Did the Tariffs Work? The Trade War Five Years Later
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Audible. There's more to imagine when you listen. Go to audible.com slash imagine and discover all the year's best waiting for you. Welcome to Money for the Rest of Us. This is a personal finance show on money, how it works, how to invest it, and how to live without worrying about it. I'm your host, David Stein. Today is episode 427. It's titled, Did the Tariffs Work? The Trade War Five Years Later.

Last week, I went camping with my two sons, Camden and Brett, and our daughter-in-law on Santa Cruz Island, which is part of the Channel Islands. This is a 150-mile-long island chain. It ranges between 12 and 70 miles off the coast of California. Santa Cruz Island is separated from the mainland by the Channel of Santa Barbara, and over

Over those few days, I would occasionally look out into that channel as we were hiking or sea kayaking, and I would see large cargo ships stacked with containers making their way to the port of Los Angeles or the port of Long Beach.

It got me wondering whether the backlog at those ports that we saw during the pandemic, whether that has subsided. And so when I got back, I looked and yeah, as of last November, the Marine Exchange of Southern California, this is an industry working group, they declared the ship backlog at those two ports had ended after 25 months. It began in October, 2020. There was heavy congestion as demand went up.

was much greater than the capacity of the ports. That was due to workers that were sick, but just the sheer volume of goods ordered trying to go through those ports. Now volume is down at those two ports over the past year, partly because there's labor negotiations and companies have started diverting some of that traffic to other ports in the U.S.,

So even though the backlog is down, overall imports of goods into the U.S. continue to increase. In 2022, the U.S. saw a record trade deficit. The trade deficit, the value of goods and services imported more than what is exported, increased 12.2% last year to $950 billion. It was a record.

Now, that's the total volume. We need to look at what is the trade deficit relative to the size of the economy, the value of goods and services produced. And if we look at the trade deficit as a percent of GDP, a measure of that output, last year, based on the trailing four quarters, it was 3.7%. That's the highest it's been going back to 2009. For much of the 2010s, the

The trade deficit as a percent of GDP was under 3%. Now it's at 3.7%.

When a country such as the U.S. runs a trade deficit, in this case nearly a trillion dollars, that's cash that has to flow to be paid to foreign companies, and that cash needs to be funded or financed somehow. If you spend $100,000 on goods more than you receive an income from selling your services as an employee, you need to come up with the money to fund the deficit. You can borrow the money, you can take it from your

your savings. But when a nation runs a trillion dollar deficit, it needs to plug the gap. It can borrow from another country. It can take investment flows from another country. In the U.S., one way this trade deficit is financed is the U.S. government runs a budget deficit. It spends more than it receives in tax revenue. And that additional spending flows into the economy and is used to

buy imports. And so it's financed that way, but then the government has to go out and sell government bonds to plug its deficit. And who buys those government bonds? Well, some of the entities are foreign governments or foreign corporations who have a lot of dollars because they're running a trade surplus. They take those dollars and they recirculate them into U.S. government bonds.

In the last year, foreign entities acquired an additional $100 billion of U.S. government bonds. And foreign entities own $7.4 trillion of U.S. government bonds. Japan is the largest holder at $1.1 trillion and China has $900 billion.

We've seen in other episodes of the show, such as episode 218, that when a nation's trade deficit gets too large, gets to be over 5% of GDP or 8% of GDP, that that can put downward pressure on the local currency because the country is unable to finance the deficit and the holders of that domestic currency, those that

Running a trade surplus, they're selling that currency and trying to convert it back to their home currency. And that can lead to the domestic currency falling in value. If it falls precipitously, then imports for that country start to get much more expensive. Rising import prices causes a big jump in inflation. And it becomes what is known as a balance of payment crisis, where an economy, a country has

has too large of a trade deficit, aren't able to plug the gap, the currency collapses, import prices spike, inflation spikes, and it can be a real economic crisis. In episode 218, we focused on Turkey in that particular episode. The U.S. has had a record trade deficit despite efforts by the Trump and Biden administrations to discourage trade through tariffs.

Tariffs are taxes, fees charged on imports, and President Trump imposed tariffs on Chinese imports three days after he took office. Later, he imposed tariffs on the import of steel and aluminum, not just from China, but from U.S.'s other trading partners in North America and Europe. The Biden administration has maintained the Trump-era tariffs on

on Chinese imports and also on steel and aluminum. The Biden administration has also taken action to further restrict China's access to technologies like high-tech computer chips and chip-making equipment.

