Will New Tariffs Drive Us Into Recession?

Last week President Trump announced new tariffs against Mexico, Canada, and China to combat the Fentanyl and immigration crisis. By Tuesday Canada and Mexico got a 30 day reprieve.

Some have argued that the new taxes will result in more inflation and kill domestic business. In this episode we will talk about how these tariffs are used and give our insights on what is really happening.

[00:00:10.08] - Alice

Hello. Welcome to Books in the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Veltre. Dan is the CEO of Envision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations. Rich is CEO of the Veltri Group and a financial strategist working with companies to manage their money more effectively. Now on to the podcast.

[00:00:44.27] - Dan Paulson

Hello, and welcome to Books in the Biz. Rich, how are you doing this week?

[00:00:48.29] - Speaker 2

I am cold. Cold?

[00:00:51.24] - Dan Paulson

At the time of this recording, I think we have both gotten a lot of ice. Yeah. Ice, baby. We should have had vanilla ice on.

[00:01:01.23] - Speaker 2

Absolutely. No, ice is my nemesis at the moment. So, yeah.

[00:01:07.27] - Dan Paulson

Not much different out here. Not much different out here. Well, hey, the one thing I will say about elections and administration changes is it's always interesting, some more interesting than others. And we've had a lot happen in the first couple of weeks of the Trump presidency that's given us a fair amount to talk Yeah. And there's one thing that I think may or may not apply to us at some point in the future is tariffs. So we recently had our illustrious President threaten tariffs to China Mexico and Canada. Mexico and Canada have managed to work their way out of the tariff issue short term, which we'll get more into. China, I believe, has not. I think they're still getting their 10 % of their pound of flesh that they need to cough up. But this could impact businesses or it could not. And I thought it would be interesting from a financial perspective as well as a business perspective to talk about this, because even though some people have small businesses versus large businesses, this could still impact you in a pretty big way.

[00:02:30.07] - Speaker 2

Sure. I would say that from the finance side of it, so far, everybody is not saying if, they're saying when. Anyone I've talked to has basically said everybody just has that expectation that the impact will automatically come from the fact that if these tariffs go into place, then there will be an effect. Not a question. That's basically not a question. It's just a statement.

[00:03:06.09] - Dan Paulson

Well, right now, I think the great deal maker is using this as a bargaining chip. I honestly don't think he has any intent to put them into effect. And of course, unless somebody calls his bluff, there's a lot of people thinking that Canada was not going to do it, and they were going to stick it out and allow the tariffs to go into effect. But Trudeau came in at the last minute, like literally the 11th hour, and worked out some concessions. It sounds like some of those concessions were already in place with the Biden administration. Of course, Trump and his team is taking their win there. It sounds like Mexico did offer a lot more than they were offering in the past. So in some ways, that's a good thing. But I really just see this as a bargaining tool. We are the 800 pound guerrilla. We are the largest economy in the And we buy a lot of goods from other places as well as sell a lot of goods to other places. So when you look at it from a bargaining point of view and not an economic point of view, it's a big tool because what?

[00:04:14.16] - Dan Paulson

And maybe you read up on this, but I think 40 % or better of Canada's goods come from the US. So it's a pretty big chunk. And I would say Mexico is probably pretty consistent that way, too. Of course, we do get a lot of other things from both those places that could impact us negatively, such as oil, a lot of goods. There's a lot of Mexican built manufacturing facilities that ship goods across the border. So that can become an issue. But I guess what are you seeing on your side of it? From your perspective, not everyone else's. What do you think?

[00:04:52.02] - Speaker 2

From my perspective, I think the tariffs, at the end of the day, I think there will be something put in place. I I don't necessarily think to the extent that he's already announced this is what he wants to go after, I don't know that that's going to stay, but I think there will be something. I think it's because if you look at his history, this is how he gets people to the table. You push him, and you push him hard, and then you come up with something that he really wants, which telling everybody, I'm going to put a 25 % tariff on it, that's a massive in trade. But if they balk at it, then he's going to do it. I don't doubt the fact that he will actually follow through on what he said. There's definitely an impact. There's definitely a fact that people are gearing up for it. So anyone who imported from China up to this point has geared up and stockpiled their inventory so they have excess so that they don't have to make an order right away and break stuff in that's going to be subject to the tariff. And the thing I saw this morning that was most interesting was Ford stock dropped.

