Tariffs are Stupid. Here’s why.

Tariffs are Hey everyone, me Kevin here. Sorry to be blunt, but the

reality and fact is that no matter what you do with tariffs, you create economic

dead weight loss that cannot be cured. You will hurt the economy with any

imposition of tariffs. And in this video, I'm going to show evidence for

exactly what has happened in the past, why tariffs are fundamentally flawed and

they should not be used. But I'm also going to provide a reason as to why

tariffs are used. Because we like to regularly hear that quote, especially

the one that's pared by people on social media. Well, if tariffs don't work, why

do other countries use them? Well, in this video, you'll finally discover the

real reason why tariffs are used. And let's just be clear, they are not used

for economic purposes. Uh, in fact, it's so widely understood that tariffs don't

work that when you look at research pieces, you typically find introductory

lines that read just like this. It is widely believed that tariffs invite

retaliation and that the post retaliation equilibrium leaves all

countries worse off than they would be at free trade. We present patterns that

are consistent with this belief. These are trade war documents that have been

written for decades. Trade wars don't work. Nobody wins in a trade war. Now,

Donald Trump likes to tell us that, "Oh, but you know, the trade war helped our

American farmers." Well, the USDA, which is literally an agency that you are in

charge of, and the economic research division tells us that no, actually,

when we had a trade war with China, our exports of Americanmade food to China

fell in half. We had a 20% uh import rate of US product to China uh

in 2017 and that was depressed to just 10%. So in other words, a 50% decline by

2019. And guess who picked up the slack? Was Brazil and other countries in South

America mostly. So in other words, the previous trade war that Donald Trump

pitches as having helped our farmers didn't help our farmers. that actually

substantially hurt our farmers. Now then, because we did so much damage to

our farmers, the US government actually provided a bailout to farmers because

there was so much damage and Donald Trump pitches that as actually a wild

success when the reality is our American farmers were net worse off post the 2018

trade war. And it's likely that today's trade war is going to do just the same

thing. Now, in this video, I'm going to explain why tariffs are a complete

failure. And again, you're also going to see why tariffs are used. And again,

they're not used for why you think they might be used. First, I'd like to refer

to the estimated impacts of proposed tariffs by the National Retail

Foundation. They represent American retailers. They want more American

products bought. Okay, this would be a good thing if we have more consumption

in America. they they benefit from the economy growing, not from the economy

shrinking. Uh so what do we find here? Well, first we find various different

scenarios for proposals from Trump. Scenario A would be a universal 10%

tariff or even 20% uh tariff on all imports into the United States. Uh and

then an additional 60% or even 100% on China. So they break this into sort of

your AB scenario. Uh, and when you look at scenario A, you could find that

scenario A shows tariffs significantly higher than where they were before the

imposition of Donald Trump's tariffs. We could see tariffs on apparel, footwear,

furniture, household appliances, toys, and travel goods about three to five

times lower than where they were post Donald Trump's 10% tariffs. Mind you,

this document is from 20 uh uh November 2014 or 2024, basically pricing in what

would happen if Donald Trump actually did something as crazy as a 10%

universal tariff. And ironically, that's where we sit today.

So what the National Retail Foundation found is that if you just look at the

six categories that they analyze, apparel, toys, furniture, household

appliances, footwear, and travel goods, in every single scenario, consumer

prices rise between six to 31 as much as

55% of increases in consumer prices. And in every single scenario, consumers lose

billions of dollars of spending power. In fact, it's estimated that just these

six categories alone could increase or create a drag on GDP, increase the loss

of consumer spending by 46 to 78 billion, increasing the nonmultiply drag

on GDP by about a third of a percent per year.