What has been the impact of these tariffs? Well, they haven't stopped imports. In first quarter 2017, when the tariffs were implemented, total imports into the U.S. were $3.2 trillion. As of earlier this year, total imports were $3.8 trillion. Imports went up. Exports also went up, but not by as much. In 2017, exports from the U.S. were $2.4 trillion, and now they're $2.9 trillion.

Because exports have grown less than imports, the trade deficit has expanded. And as I mentioned, it was 3.7% of GDP in the most recent four quarters through year-end 2022. When Trump took office, the trade deficit to GDP was 2.6%. Despite the tariffs, despite the trade war, the

the trade deficit has gotten larger as a percent of the economy and definitely larger on an absolute basis.

The overall U.S. trade deficit with China also increased. It went from $350 billion back in 2017 to $372 billion. Now, the Chinese imports haven't grown as much as other countries. So the goods deficit as a percent of total imports, the goods deficit with China, was 50% of the U.S. goods trade deficit.

Now it's 32% of the trade deficit. The tariffs did push some of the trade to other countries. Those other countries' percent of total imports has increased while China's has decreased. The tariffs also raised prices.

The U.S. International Trade Commission looked at this and released a report last month that showed that the full cost of the tariffs were reflected in higher import prices. In other words, exporters didn't eat the cost. They just added it to what they cost for the goods. The U.S. Trade Commission estimated that prices increased by about 1% for each 1% increase in the tariffs.

The steel and aluminum tariffs did lead to a reduction in the amount of steel imports. Imports of steel dropped 24% from 2018 to 2021. Aluminum imports fell 31%. There was more production of U.S. steel. That was up 1.9% from 2018 to 21. Aluminum production increased 3.6% over that period, but prices also increased.

because it was more expensive to produce steel and aluminum in the U.S. Steel prices increased 2.4% in the U.S. and aluminum 1.6%. Overall, these tariffs reduced the imports from China by 13%. But even though there was more steel and aluminum produced in the U.S. and presumably more jobs, prices were higher.

Kara Reynolds of American University looked at this. She estimates that these tariffs, which covered about 50% of U.S. consumer imports, cost the average household about $160 per year.

We paid more for goods, imported goods, because of the tariffs. And the lowest income consumers, they paid the most. They paid 1.2% of their after-tax income to fight the trade war, while the wealthiest consumers only paid 0.8% of their after-tax income. Again, this is a study by Kara Reynolds. Other areas also saw volumes from...

China dropped. Semiconductors imports decreased 72%. Footwear imports decreased. But in that study, there was something I found fascinating. The imports of apparel, what's classified as cut-and-sew apparel, from China decreased from $25 billion in 2018 to $17 billion in 2021. But they found that the price of the apparel that was imported from China decreased

fell by 13.5% between 2016 and 2021. In the other areas, steel, aluminum, etc., the tariffs led to higher prices. But for apparel, prices still fell, even though the Chinese imports had new tariffs of 15% at first, and they were later dropped to 7.5%.

How is it that prices of Chinese apparel imports dropped even though the tariffs were there? It comes down to two increasingly popular Chinese companies, Xiyin and Timu. Both of those apps, if you look at them, along with TikTok, are in the top 10 of most downloaded apps on the App Store. Xiyin is the most popular apparel app or marketplace app of any app

just behind Amazon. Shein is a global fashion company. They were founded in 2008, and they sell clothing at incredibly inexpensive prices. Goods range from $5 to t-shirts. You can get jeans for $20. The most expensive item I could find on their website was $50 for a full evening gown. You can get swimsuits for $10. And Shein adds fashion.

3,000 to 4,000 new products to their website every day. Their ability to create new designs, their average new design from start to finish on their website is around 10 days.

Shein's growth exploded during the pandemic and continues to do so. One of their main ways of doing that is to pay influencers on TikTok, Instagram, YouTube to promote their products, to go do hauls, to offer discount coupons. More than half of Shein's customers are from Gen Z, so those born between the late 1990s and early 2010s.

Sheehan has been an incredibly successful investment for the venture capitalists that funded it and continue to fund it. Venture capitalists such as Sequoia, IDG Capital, and Tiger Global. Bloomberg estimates that Tiger Global, this New York-based firm, invested around $72 million in Sheehan back in 2018 and has made 2,000% on that investment as Sheehan...

has become more and more popular, gaining 40% of the fast fashion business in the U.S.,

None of Shein's sales or virtually none are in China. It's the U.S. In 2020, their sales were $10 billion, $16 billion in 2021, and estimated to be $23 billion in 2023. Based on their sales last year, if the average price is $15, that's one and a half billion pieces of clothing that were sent from China originally.

around the world. Xi'an operates in over 200 countries and sells to them, but again, virtually none of it is in China. And in 2022, it's estimated that they achieved a profit of $700 million. Before we continue, let me pause and share some words from this week's sponsors.

