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 [Music] I'm Charlotte Mloud with investingnews.com and here today with me is Dr. Phil Magnus. He's the David J. Thorough chair at the Independent Institute. Thank you so much for being here. Great to have you. Yeah, happy to be here. Really good to be speaking with you. I think it's the perfect time because we are going to hone in on what's going on with tariffs today. So this is a hot topic for sure right now and it's an area where you have a lot of knowledge. So we'll get into current

events but before we go there I'm wondering if we can talk a little bit about the history of tariff usage in the US. I know that's a really a really big topic. So we'll see what we can do. But I think people will be they'll remember what Trump did with tariffs in his previous term. But if we look way back in history, we can definitely see es and flows in how terrorists rule used. So let's start there. Absolutely. So it actually dates all the way back to the declaration of independence. If you read

the cre the grievances against king George, one of them was that he has disrupted our trade against the rest of the world. The right of the colonist to trade freely with the rest of the world. Um so when the uh constitution was written, this was very much on everyone's mind. So in 1787 they draft a clause of the constitution that allows Congress to have the power to impose taxes, excises, imposts and duties. Uh encompassed in that are what we refer to now as tariffs. And the reason behind it, the original reason was they needed

to raise revenue for the new government, uh the national government. And tariffs are a relatively easy way to assess taxes because they have a single collection point at the port at the border and uh that's where all goods come through. So you assess a fee on it. But that basically created the first tax system of the United States is a tariff system. And really up until 1913 when we switch over to the income tax, tariffs are the dominant revenue source of the federal government. Okay. Really

interesting. And I'm wondering if you could talk a little bit more about that relationship between tariffs and government revenue and that switch over to income tax because that feels pretty important to to understand what's going on right now. Yeah. So so the tariff system it was suited for the 19th century. It raised enough revenue in most years to pay for the federal government. Uh but they also had another problem associated with it. It attracted lobbyists and special interests who wanted favorable rates carved out for

their own sector of the economy, their industry. It could be the iron or steel industry in some cases, other way places it's textiles. And it's basically every time that they revise the tariff schedule that changed the tax rates, uh they descend on Washington like vultures and start lobbying their local representative to give them a favorable rate that either allows them to have um greater ease at accessing raw materials or the more common one is to penalize their competitors abroad. So, if I'm a

Pennsylvania iron mill or Pennsylvania steel mill by the end of the 19th century, I want a tariff put in place against British steel. Uh they're my competitors abroad because then I can charge higher prices at home. And what really happened, it all comes to a head in 1909. There's a tariff schedule revision. President Taft asks Congress in his um annual message. He says um uh I'm tasking you with revising and modernizing tariff schedule. All the lobbyists descended on Washington DC and

it turned into a corrupt free-for-all. Uh so much of a backlash against it that in fact members of the Tapstone party, the Republicans were in control at that time started to defect and said maybe we need a different revenue system. And that's where the income tax amendment is born. Okay, so we've spent a little bit of time looking backward. I don't want to spend too too much time on history though because there's so much going on today that we should also cover. So looking at today, this has been a a

pretty wild week in terms of Trump and the whole tariff situation. So starting with a an overview of what's going on here. Does Trump want to have all these tariffs in place or is this a negotiating tactic? I'm wondering what you think is is the endgame here. And that's the great uh mystery that I think everyone is confounded with in Washington right now is because he keeps switching between the two or three different rationes. And we've seen this since he took office back in January. He

announced he was going to do tariffs, but he didn't he wasn't really clear on why he wanted to do tariffs. Sometimes he says it's to protect and rebuild American industry. Other times he says it's to raise tax revenue to offset the deficits. And then in other cases, he says it's a negotiating tactic to try to get foreign countries to change their trade practices with the United States in some cases. But he's also ventured into other policies. Sometimes he says, "I'm putting tariffs in place to

penalize Mexico, for example, for immigration enforcement." Uh or he claims there's a drug trade coming out of Canada. And he wants them to do things. Uh but he has vacasillated back and forth between these five or six different reasons. uh no one really understands or knows what the permanent endgame is supposed to be. And what we saw earlier this week is is uh just great market uncertainty because even up until the minute that he rolled out the rates, no one quite knew what the tariff rates

were supposed to be. They didn't know if he was going to go big, go modest, and just try to uh walk it back as a negotiating tactic. Excuse me there. uh or or if he was actually going to put in extremely high rates. And unfortunately, what we got were very very high rates uh some as as high as 50 or 60% against other trading partners and then a baseline international rate of 10% against all tariffs. And to give you some perspective, um that baseline of 10% is about three times what the previous average tariff rate was before

