‘Every industry will be impacted‘: Economics professor reacts to Trump's tariffs

[THEME MUSIC] NINA MOINI: It's our top story this afternoon on Minnesota Now. Stocks took a dive this morning after President Donald Trump outlined his plans for widespread tariffs. Beginning Saturday, the US is set to charge a 10% tax on imports across the board, with so-called reciprocal taxes starting next week. Those include a 34% tariff on Chinese goods, 20% tariff on goods coming from the European Union. Now, China's government, for one, has said it will retaliate.

Joining me to explain what all of this could mean for consumers and businesses alike here in Minnesota is Allison Luedtke, department chair of economics at Saint Olaf College. Thank you so much for being with us, Professor.

ALLISON LUEDTKE: Thank you for having me.

NINA MOINI: I'm curious to know your initial reaction to the announcements yesterday.

ALLISON LUEDTKE: Well, my initial reaction probably would not be appropriate to share on Public Radio. But having moved on from that first one, it doesn't seem good. I would not say that I feel good about any increase in tariffs, much less such a sweeping increase in tariffs across all of the globe.

NINA MOINI: And can you explain why that is? Tariffs, the word has been around for a long time. But I still think that there's confusion on what the process is like and what it could mean. Can you share about that?

ALLISON LUEDTKE: Absolutely. So a tariff is a tax. It's a tax on imports. And part of the reason there's so much confusion about what it could mean or what could happen is because we don't know. We don't know how they will end up impacting the economy. We don't even know how the change in prices that comes from this change in taxes will pass through to the consumers, from the exporters from which we're importing.

So it could be that some of the foreign countries eat some of the cost of these tariffs, and we don't see large increase in prices. But what I think is much more likely, both based on theory and data, is that they will pass these increase in prices onto the consumers, which will mean higher prices for those of us buying the goods here in the US.

NINA MOINI: How much agreement or disagreement are you seeing among economists on this?

ALLISON LUEDTKE: Well, I haven't found an economist who thinks it's a good idea yet. I've been looking around. I've been doing my best to find one. I would say there's some-- there's definitely a spectrum of responses. Some people think it will be catastrophic, and some people think it's pretty bad and some people think somewhere in between. But I have yet to find an economist that said, yeah, this is the move. This is the thing we need to do for the economy going forward.

NINA MOINI: And what industries in Minnesota, would you remind us, would likely be impacted the deepest from this?

ALLISON LUEDTKE: Oof, that's a very good question. And first of all, I think the answer is every single industry. There are almost no industries that don't rely on a complicated supply chain of domestic and imported inputs. And so anytime those inputs get more expensive, the final products get more expensive. So I don't think there's any industries that won't be affected.

And there are likely some industries-- so one that comes to mind immediately is Minnesota's a big producer of medical devices. That's a big part of our economy. And medical devices have some of the most complicated supply chains with inputs from all over, and including inputs from some of the countries that have seen some of the highest proposed tariff rates.

NINA MOINI: Do you think that this is going to start to be pretty immediate, the effects that consumers might see? I've seen people now on social media saying, you should be stocking up on this and stocking up on that. And it's hard to know if that is alarmist or if people really should be looking at the things that they buy and the things that they need and deciding if they want to stock up.

ALLISON LUEDTKE: Well, I'm definitely not a person that thought it was a good idea for us to go stock up on toilet paper during the pandemic. I thought that just made things worse. And I think that's true, still. It's not a good idea to go out and buy up things you think will suddenly become more expensive, first of all, because that will make them become more expensive.

But also, we're not very good at predicting what things will be hit first. The timeline and the pipeline of the effects is not clear at all. And so I don't think anyone will be able to make themselves better off by stocking up on medical devices or toilet paper.

NINA MOINI: Should people, then, you think, just hang tight, or maybe begin to tuck a little bit more away for savings if they can?

ALLISON LUEDTKE: Yes, I think hang tight is good advice, both in terms of big purchases and small purchases and the stock market. You never want to react immediately to things. If your main interest in the stock market, for example, is just your retirement, you don't want to go out and sell everything and not be invested anymore just because it fell 1,300 points and 3% overnight.

And the same is true for buying goods. You don't want to react to in the moment, but building your savings, creating some space for what we anticipate will be increased prices, is a good idea.

NINA MOINI: OK. So President Trump has said this is about being fair, this is about things being reciprocal, that there might be some difficulties in the short term, but that it's really going to be helpful for the US in the long term. What do you make of that perspective. And also, the way the numbers-- or these percentages-- are coming up, it's hard to understand 34%. It's like, why?

ALLISON LUEDTKE: Why? Very good question. Yes, it is hard to understand. So they came up with this formula that they shared with everyone for how they set the new reciprocal tariff rates. And the idea behind the formula is to try and get the deficit where the trade deficit that we have with-- all the countries we have trade deficits with down to zero. So they want to get rid of the trade deficits.

Now, first of all, besides any issue I have with the formula that they came up with-- and I have some-- I don't agree with the premise that it's necessary to rid ourselves of trade deficits. It's like I tell my students. I'm in a trade deficit with Sephora. That doesn't mean that I need to start implementing tariffs with Sephora. They make a product that I want, and they will take my money for it.

We want things from abroad, and we will give them American dollars for those things. And that's how trade should work. Trade makes everybody better off. So that's how they set the formula. And then the actual formula they use, it has some stuff going on with it. But they did-- they made some assumptions that set it so that their new tariffs will theoretically reduce the trade deficit with those countries to zero.

NINA MOINI: But the idea that it's going to hurt, it might hurt us in the short term in people's pocketbooks, but that it's going to be worthwhile in the long term, is there a best-case scenario that comes out of this? Is this a bargaining tool and then a way to frighten other countries to come to the table? What's like a best-case scenario in all of this, do you think?

ALLISON LUEDTKE: Well, I think the best-case scenario is that one, it incentivizes us to produce more things in the US domestically so that other domestic manufacturers can use those things as inputs instead of buying from overseas companies.

NINA MOINI: Which is what the president says will happen.

ALLISON LUEDTKE: Right. And that could happen. I'm not sure that's a good thing to have happen because comparative advantage and specialization of labor are real and good. It's like why I teach two economics courses and not one economics course and one calculus course. I'm better at econ, and my colleagues are better at math, and everybody is made better off when we specialize in the thing we're better at.

We produce better products when we specialize in the thing we're good at making. So that's why I'm not wild about the prediction that will produce everything domestically. One, we can't, and two, we shouldn't.

NINA MOINI: So before I let you go, how have you been talking about this with students, and how much of a part of your coursework has that been?

ALLISON LUEDTKE: Yeah, students often have a lot of questions about this. It's come up. It's come up a lot because it has been in the news. For years, now, we've been talking about tariffs and trade wars and whether they're good and easy to win. And one of the things-- I mean, even starting in principles of economics, day one, when I talk about the foundational principles of economics, one of the things I talk about is that trade creates value.

And I tell them that it's actually one of my favorite proofs, mathematical proofs, is the proof that trade creates value. And that proof goes like this. If it didn't, we wouldn't do it. And that's day one. That's-- students are getting that from the beginning.

NINA MOINI: OK, all right. Well, I really appreciate you stopping by to break this down for us, Allison, and wishing you a great rest of the semester.

ALLISON LUEDTKE: Thank you so much. Thanks for having me.

NINA MOINI: Thank you. That's Allison Luedtke, associate professor and department chair of economics at Saint Olaf College in Northfield.