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The other company, Timu, just launched. Last year, if you watched the Super Bowl, they ran an ad telling people they could shop like a billionaire. Again, same business model. This is goods sent directly from China to the purchaser. Bypasses any middleman, including Amazon.

If you go on Timu, they have more household goods. I looked. They had an avocado slicer that you could purchase for 88 cents with free shipping. The regular price was $2.49 on Timu. If you look for the exact same avocado slicer on Amazon, it's anywhere from $4 to $9.99. So even less expensive than what you can get on Amazon. And again, they're using influencers. I checked out some YouTube videos. They use coupon codes to get influencers.

An extra 30% off. You get free shipping. You can get free returns within 90 days. Timu just launched in the U.S. last September. They're the sister company for a Chinese retail platform that also sells directly to consumers in China called Penduo Duo. And because they ship directly to consumers from the manufacturers in China, costs are very, very low.

Timu is still private. It's unclear whether they're profitable or not, but they definitely have made shopping, particularly for teenagers, exciting. They use gamification, contest, leverage influencers to recommend, to do hauls, just like Sheehan does.

One of the manufacturers in China named Sally, she does women's wear, says, Timu's prices are too low. This isn't good for merchants. It reduces our profits. How do they do it? How does Shein and Timu produce and sell clothing and other goods so inexpensively?

They cut corners. You can go on Sheehan's website and see that there's problems. The website looks great. They talk about being responsible, having a responsible sourcing plan, shifting to more sustainable materials. They say fashion has an undeniable impact on the health of our environment. To protect our shared home, Sheehan is committed to lowering emissions and reducing waste at every stage of the value chain.

They said they did 700 audits of their manufacturers in 2021. They ranked them using the Sheehan Responsible Sourcing Evaluation System. You can get ranked A, B, C, D, or zero tolerance violations. And what is the conclusion of those 700 audits? 66% got a C, which was mediocre, means there were one to three major risks. 12% had C,

ZTV, very poor, which means immediate corrective action was needed. And another 5% got a D, poor performance with three major risks. So Sheehan, on their own website, their own audit, has found that 83% of their manufacturers were essentially failing and had risk.

If you look at the top violation categories, it was fire and emergency preparedness, 27%, working hours, recruitment compliance, grievance management, general working environment, environmental protection, cutting corners to get the cheap goods out to households around the world.

They talk a good game on their website, but their entire business model is based on producing and selling more and more things at super low prices. Currently, the fashion industry makes up 10% of global carbon emissions, just behind oil and gas, which is about 15%. American shoppers buy five times more clothing now than they did in 1980, about 68 garments per year, if not more now, and because it's so cheap.

Sheehan and others are known for stealing the designs of others. Spencer Cluth, writing in the Ohio State Law Journal, pointed out in the summer of 2021 there was a small business named Alexie. They went to social media to show that Sheehan had taken one of their sweater designs, an exact copy, a sweater that Alexie sold to

for $330 in order to compensate the Nigerian women that knitted the sweaters. Sheehan was selling it, the exact same sweater, for $17.40, using cheaper materials, obviously. But it was stolen. It was a stolen design. And it happens over and over again because...

Design piracy isn't adequately protected by U.S. law. And the scale is so huge, it would be incredibly hard to pick up. Introducing 4,000 new products a day, how could you not be cutting corners? Sometimes they even use the same image from the original designer on their website to advertise the particular product. Bloomberg News, in terms of other corners being cut, tested the cotton used in Sheehan's goods and

And they found that, based on their laboratory tests, that the garments were made with cotton from China's Xinjiang province, which the U.S. has called out for horrific abuses against the Uyghur people that have been put into work camps, basically working as slave labor, re-education camps. The U.S. has banned the import of cotton from that region, and Xi'an didn't deny it. Kim

Kim Glass, president and chief executive officer of the National Council of Textile Organizations, said Chinese companies like Xi'an have taken this loophole and exploded it. The loophole is that if a good is worth less than $800, it doesn't have to meet any type of special inspections and it can get through. And because Xi'an and Timu are using a direct-to-consumer model, the volume of what they send out is less than $800.