[00:06:06.04] - Speaker 2

And everybody's talking about Ford stock dropping because I think a bunch of their parts or a bunch of their vehicles are actually manufactured in Mexico. So somebody there, smarter people than me, are seeing that Ford's going to be impacted. And people have already said the auto industry is where you're probably going to see a big hit. And another document that I saw in there related to that same article, it's not just a finished vehicle, it's actually parts. So there are some parts.

[00:06:41.12] - Dan Paulson

A lot of parts.

[00:06:42.14] - Speaker 2

And there was one, it was really interesting to look at, they were like piston rods. The aluminum is basically polished and put together in Tennessee. Then it goes to Canada. Then it goes to Mexico.

[00:07:00.00] - Dan Paulson

And we wonder why our cars cost so much, right?

[00:07:02.14] - Speaker 2

And then it comes back into the US and winds up in Detroit to be put into a finished vehicle. And you're basically sitting there, you're scratching your head. You're like, maybe there's an efficiency that can go on there.

[00:07:14.29] - Dan Paulson

Well, could you imagine if all those tariffs kicked in, though? You got the piston rods that are going into Canada. So Canada already announced they would do retaliatory tariffs on us if we did it on them. So there would be 25 % going in. There would be then 25 %. Well, I guess if it goes from Canada to Mexico, it would skip over us. So there wouldn't be the markup there. But then it would get in Mexico, and then it would come back into the US. There would be another 25 % markup. You're talking, it's not exactly 50 % because it's 25 % on top of the 25 % plus whatever the initial cost was. That starts adding up pretty quick.

[00:07:53.26] - Speaker 2

Yeah. I think they also estimated that the average cost of a vehicle would go up by, I think, I saw the number of $3,000. Which you start off thinking, well, that's a lot. But I started looking at it also. I'm like, recently, all vehicles have gone up in price for a whole lot of other reasons than the tariff.

[00:08:17.06] - Dan Paulson

Well, the average cost of a new vehicle now is about $45,000.

[00:08:20.23] - Speaker 2

Yeah. So somewhere along the line, people are going to realize we don't have a market for this. So either the tariff is going to work to the point of people are going to buy vehicles that aren't being put together by other people other than the US, or they're just going to basically make a different choice, or they're not going to buy, which is going to force people to start thinking about, well, why aren't they buying? If they're not buying because of cost, how do I get the cost down? So it's a triggering effect, right? The tariff should have a triggering effect to kick in, I don't know, something, whether Whether it's making the companies realize that, okay, we were making a bigger profit before by having the prices up higher to cover our cost of getting stuff done outside the US. Maybe it really is just they made in the USA push like we had when we were kids.

[00:09:17.22] - Dan Paulson

Right. Yeah, I do think there's some of that. I mean, the reason for the tariffs is not what I would say technically an economic one. If we're sticking true to what is being told to us, the point of the tariffs is to help curb immigration and the fentanyl issues that have been plaguing us over probably the past 5 to 10 years, because a lot of that is coming across the border in various ways. Of course, we've seen the immigration situation over the last four years, and it's my understanding that this is being used as leverage to essentially shut that off. And I would have to agree with that because if you're going to hurt somebody, hurt them in their pocketbook, and if you're doing that with Canada and Mexico, and it forces them to take action on it, then you did what you needed to do, if they weren't doing anything before. And as we know, our President is a businessman by trade. He talks about the art of the deal. He is a Wheeler dealer. So this is going to be the method he's going to use for it, where maybe in the past, it would have been more diplomatic approach to it.

[00:10:25.25] - Dan Paulson

But I think also we've seen diplomatic approaches that haven't panned out that well for the past couple of years. We've been taking advantage of some of that.

[00:10:33.27] - Speaker 2

This is true. Did I hear that the other reason that they're saying China was included in the Magic Three, China was included because they manufacture the chemical that allows- That is correct. The manufacture of fentanyl?