Trump took this action. Okay. Okay. So that's what's going on right now. And talking about those calculations, I think probably many people have seen that very interesting formula that's come out. So wondering if you can talk about that, what do you make of that? Because I'm I'm not such a math person. So to me that looks very complicated. Yeah. So uh they intentionally made it look comp complicated. So what they published on the White House website and they circulated to the press was a

picture with all these Greek letters and it looks like it's something out of a science journal. uh some economists do use this type of formal uh expression, mathematical expression, but I liken it to dressed up alchemy even uh I mean I and I I use that is very intentionally as a term because it turns out the Greek letters are actually just standins for very simple numbers, very simple calculations. And one of those calculations is so they use concepts from economists we refer to as price elasticity. And two of those Greek

letters are offsetting elasticity measures. They measure uh they basically multiply the number four which is one of their parameter assumptions by the number 0.25 which is their other parameter assumptions. Four times 0.25 equals 1. So it has absolutely no effect. The Greek letters are just in there for window dressing. And what it comes down to is they came up with a improvised formula to get Trump the numbers that he wanted. And that improvised formula mistakes the use of the trade deficit, the difference

between imports and exports with indual country for the tariff rate and basically just subtracts those two and then divides it into itself. and you get these numbers that are just basically drawn out of thin air with the only pretext being that he wants to justify higher tariff rates on specific countries. Yeah, I think if the intent was to to confuse certainly that happened. So essentially you're saying we started with the end result and then went backwards to figure out the calculation. they decided what they

wanted to do and then they they made a formula to fit what results they sought essentially. Very very tricky. So looking more at this this whole tariff situation I know this week and and leading up to it there's been a lot of concerns that these are going to be inflationary for the US. So curious to get your take there. what do you see coming and what what historically have tariffs meant for inflation? Right. Uh so tariffs they have a complex relationship with inflation because you know there can be

distortive effects that alter the price level and that's the traditional definition of inflation is a change in the price level. Uh I actually think the inflation discussion is a little bit of a canard uh here for a much more precise microlevel uh effect on prices. So what tariffs essentially do is they're a tax uh you know they're attacks on goods as they cross the border and they work in two ways. one, you can actually pay the tax which collects revenue for the federal government. Or two, if the

tariff is so high, it changes the import pattern to seeking a domestic producer, a domestic company that makes the same or a very similar product at a higher price. So either if it's either the tax collected tariff or the trade diversion effect, the protective effect of the tariff, they have the same uh tendency here. they raise prices on domestic products and the burden of that is passed through by uh companies that are purchasing things eventually into the lap of the consumer. So what it means is

if you are uh buying a toaster oven or a refrigerator or a new car that uses steel and aluminum as raw material inputs, the production of those products is now going to be more expensive because there's a tariff on steel or there's a tariff on aluminum. And rather than absorbing that on the company's side, they pass it through to consumers in terms of higher prices. So what it means is if you're looking to buy a new car next year, it's probably going to be significantly more expensive because now

it encompasses the price of that tariff on it. So you see microlevel increases in prices on individual targeted products that are subject to the tariff. Okay. Okay. And speaking about industry, let's let's talk a little bit more about that because that's one of the the possible Trump goals here is to bring more industry manufacturing into the US and and boost that. So if I'm understanding, so we do get that in this situation, but then also the higher prices. Exactly. Exactly. So it's it's

all a tradeoff. And this is the model he used in his first term. So remember in 2018 he put state uh tariffs in place on steel and he he suggested this was a national security justification which might be a possible argument here because China is a major steel producer. Although this time around he's targeting Canadian and Mexican steel, not Chinese steel because it turns out America imports very little steel from China. Uh mostly gets it. It's either domestically produced in in the United

