwan tomorrow and virtually all of our Electronics would suddenly be if not impossible to get wildly more expensive that's not a nonissue that's actually a big deal and one of the

20:32 problems with being anti- fragile is we need to have a certain amount of redundancy free trade creates economic efficiency it creates a division of labor and specialization we get to get better at the things we're good at and other people and other countries focus on and get way better at the things they're good at and we all do ultimately over time benefit from that increased output this is Adam Smith's work in The Wealth of Nations that the division of

21:04 labor which is to say how do we get to focus more narrowly on our specific area of expertise and divide our labor divide and conquer that is limited by the extent of the market how many trading partners we have the reason why we have lots of choice in our stores is because we have lots of people with lots of different tastes and lots of trading partners that that enable all that diversity all that choice the reason why

21:33 we have so many car models is because we have a global market for automobiles that's division of labor specialization and comparative advantage that's David Ricardo's phrase that is all true basically every Economist agrees that that is correct Donald Trump's Us Versus Them Zero Sum art of the deal impulses on this aren't good economics theoretically but but sometimes efficiency brings fragility so when we saw firsthand

22:05 during covid how Supply chains broke and how the lack of any inventory in the system because we've gotten so efficient with such a broad Global division of labor the iPhone is the product not of China China assembles this thing but the glass from Coreg is made I think in Germany and the micro processes were made in Taiwan and designed in California and the and the aluminum or Titanium or whatever this metal Edge is that's made somewhere else and mine

22:36 somewhere else before that over a hundred countries are involved in making the iPhone so it isn't just made in China that's false we're deeply interconnected but that also makes us kind of fragile and when there's a disruption things break and they break hard and Nim talb said look if economists had their way we'd all share one kidney instead of having a spare in our own bodies because why why do you need two there's a certain amount of

23:08 buffer that having self-sufficiency provides it's a kind of insurance policy and so having two kidneys is an insurance policy it costs it costs us our bodies a little extra in calories to maintain but so too can some instances of a certain amount of economic nationalism be beneficial provide us with leverage negotiating power and close down opportunities for adversaries to try to head us off at the pass there

23:39 is one last point I want to make in the battle between cheaper goods and protecting our livelihoods trade isn't actually the hardest problem we Face we have a different thing that does even more both for good Bringing Down the costs and for still disrupting the structure of our lives and that is technology it turns out that manufacturing labor in the United States has actually been falling since the 1950s and the reason isn't trade it's

24:11 automation we get to do more with less by using machine labor instead of human labor if you stripped out all the Automation in our society you would be back to the Stone Age you wouldn't have air conditioning you wouldn't have automobiles automation moves people's cheese we all need to eat right well automation is the reason why food is cheap and it's going to probably continue to be so there are roughly 2.4 million farm jobs that need to be filled annually but

24:39 the number of available workers is on the decline now with the help of artificial intelligence farmers are getting the help they need to perform labor intensive tasks despite that labor shortage growing the plants has become the easiest part all those crops take a lot of hand labor our biggest challenge is people and making that part of it work we need more people meet the farm and G production crew Ethan ruley and Claire Dillan launched farm and just

25:09 outside Silicon Valley to reimagine farm tools with the help of AI they built the Amiga a robot that can handle farming tasks including seeding weeding and harvesting back in the day we would do that we' bring a wagon in here with a load of compost and with shovels and buckets it got to the point where we couldn't afford to do that anymore too labor intensive with compost spread in the amga tool all of a sudden one guy can do

25:36 the comple spreading by himself the way young people are going to be farming in the future is going to be a few Young Smart individuals really excited about growing food excited about soils and having all these Cool Tools to play with this is part of a long tradition that is the reason why we have the world we have because you don't have to go that far back for the United States to be 40% agriculture in terms of our labor force

26:02 and you go a little further back and we are all trying to keep ourselves alive on our family farms and having a lot of kids partly because we need the labor Innovation technological Improvement is the far more powerful disruptor of particular jobs at particular times this is a constant tension we face this is a classic sort of free market libertarian story oh look why worry we used to all be farmers now only 2% of the country

26:30 farms less than 2% isn't that great isn't that perfect isn't it wonderful and the answer is yes but work brings human dignity and we are on the verge of things that start to get a little scary I wake I clean I live they leave gifts for me so kind they feed feed me like a

27:01 king but I don't do it for accolades my work is my sustenance soaking up every last crumb in every last crevice potato chips so say goodbye to working at the car wash on your summer break the Tesla robots are going to do it for you and for our kids and that will raise the question of where the heck is anybody going to learn what it means to work an honest day in the future I

27:34 think this is something I worry about quite a bit what where are we headed trade is one thing that disrupts our lives but the future of technological change uh threatens to be an even bigger disruptor and I'm not really sure where that leaves us in the future we will be materially better off but the entire order of our society might change in ways that are hard for us to understand I think in a lot of ways the issues around trade mirror that

28:06 of a lot of the rest of what it means to live in a free society and want to have freedom and why individual freedom in general is going to be a better deal than political control and Central planning because for all of the caveats about where free trade disrupts Our Lives or creates fragility that might be a problem I personally have yet to see an example where the government did a particularly good job in rationally or

28:37 ethically adjusting for those challenges we spend a lot of money on government training programs that are highly ineffective as you saw going back to Ronald Reagan and throughout all of political history the attempts to protect certain industries are often shrouded in nationalist language but tend just to be kind of corporate Cron ISM and special interest lobbying more than anything that you could call the common good while I supported president Trump and I want him to succeed I don't

29:08 think he in any way is immune to these corrupt forces of politics and you know he's always been a tiny bit corrupt himself let's be honest here we can like him and recognize that he's a little prone towards um playing favorites so I would much rather I think live in a world where we been benefit from the from trade both the pressure it puts on us to do better and be competitive and the benefits that are just outright in

29:36 terms of our division of labor Bringing Down the cost of all the goods and services that we need and try to learn for ourselves as individuals as families as businesses as Industries where to build up more resilience I hope the private sector learned from covid that we need more buffer we need need more capacity in this country and we can afford to do it we are big we are wealthy we should do that we shouldn't leave ourselves open to that kind of

30:08 disruption and be as reliant on our geopolitical enemy China as we are now do I want China to be our enemy no I don't I'd much rather have peaceful trade and be friends but I don't get to make the rules on the global order we as parents should do our best to try to educate ourselves on these issues isues and help guide our kids to a better economic understanding because I think the more you understand this Central

30:35 pillar of Economics I mean this is the central argument of Adam Smith's Wealth of Nations the benefits of free trade not just between nations but between states between cities between businesses the logic of free trade applies at all levels I think the better off we understand that the better our kids understand it the better we'll be at navigating the world and that's what I think we should want for our our eles and for our kids but let me know what

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