[00:10:50.21] - Dan Paulson

Yes, that is correct, which in some ways surprised me that it was only a 10 % on China. I actually would have thought that might have been higher because of that issue is where the raw chemicals from China are being refined, typically in Mexico more than Canada. But that is part of the reason for that, why China was included in that. I think there's other issues going on with China that are probably also going to be worked into this deal in the future. I was thinking that as well.

[00:11:24.15] - Speaker 2

I don't necessarily think. I think fentanyl is a very small percentage of the issue with China, when we have effectively over the past 30, 40 years, basically said, here, China, why don't you manufacture all this stuff for us, especially all the way down to medication Yes.

[00:11:47.07] - Dan Paulson

Well, and I think we learned our lesson on that with COVID. Everything was manufactured in China. And then, of course, COVID hit and that shut down stuff for a while. And then you had difficulty getting ships in the port. So a lot of those goods and services we needed were sitting on a cargo ship just off the Coast, waiting for their chance to get unloaded. But do you really want all your medication and all your pharmaceuticals to be overseas. It might be, again, cheaper to manufacture there. But now we run into a situation where much needed goods and services can't be accessed. And this isn't really part of the subject, but it's to tie in. The China initiative, basically, where they're going into countries and say, hey, we'll redo your port. We will give you a fully modern port to bring in goods, and all you have to let us do is manage it. And I think some of that was tied into the kerfuffle over the Panama Canal, because they were working on an agreement with Panama to essentially help upgrade the canal and the facilities and And the same thing, they were going to manage it.

[00:13:01.20] - Dan Paulson

Well, once you give another country control of your port system, they can control what comes in, they can control what goes out, and you lose some of that sovereignty to it. So Well, it doesn't tie to the taxes directly. I think that's another subject for another day. But this all leads to also increasing the cost of goods and services, or well, mostly the goods that we get overseas. So for From your perspective, if you were looking at this from a CFO site, you see all this stuff going on. I know what things I would look at operationally, but what do you do from a financial end, especially for a small to medium-sized company that maybe doesn't have a gajillion dollars in funds to buy up all the goods that they need ahead of time.

[00:13:57.21] - Speaker 2

Yeah, I was actually thinking about that. I'm like, buying all the stuff in advance and building up a warehouse full of stuff is okay if you, like you said, have the money to do that. I think the other problem is you really have to go almost product by product, especially if you're doing multiple products or multiple lines, then you have to go through and figure out, what are your margins already? And it scares me a little bit because there's a lot of smaller companies that don't have the time or energy and haven't actually done to go through and actually figure out what their margins are now. What are they going to be after you have to pay a tariff? What's it going to be when you add that much cost? Did you actually just lose all your profit on that product? You really do have to take the time now and actually understand, am I going to lose out on this? Was I making enough before, but now I'm not? And therefore, does that have a much more radical change to what I have to do for my business going forward? So I think that analysis is really the first thing that I would tell people you have to do.

[00:15:05.14] - Speaker 2

You have to make sure. If you are getting something manufactured overseas or north or South border, whichever border you're going to cross, how much does this change your your projections? How much does this change what you expect that you're going to do between now and the end of 2025?

[00:15:26.25] - Dan Paulson

Yeah, I would say the other end of it, too, from the operations I'm also looking at what other vendors can I get on my list to become potential suppliers. So you know where you're currently getting your goods and services from now. Are there some more localized ones, people in the US who manufacture those goods? Because what you might find is those items might actually be about the same price, maybe even a little cheaper after these tariffs kick in. That's something you got to be considering, too. So even though you might be paying more, you probably really need to look at who you have as a And that's really good to have anyway. I mean, to me, that's just sound systems management to have two or three suppliers around that you can rotate in. It allows you to manage quality. So from a QA standpoint, you can test your other vendors quality against different vendors just to make sure you're getting good quality. But it also provides you a situation where now if a vendor can't supply you with something, you can go somewhere else to get it, where if you got to go through that procurement process at the last minute, anyone who's done that knows it isn't always easy or fun.