States or it's imported from Canada and Mexico or the major other producers. Uh but what's going on here is Trump is saying he's doing this on behalf of the American steel industry to try to bring the the companies home to try to reshore them and revitalize American steel. There is something of an effect there because the steel industry higher prices will benefit it. Uh higher prices from that tax or from that trade diversion will benefit the steel industry. But the question is what's the net overall

effect? Because if it helps 10,000 steel workers, creates 10,000 new steel jobs, but it costs 150,000 jobs in other industries that use steel through higher prices, then on net, it's harmful. And that's the big concern here because historical instances when we've done this, they've been very beneficial to the steel industry, but they've cost other sectors of the economy significantly higher prices. And people respond to that like automobile manufacturers. They respond to that by

laying off workers. And we've already seen that. The major US automobile manufacturers have announced in anticipation of higher steel and aluminum prices, they're going to do temporary layoffs of factories that were operating just a few months ago. This is this is clearly very complex and I'm going to ask you another big question. We'll see what we can do to to address it. So what is your outlook then in the situation for the US economy? because we've we've had these inflation

concerns. There's also recession concerns that have been in the background for a while. Now they're kind of coming more to the forefront. What do you see coming? Well, this is the great risk we're facing. And this is why everyone's sitting on edge here is cuz this could be the event that supercharges us into a recession. Uh it could be the major trigger. We know historically uh one thing that the United States did on the outset of the Great Depression in 1929, you know, the stock market crashed first. That's the

first event that triggers everything. Everyone knew that problems were on the horizon. And Congress thought, well, we're going to have basically a stimulus package, a 1929 style stimulus package was to wall up the American economy and protect it from foreign competition. So in 1930, they passed a tariff, but it backfired. Rather than protecting the United States, it just triggered a trade war with other countries, and they retaliated against us. And within the course of about four years, the whole volume of international

trade just disappeared. It dried up and it thrust us even deeper into a recession. So that's the nightmare scenario. Uh I don't think we're quite there yet because this is too new. But we've had uh just as of this morning, we have had two successive days of very very catastrophic drops in the stock market and really the industry specific sectors of the stock market. You look at the S&P 500 that on top of the Dow Jones, both of them are way way down because of this tariff announcement and it's almost

exclusively that. Okay. So, that gives us the some idea of the very the very bad case scenario for the US economy. Anything further you would say about what's going on in the stock market right now because I know that's a big area of concern for for investors. Yeah. So unfortunately the way that Trump has rolled this out uh has not helped him. When he started talking about tariffs back in January and then it started uh flip-flopping between all these different rationes and not only creates the fear of higher prices from

the tax effect of the tariff, it also creates uncertainty. So if you are a manufacturer and you have to order aluminum as a raw material for 6 months from now to plan what you're going to make in your factory, uh you don't know what the price is going to be. And if the price changes every 2 weeks because there's a different tariff announcement or it changes every 24 hours because he threatens one and walks it back, it creates uncertainty. So for the last two months, the markets have just kind of

been teetering on the edge of uh something bad could really happen. And then what happened with the so-called liberation day announcement is it confirmed uh some very very high tariffs were about to be put into place and the market reacted in in extremely negative ways uh that still seem to be rippling out. I don't know what extent you can talk about this but I think for investors they're looking at this they're wondering okay where where are places of safety that I can go right now

any any thoughts there exactly so the interesting thing that that you know the conventional safe storage place in any time of economic turmoil precious metals and we've seen that in the gold price it actually in the uh not so much since the tariffs but in the in the weeks leading up to the tariff announcement gold uh you know surpassed $3,000 an ounce. It uh it has been a very very robust market. We hear anecdotes like a Costco uh is having trouble keeping uh ounces of gold in stock because so many people

are ordering it. And I I think there's actually a uh a sound reason behind this. Now gold uh some of the jitters in the gold market over the last two days, it's leveled out a little bit, but that's just because the expectation has hit already. Uh but you know these are historical stores of value in the sense that they're a bit more insulated from uh the uh the chaos of the stock market. The fact that maybe 6 months from now there could be an entirely new tax that completely disrupts your supply chain

planning. Uh gold is actually a precious metal. You can sit there and hold it. And it's it's a uh uh another way to put it, it's a type of uh it's a store of value that is relatively immune to the es and flows of politics and politicians meddling in the economy. So that's why people are turning to it right now. Yeah, I think if there was ever a time for gold, certainly certainly now is one of them. So we've we've been seeing it shine notwithstanding these last couple

of days. So thank you for going into that one. And we've been talking a lot about the impact on the US of everything that's going on. I wonder if we can look a little bit more globally. So we have the US going inward into itself and I'm wondering what you see other countries doing in this situation. Do you see them going inward or maybe they go outward and forge new relationships with countries that aren't the US perhaps? Well, and that's that's exactly what we're seeing settle down. Uh so one of