That's significant especially since our Q1 growth would be negative if we

lost.3% of GDP. So tariffs exacerbate this because not only would these six

categories hurt.3% of GDP, but you also have to figure a multiplier effect of

anywhere between 2x to 4x. Because when you go buy shoes from Nike that are

manufactured, you know, in China, when you go spend $100 on a pair of shoes

from Nike, only about $25 of that is going to China. The rest is going to the

advertisers in America, the retail store in America, the person who delivered the

shoes to the store, the person who unboxed it from the shipping containers

in America. Americans get the bulk of that $100 of revenue. most of that money

stays in America even though the shoes are manufactured in China. Anyway, with

that said, when that employee doesn't get paid a salary because they get laid

off or you know their hourly wage, they don't have money to pay their rent. They

can't pay their rent. Their landlord can't renovate a property. Landlord

can't renovate a property. All of a sudden, you've got drywallers and

painters who are out of work and then they can't pay their rent. That's how

recessions start. Everybody has to compress their spending because of

tariffs. Tariffs are an economically vile tool to achieve your goals. And

there are way better ways of accomplishing this. So, not only do we

have the velocity of money, the ripple effects of expansion, employment, and

otherwise, they also add a substantial amount of uncertainty, which uh is a

very difficult factor to estimate. The CBO estimates that the real damage to

GDP from a 10% universal tariff would be about 6%. That's.3 because of the China

60% and.3 because of the 10% universally. That's every single year

that you have that GDP damage which just isn't smart. You're hurting the economy

and you're not quite able to offset that. Now, we do have alternatives to

tariffs, but first I'd like to answer why do we use tariffs in the first place

then? like why why would we ever use tariffs if they're so economically dumb?

Well, I make this very very simple outline right here. Economically,

tariffs are dumb. However, they are a political tool that costs actual

money. So, that's my distillation. But take a look at this. I'll read it in a

little bit more of a complicated manner. In this paper, we shall model the

lobbying activities of labor used intensively in the import competing

industry as a game between labor and the government where the actions of the

government are determined jointly by its willingness to grant tariffs in the face

of political pressure and by its desire to maximize social welfare. In other

words, politicians want to a make you feel good and b are begged by unions in

exchange for votes to please provide protectionist measures. So in other

words, tariffs or protectionism are solely a political tool. They are

designed to make people who support one political party feel like they are

getting something good. And feeling good is very common. In fact, let me read

this research out to you. In fact, I'll even show it to you right here. Okay.

Notably, a recent poll found that while 62% of Americans are sympathetic to a

tariff impo on imported blue jeans meant to boost production and employment in

the domestic blue jeans industry, that support evaporates if tariffs make the

jeans 10 to $25 more expensive, which our analysis suggests would be the case.

So, in other words, tariffs are great until you start having to pay the price.

As soon as you start having to pay the price, you hate

tariffs. Now, of course, today we're May 9th. People are like, "Oh, but where are

the empty cell shelves CNN is talking about?" Who cares? The Communist News

Network isn't going to tell you the reality that most businesses are sitting

on one, two, three, maybe four months of additional inventory. You're not

actually going to see the impact of tariffs until June, probably July, maybe

July through September and October before Christmas season. Hopefully, the

tariffs are gone by then. And I remain convinced that we will be back to free

trade either under the Trump administration or within the first six

months of the next administration. Which is exactly why I think it's nonsensical

to think that companies are actually going to expand their manufacturing in

the United States because they'll just get left holding a bag when we go back

to free trade and they spend all this money on infrastructure in the United

States only to go back to free trade and find it's much cheaper to manufacture in

Mexico or otherwise. See, another argument that people provide against

tariffs is they argue, "Oh, but Kevin, why should we be supporting uh people in

India who are working for $2 an hour? That's slave labor." Uh, no. Actually,

if we didn't support those industries in other countries where people are working

for $2 an hour, they would end up taking jobs working for 50 cents an hour. So

the lesser of two evils, it's actually not evil. The the lesser harm is

actually promoting capitalism and more good. So not being capitalistic would be

evil. Being capitalistic and spreading our production amongst the globe to

raise the standard of living for everyone around the entire world, just

like Warren Buffett says, also benefits us in America. We just move more into

the service industry rather than the manufacturing industry. We work more in

customer service and sales and uh you know retail or hospitality than we do in

manufacturing because we're a more advanced economy with greater per capita

wealth per head wealth right this is a good thing. So capitalism helps us but

it also helps the areas where we spread capitalism. So this idea that oh slave

labor, imagine what their situation would be like in poor countries if they

had no work, even worse. So anyway, it's

somewhat ironic that as soon as prices go up, people start hating tariffs.