[00:16:37.26] - Dan Paulson

And then you're beholden to whoever that supplier is because they know they have you over a barrel. So now they can charge you whatever, otherwise you're shut down. I think the other thing that you should be doing, you probably agree with this, too, is you probably need to start looking at your pricing structure and probably start factoring in some of those increases now. And I'm sure there's a lot of people that don't want to hear that, but you should probably start edging up your prices now just in case, because there's probably going to be a period of time where there's going to be a dip in. There's going to be an increase in cost and a dip in in revenue. So you might as well take advantage of that now and be prepared and also normalize your customers that costs are potentially going up.

[00:17:21.21] - Speaker 2

No, I totally agree with that. I think it's a matter of, I think there are a few people that are already talking about that, the fact that they've already, as you said, as I said before, the one company was definitely talking about how the fact of the tariff has caused them to put more stockpile in. The next piece is, if you can adjust your pricing, I'd probably start to do it. And also So when you figure that price increase in, try to be as conservative as you can in figuring out what your projected demand will be. If you're expecting a higher price, I wouldn't expect that all the same are going to come in. I would have to lower how many people are going to buy because it is now a higher price. So think about it from that supply and demand standpoint and understand that you're going to You're going to have a drop, at least in some way, you're going to have a drop in who's going to come in and actually buy your product.

[00:18:21.09] - Dan Paulson

Yeah, exactly. Any other words of wisdom you would have for a company that's going to be dealing with this?

[00:18:30.11] - Speaker 2

I don't know that there's any other real words of wisdom on this one, I think, to a certain extent. I don't think that it's going to be world ending for the most part, I would think that there's a little bit more of just take it with some degree of reality. I don't expect that I believe this is going to happen. I understand that there is a need or a push for us to take everything back inside the United States and boost our manufacturing capabilities and boost what we've been outsourcing in the past. I think that's somewhat of a new reality. And so there might be a little bit more cost involved. But I think for the long term, it's not a bad thing. I think it's smart to expect that people are going to push for this after all the debacle, like you said, about COVID, et cetera, all the other outside factors of why I think that it's a good thing for the long term. Expect that it's going to be a slightly higher cost and work it out so that you can actually afford it and move forward.

[00:19:43.06] - Dan Paulson

Yeah. I think it'll actually Long term, I think it'll actually stabilize pricing because if it's within the US, you have some controls over shipping costs more so maybe than over port fees and over container fees and everything else like Plus, you don't have to worry about something gets stuck in in customs or stuck on a cargo ship waiting to be unloaded and waiting for those. They might be key components that keep your processes going. Well, what happens if you have to wait a week or two to get those components in? Now you're back ordering items and you're delaying product, and there's holding costs to all that, where you've sold items and you can't get them off your shelf and get them into the hands of your customers. So I think overall it will help us long term. But like anything, any change like this, there's going to be some short term pain that comes with it. It's unfortunate, but that's the way it is. I would also suggest that you keep an open line of communication with your customers. Be sure to talk to them and let them know what you're seeing, what you're experiencing, and how it's going to impact them.

[00:20:54.13] - Dan Paulson

That also helps to what point you're making, Rich, where you get a feel of, okay, does that mean now my clients are going to cut back on some of their orders. They might hold off on certain things until they realize what's going to happen next. It helps you with that forecasting and that planning part. So that's another thing I would suggest is reach out to your customers, let them know what you're experiencing and what they can expect to happen. And it will be helpful to you and hopefully helpful to them as well.

[00:21:21.00] - Speaker 2

I agree.

[00:21:23.16] - Dan Paulson

All right. Well, it's a short one, but there was a lot discussed there. And I think, again, it affects a lot of businesses, maybe more than they realized. I almost, almost had a guest on from Canada today to talk about what he was going through, because he does have several product lines that come through the US, and he was talking about the impact it was having on him. So the nice part is he's going to come back in March and he's going to share that with us. And that will be close to that 30 day window. So we'll be able to probably talk about this again on if something happened or if something didn't. But yeah, that's pretty much all I had today. Do you have anything else to add?

[00:22:03.24] - Speaker 2

No, I think that's it.

[00:22:05.26] - Dan Paulson

That's awesome. Well, we'll let Bob take us out and we'll talk to you next week.

[00:22:10.27] - Bob

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