the other interesting things is the European stock market over the the last 3 months has performed generally better than the US stock market precisely because they're not under this daily shifting threat of tariffs. Um the question is what do countries do in response to the fact that they just had maybe a 50 or 60% tax slapped on them by Trump's order? Uh well there one of two things they can do. One is they can try to retaliate by uh turning around and putting a tax on American goods. And

this is just a race to the economic bottom. Uh it mean it's a it's kind of the tit fortat back and forth between uh overtly hostile economic actions. Uh and I I'm concerned that some countries are actually threatening that. Uh we did we saw just this morning China announced new tariffs on the United States in retaliation. uh Canada, which had been the subject of the earlier tariff order, retaliated against the United States. And I see this as a no-win game for both countries involved. Uh what it means is

they're they're basically putting their own economies on the line for a political battle and that political battle essentially erodess away. Now the other thing you can do is accept the fact that yes the United States is uh maybe behaving badly in the international arena but look for other outlets for your markets and there's been some discussion uh like one proposal I've seen floated and I actually like this I think it would be a a brilliant idea as the United Kingdom Britain uh there's been some discussion

should they revive a free trade agreement with all of the other countries that are the uh various former parts of the British Empire. higher. Uh so sign a free trade agreement between Great Britain uh the United Kingdom proper with Canada, with Australia, with New Zealand, with India, with different parts of the world that uh are what we now refer to as like parts of the Commonwealth and adjacent uh countries. You could create a free trade zone between those and that could be a very robust area of economic activity. Yes,

it would leave the US behind and out of it, but um you know that's kind of the US's uh own mistake. Um the European Union also is is discussed similar things and the EU is interesting because it's an assortment of it's a very large assortment. It's an entire continent of countries that essentially have existing free trade zones in between them. So all EU countries internally they have their own customs union, their own market. Um the fact that that exists is a much more robust uh trading block than what

happened in 1930 when Germany, France, England, Switzerland, you name it, Italy are all individual countries and they all had their own internal tariff policies against each other as well as the United States. Okay. Interesting to go into that and get your perspective there. I think we're we're almost wrapping up here. I don't want to keep you too too long, but before I let you go, I'll I'll put it back to you. This is a really complex situation and I'm wondering if there are any final

takeaways you would share, things that you want people to know. I know there's probably a lot of misconceptions that that you're used to to seeing on this. Yeah. Yeah. So, I mean, my great message here, the final message would uh I I hold out hope that the United States will see some of the most recent policies, particular the so-called liberation day order, as an error and we'll reverse course. I think there's still an off-ramp where Trump could do that and save face. Uh realized that it

was rolled out in a way that was very clumsy. Uh rolled out in a way that wasn't really based on sound economics. It was based on this weird formula that they justified. Um if that happens, then actually I think you start to see some of the the stock markets rebound. You see investor confidence return. you see uncertainty, which is the looming uh presence over all of this, actually start to diminish because people can start expecting the circumstance that they're going to be in uh for the

foreseeable future. In other words, I'd say that this uh this policy has been pursued for very needless ways that are going to be costly to the vast majority of Americans at the at the benefit of a very very small few uh in certain sectors and industries. And that's just generally not a good political policy or an economic one in the long run. Uh so you know the political consideration is there. Uh maybe Trump will see that the stock markets are responding very negatively and realize that hey he needs

to do something different, try something different uh than this course he set us on and at least salvage or or get us back to a period of economic growth before a recessionary event occurs and and sets in. Okay. So, we haven't we haven't gone over the cliff yet. We could still walk back from a a fullon trip. Still a chance to turn around and do a U-turn. Do a U-turn because uh we we were uh you know, the economy was not in perfect situation coming into the Trump administration. We just emerged

from a very high period of inflation. But at the same time, some of the vital signs were very good. Uh stable at least. The stock market was increasing. unemployment has been low and actually inflation because the Federal Reserve finally acted uh inflation had been pushed back down and held down at a at a pretty low level. Uh we just don't want to slip into the risk of u really it's it's the stagflation risk where you get both economic decline and high inflation and high unemployment and all of those

problems and chaos and uncertainty just increase that risk. Okay. Well, really good to go into this with you. I found it very informative. So, thank you so much for taking the time and I'll let you go, but hope to have you back in the future because I'm sure things will change dramatically from time to time. Absolutely. Well, thank you again. Thank you very much once again. I'm Charlotte Mloud with investingnews.com and this is Dr. Phil Magnus. Thank you for watching. If you like this video, make sure you

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