Well, that'll come. In fact, here are some of the estimates for what we could

see for tariffs on an individual basis, and then I will explain what tariffs

look like. Our analysis found that the price of apparel would rise

significantly 12.5 to 20.6%. Consumers would cut back on

spending by 22 to 33%. So in other words, consumers would cut back by more

than the increase in price. In addition to that, lower inome households would be

hurt more and consumers would pay $20 for every single dollar that US

producers earn. Now, the US government would take a little slice of that, not

all of it, because there's dead weight loss. But basically, consumers are

paying $20 to donate $1 to American manufacturing. That's illogical. That's

stupid. Now, is there a way we can graphically understand this? Yes. This

is a little bit complicated, but I'm going to provide it in a as simple of a

process as I can. If you don't want to hear this graphical explanation of why

tariffs always fail, you can fast forward probably about 2 minutes.

That'll be about what it takes. And if you want two minutes, you want to spend

that with me here on this, great. Left side price, right side quantity. Okay,

how does this work? It's very simple. When a market is at equilibrium, so

basically the middle of this meeting of supply and demand, what do you have? You

have a free market. It's very simple. People demand more quantity when the

price is lower. So see right here, demand is way up on the quantity side

over here. When the price is low, that's logical, right? Price is low, people

want more of it, right? As the price goes up, guess what happens to the

demand curve? Well, you start moving left on the demand curve. You demand

less. That makes sense so far. Very logical, right? Price goes up, demand

goes down. Very simple. That's why the demand curve is downward sloping. And

that's also why the supply curve is upward sloping. Because as price goes

up, suppliers want to provide more goods.

All right, very simple. So what do tariffs do? Well, to see what tariffs

do, let's pick a price. So we'll pick a price at the blue line over here. Okay,

so at the blue line, prices are relatively low. So do we demand a high

level of that good at that low price, but suppliers are not willing to supply

as much. So you actually have uh a shortage right here. This is when prices

are too low and you have a shortage because suppliers don't want to produce

that much good that many of those goods at a low price. So they just don't and

then you have a shortage. This is why when you know you have things like rent

control you end up with a shortage of homes because suppliers are not willing

to supply as much as you need. Very simple simple economic 101 principles.

Rent controls are little band-aids that make people feel better who are

currently in their homes. They are politically popular. They are

economically dumb and they actually make housing more unaffordable. Every

economist knows that. Anyway, then what do we have? We impose a tariff. So with

a tariff, we're actually increasing the price. So we're going to go from the

blue line to the green line. Now what's the problem of going up from the blue

line to the green line? When we yield from the blue line to the green line,

you've raised the price. So what happens with demand? Well, demand goes from the

right red circle to the left red circle. In other words, we demand less of that

product by the purple squiggly line right there. That's just how much less

of it we're going to demand. Now, producers get the

benefit domestically of some producer surplus on the left side over here,

which is great. but not all of it because we have

another dead weight loss category over here because you're not actually selling

your product for that green line. You're selling your product for where the blue

line intersects and consumers are paying where the green line intersects on the

right. And what's in between is an economic

inefficiency. Now, part of that is captured by government revenues. That

would be this green box right here in the middle, government revenues. So you

get domestic producer surplus and then government revenues in the middle.

However, that purple section is the section that is lost. It is always lost

in every single economic scenario where you chart tariffs. You will always have

a dead weight loss here and here. So the net total effect is negative by this

entire segment plus the benefit of government revenue and producer surplus

which means you have this overarching negative that is always greater than the

benefits. So no matter what you do from a logical, economical, factual point of

view, no matter what you do, tariffs will always create a dead weight loss.