Blaskin continues, products are making their way to our closets with no scrutiny. Bloomberg said, simple mathematics suggests that plenty of cotton from Xinjiang has made its way to the U.S. recently, since the overwhelming majority of China's cotton comes from that region. Last year, U.S. importers brought in $8.4 billion worth of cotton products from China.

There are many other ways that corners are being cut. Last year, I read a book called Worn by Sophie Thanhouser, and she looked at cotton, looked at rayon, and the process used to make clothes. She pointed out that textile dyeing is one of the most polluting industries in the world, responsible for 20% of global wastewater, according to the World Bank. Textile dyeing relies on chromium, lead,

cadmium, sulfur, nitrates, chlorine compounds, arsenic, mercury, nickel, and cobalt, formaldehyde-based dye-fixing agents, chlorinated stain removers. Other pollution is microplastics used in polyester, nylon, acrylic, which makes up 60% of the material. As peril is washed, microfibers make their way into the water system and eventually into the oceans.

Now, we all need clothes. The problem is the volume of clothes that is being produced. We're not keeping them long enough. Virginia Newman, who's an attorney based in Washington, D.C., said, "...some companies have a business model of importing smaller, lower-value packages that don't necessarily trigger the same types of reviews that we are seeing with the larger shipments that are being detained."

And for the most part, these companies, therefore, aren't experiencing enforcement. She's talking specifically about the enforcement of the cotton band from the Xinjiang region of China. But she goes on to say, until customers...

demand or show that they're not willing to buy products without having some visibility into where they're coming from and the environmental and labor practices related to that production. Small value importers may not be incentivized to bolster their supply chain due diligence programs in ways that many other companies are right now.

And those companies that aren't doing it, sounds like, include Shein and potentially Timu, companies that are funded by venture capitalists in the U.S. with U.S. investors, colleges and universities investing in their funds, backing those companies that are increasing the trade deficit in the U.S., but more importantly, destroying the environment.

When we talk about trade, certainly that the sheer volume, the trade deficits matter, because if they get to be too large, then that can lead to economic crisis, a balance of payment crisis. But we're not doing away with trade, and this episode is not about doing away with trade. We've seen that tariffs can impact certain sectors, but it doesn't stop trade.

Trade will continue, and trade is a good thing. But as individuals and as businesses, we have to take responsibility for what we're willing to buy and get the visibility. I thought a lot about this after doing episode 413 late last year on Will the World Stop Shopping.

about the economic impact of decisions. And I realized I'm buying too much. So I decided to try out not buying anything new this year. Certainly no clothes. Bought a couple used pieces, but no new clothes. And, you know, other than food, I mean, we are buying some things, but in terms of trying to significantly reduce that because of the environmental impact,

But certainly it impacts the trade deficit depending on where the things are made. And I have found a great deal of personal satisfaction in buying fewer better things because we become more attached to those things. But everything's connected. An influencer marketing she and goods without questioning how they were made, where the design came from, the environmental impact.

because the volumes are so high, is contributing to the U.S. trade deficit and the trade deficit of other countries that import large amounts. Those trade deficits allow countries like China to run huge trade surpluses, buying up government debt of the U.S. and other nations. And we haven't even begun to talk about other geopolitical risks of that, privacy concerns with these apps. Certainly not an area that I'm

but there's definitely been congressional hearings about this, particularly with TikTok. But ultimately, it's the individual's decisions that contribute to this, even though there's a ban. It's like Martin Wolf's comment from last week's podcast or two weeks ago. If there's profits to be made, businesses will figure out a way to make a profit off of it. And if there isn't a way to direct those businesses to do things in a more environmentally responsible way, oftentimes,

Often those regulations get skirted anyway, as we're seeing. So ultimately, it has to be us that decide and teach our children and grandchildren the implications of what we buy, the impact of our domestic economy, and the impact on the environment in our own nation and around the world.

The tariffs didn't work in the sense that it didn't stop trade because trade can't be stopped unless there are major, major tariffs. The tariffs led to higher prices, but it ultimately didn't stop trade. Trade deficit is higher than ever. That's episode 427. Thanks for listening.

I have thoroughly enjoyed teaching you about investing on this podcast for almost nine years now. But some topics are just better explained in writing or with a chart. That's why we have a weekly email newsletter, the Insider's Guide. In that newsletter, I share charts, graphs, and other materials that can help you better understand investing. It's some of the most important writing I do each week.

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