Scott Lincecum
Appearances
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Well, it was a joke that I guess has increasing relevance.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Yeah. So on Saturday, the president issued three executive orders invoking a national emergency with respect to fentanyl and the importation of fentanyl from China, Canada, and Mexico.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Correct, correct. And, of course, then applying tariffs on imports of all goods from these three countries. 10% for China, because they already had 25% tariffs on a bunch of stuff. And then 25% on all imports from Canada and Mexico. Leaving aside whether there is a Canadian fentanyl crisis.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Yes. Well, it's – and the big point and I think the point that I think is going to be litigated is even if you grant all of these crises, the remedy is utterly disconnected from the emergency itself. I mean how does applying tariffs on avocados solve the fentanyl crisis?
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
That's the big – I think the bigger issue here is that the remedy is really damaging for the US economy, for the United States global reputation, whatever – however you want to call that. I really mean that in terms of international economic agreements. Because, you know, Canada and Mexico are our biggest trading partners.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
They have had relatively free trade with the United States since 1994 because of the North American Free Trade Agreement, which then Trump rebranded the USMCA and said it was the greatest trade deal ever. So Trump's trade deal, all of that has been thrown away. along with, of course, all of the microeconomic stuff, right? So you have supply chains that have evolved over decades.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Automotive parts will cross the US-Mexico border five, six, seven times before getting put into a vehicle. And they do that, again, because of this free trade zone. This has been a relatively good thing for the US economy overall, right? Yes, there have been discrete harms for certain workers and companies. But overall, it's been a good thing.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
It's allowed US firms to compete against Asian supply chains and European supply chains by diversifying. So all of this is good. And yet, Trump's going to implode all of it because of fentanyl. It just it really makes no sense.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Well, they're very nice people.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
And Trump was on Truth Social bringing up the trade balances, bringing up that this is going to be a great thing for manufacturing. So yeah, the fentanyl thing kind of disappeared within about 12 hours, right? And I would add, it's not just their words that show they understand this is going to be painful for the US economy. It's the actions as well, because they carved out
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
canadian oil so canadian oil gets a special 10 tariff not the full 25 now why would you do that if this is going to be good for the american economy well you do it because in reality it's going to raise gas prices in the midwest because we import a ton of canadian crude oil we do that not because we're not energy independent or any of that nonsense we do it because canada makes a certain type of crude oil that goes in the refineries that are in the midwest
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
And again, we have this wonderful free trade relationship with Canadians. So we stopped buying OPEC oil. We started buying Canadian heavy crude. Everybody ends up better off, or at least they did, right? So even in their actions, their formal actions, they understand that this is going to be painful. But now, of course, it's just the great covering and distraction.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Yeah, and it really reveals a fundamental flaw in a lot of kind of the protectionist mindset is that a lot of the imports from Canada and Mexico are complementary to US production. They do not push out US production. They actually support US production. So a huge chunk of what we import from Canada and Mexico are industrial inputs, so things that we put in cars or microwave ovens or whatever.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
And that allows us to make more of those things. It allows us to create cheaper gasoline, right? So these are – complementary supply chains. They are not just simply zero-sum directly competitive. And the whole protectionist idea with trade deficits and imports bad, exports goods really fails when you understand these complementaries, right?
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
When you understand that production actually goes up in the United States as imports go up. So, it's a big problem for them. And for better or worse, assuming these tariffs actually happen, I think we're going to get a lot of real-world lessons in the next couple weeks of how these complementaries work in practice.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Yeah, so we talk about tariffs when we talk about legal incidents and economic incidents. Legal incidents is who pays at the border. Almost always, it's an American importer. There are a few little exceptions, but forget about those. So a good cross at the border, customs basically hands you a bill. Typically, you actually get the bill later, but you get the idea. And then you pay it.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
The economic incidence is trickier, right? Because foreign producers can, in theory, lower their prices to offset the tariff, right? So if you used to be charging 100 and there's a 25% tariff, you start charging 80. 80 plus 20, you're back to 100. Everything's good, right? Another thing is there are currency movements. So the economic incidence is harder.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Generally, though, we have a ton of recent evidence from the Trump 1.0 tariffs. And we found that the economic incidence, the burden of these tariffs was primarily falling on domestic American companies and consumers.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
You still get the exact same legal framework. Customs collects the duty from the importer. The only thing that changes is the import price of the good. So basically, a foreign producer can say, you know what, I'm going to lower my prices and effectively offset any additional tariff that's applied at the border. It happens occasionally. And I would imagine you're going to see some –
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
of this with these new tariffs. But in general, most of it is going to be paid by Americans. And the other thing we should note, though, is there's then an invisible tariff. Because tariffs don't just raise the price of imports. They raise the price of domestic goods, too. Because if you're a domestic producer, you suddenly have more demand and less competition and less supply in the market.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
So we, Econ 101, you raise your prices, right? Supply and demand. Yeah. So this morning, Wall Street Journal had the most predictable headline ever, which is that U.S. steelmakers are raising their prices right now. because of these tariffs.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
And great for manufacturers, because you and I, I mean, actually, I don't know about your shopping habits, Tim, but I don't go out and buy big hunks of steel.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Okay. So, that's all American manufacturers. So,
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
automakers aircraft manufacturers energy pipeline producers you name it these are the folks that are going to be eating these new higher prices as well as any higher import prices as well i love that little economics lesson okay just one more time on crossing the border i want you to do the sesame street style all right so we've got like you're imagining it's a cartoon i guess sesame street isn't a cartoon we're gonna do a pbs cartoon
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