They will always hurt. And that's why when you go through this retail

foundation document, what you'll actually find, oh mind you, here's just

another chart of our trade weighted average tariffs, right? You know, before

the Trump tariff imposition, our tariffs were really only around one and a half

percent. And as were they with most other countries because they're

economically stupid, but politically you want to show some tariffs to your base

to get your votes, right? That's the only reason they exist. But anyway, as

you go through this retail foundation piece, you'll find in every scenario,

consumers will pay more than we actually benefit. See, in the case of toys,

consumers pay $24 for every additional dollar earned by US toy producers. Now,

again, the government is going to pick up some of that difference, but not all

of it. You will always have a loss. So, consumers are paying $24 for every $1

earned by producers in the US. That is a stupid trade-off. Why would you do that?

It doesn't make sense. Lower income households spend more than three times

as much of their after tax money on toys as do higher income households. And a

$50 tricycle is expected to cost 68 to $78. A $25 board game will cost $34 to

$39. A $17 plush toy will cost 23 to $27. And American families will bear the

cost of tariffs. Price increases are expected at 36 to 56% especially since

in 2023 China accounted for 77% of total toy imports about 25 times greater than

the total value of toy imports from the next largest foreign source of supply

Mexico. In other words, tariffs dumb tariffs very dumb. Furniture price is

expected to rise $6 to $10. Cribs, couches, everything more expensive.

Consumers would pay $3 for extra every extra dollar of US producers. So

actually not as bad over there, but still inefficient. For appliances,

appliances are expected to go up 19 to 31% and consumers will pay $30 for every

additional dollar earned by US household appliance producers. Uh the gains to US

producers and the Treasury from tariff revenue do not outweigh losses to

consumers. Overall, the economy suffers a net loss of $4 to7 billion just from

the appliance sector. Footwear, same thing. You're

paying $32 for every $1 of local producer revenue. Travel goods, you're

paying $13 for every $1 of local producer revenue. Conclusion: tariffs

are paid first by the American importer, not foreign countries or foreign

suppliers. Very few American importers can absorb the significantly higher

costs out of their profits. As products make their way to retail shelves, the

tariff costs transfer and materialize in the form of higher prices to American

consumers. Now, in the event that American consu or American businesses

say we can't pass on these prices because we don't have pricing power,

then they have to take it in the margin which leads to layoffs which leads to

recession. So when people ask me, you know, they say this all the time,

they're like, "Kevin, well, what is the good of tariffs?" I answer, "There is no

good. There is no good of tariffs." Again, unless you were using them as a

temporary tool to get to free trade. There is no inherent good to tariffs.

And somebody is going to have to pay for the damage that's caused every single

day tariffs exist. And that cost will be greater than the benefit. So every day

you have tariffs you are paying more than you are getting. It's a very simple

factual economically found uh you know founded grounded understanding. There's

no debating it. There is no benefit to a tariff. There are better ways to do this

and I wrote down a few. So my take is that some things you could do instead

would be incentivizing local uh production such as when we incentivize

uh in a solar inverter manufacturing in America. We bring jobs to America. And

guess what? We don't piss off our alliances. We don't piss off Canadian or

European tourists who don't want to come to America anymore. We don't piss off

other countries. We don't make our enemies become friends with our friends.

China cozying up to the UK and European Union countries. This is a disaster. We

are destroying our global credibility with an economically idiotic move. This

does not make sense. So again, I reiterate people are like, Kevin, where

is this passion against Biden? A, if you were watching, you would have seen it

because I just hate politicians and I rag on all of them. Okay? I've realized

like I'm not on anybody's team. In fact, my goal is just to educate. And if I

piss off everybody who watches me, fine. But I'm still going to provide the

facts, data, evidence, and logic. And usually what I find is people who

actually have an IQ over that of a rock appreciate this perspective and

recognize, damn, yeah, no wonder Kevin doesn't like tariffs and he's so

aggressive against tariffs. There's no economic literature that says they're

good. They're used for political purposes and that's it. But they come at

a massive economic cost. And as somebody who prides themselves on a rich

understanding of economics, tariffs are bad. Full stop. Why not advertise these

things that you told us here? I feel like nobody else knows about this. We'll

we'll try a little advertising and see how it goes. Congratulations, man. You

have done so much. People love you. People look up to you. Kevin Praat

there, financial analyst and YouTuber. Meet Kevin. Always great to get your

take.