No, it's by value. Typically by value. Sometimes they do it by weight or whatever, but most of our tariffs are what we call ad valorem. It's dumb Latin. It just means by value. So if you have a 25% tariff and you're bringing over $100 worth of avocados, you're going to get a bill at the border for $25.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
They charge the importer, yeah.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
That's actually a really important point. Mexico isn't launching avocados across the border. These are – I mean – Not yet.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Almost all trade has a willing consumer on the other end, an importer. So think of a company like Walmart. Walmart is buying from a seller in China or Japan or wherever, Mexico. And when the boat arrives with Walmart's purchases, Walmart is then actually taking possession of those at the border. And it's not a guy with avocados from Mexico.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
It's actually, they're shipping it, Walmart's taking possession, and that's when they're paying the bill of customs.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
So just last week on Cato, my RA and I did a blog post on the automotive sector and North American automotive supply chain. And we had this nice little map that we showed a single product because Bloomberg went out good for them. They actually tracked a single product that crossed the border several times to go into a car seat.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
So in the olden days, so pre these executive orders, that widget, it was a capacitor, could actually cross the US-Mexico border the five times that it did, end up in a car seat, and have zero tariff supply. This time, it's going to get tariffed every single time it crosses the border. Why was it going across five times? Comparative advantage.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
So you have certain factories in the United States are good at certain things, like creating circuit boards.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
So it gets put into another thing that gets put into another thing. So engines are another example of this. They start out as an engine block. They keep getting more stuff added to them. There is a little buried provision in both of the Canada and Mexico executive orders, not to get too wonky on you, that is barring what we call duty drawback.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
This is a system that effectively allows importers to not pay duties if they're exporting the same thing they just imported. So let's say you import an avocado, you make guacamole, you put that in a container and you export the guacamole. You can actually get a refund on the tariff you paid on the avocado. We call that duty drawback.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Makes perfect sense because it's not actually entering the United States for consumption. You're actually just processing it. And we want to get that processing value, right? So that's normal.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
They removed duty drawbacks. So I've heard from several people. who are in these supply chains who are like, what, what the heck, what are we even going to do?
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Yeah. And you know, I'm all sanitized. So we have this question of compounding tariffs. So if you go back to the automotive example, You could have a good that gets a tariff as its starting point, gets incorporated into something, crosses again, gets another tariff, crosses again, gets another tariff.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
By the end of it, you actually – because your tariffs apply – this is, sorry, really wonky – to the gross value of the product. That means – They don't apply to just the value you've added to a product in a certain place. So let's go back to our guacamole example. Even though the guacamole part of it is only half of the – avocado is half of the cost. The guacamole is the half of the cost.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Tariffs don't do that. They don't say, oh, we're only going to tariff the additional stuff you did. They just give you the full 100% of the new value of the product, right? So – You're effectively, because of this system, which makes sense, it's hard to determine value-add at the border. Nobody's going to do that.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Because of the system, though, you can end up with tariffs that are just exponentially increasing because these things cross the border so many times.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
This is another one of those kind of hugely underreported things. So the de minimis exception does have raised some concerns, right?
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Because effectively, after the China tariffs were applied, a bunch of manufacturers realized they could set up warehouses in Mexico and Canada and bring in small shipments from China, store them in the warehouse, and then send them to the United States duty-free, right? Because they're small dollar values. Got it.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
There are needs for reforms, but by simply banning all de minimis shipments, you're actually hitting a lot of perfectly legal trade and a lot of stuff, like you said, like grandma's cookies from Canada. But the other big point is – I don't know how customs is actually going to enforce this.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
So some people look – because de minimis reform has been a thing that has been discussed for years now because of the kind of Sheehan and Timu taking advantage of this system, which by the way, again, just to be clear, was never a problem until we had all these tariffs in place, right?
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Well, this is what we're getting at. 30,000 new customs agents or more. Customs officials have said to Congress and whatever, the amount of resources it would need to actually inspect individual de minimis shipments is outrageous. It's crazy. They do inspect. They do a sampling system. They scan them. They do everything they can. Sure.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
But there's been this, I mean, we're talking about, I seem to remember 4 million parcels a day crossing via the de minimis exception now. Now, again, I'll just put on my libertarian free trader hat and say, maybe it was actually better to have bulk shipments coming directly from China than having 4 million packages sent across from Mexico. But sorry, your tariffs have caused this big mess.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
So this is tariffs 101, right? Tariffs, when you apply them to an input, fertilizer is an input. It's going to harm your downstream producers. Farmers are downstream producers. And tariffs always lead to cronyism and lobbying because everybody wants an exception or exemption or they want their own tariffs.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Well, for sure. Well, the last time Trump implemented a bunch of tariffs, there was an exemption process through both Commerce Department and USTR.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
And then a bunch of enterprising economists went back and looked and they found that you actually had a much better likelihood of getting your exemption if you donated to Republican candidates and hired a lobbyist who had connections to the Trump administration. So, you know, this is DC 101, right, man?
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
That's also trade 101. Retaliation is almost inevitable because politicians in these other places can't look weak to their own domestic constituents. You can't just look like a patsy to Donald Trump. You understand that import tariffs are going to be costly because you're not a mercantilist like Donald Trump. You actually understand this is going to be painful.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
But you have to do it because you need to get reelected or there's national solidarity, all that kind of stuff. And you can actually – apparently, the Canadians are really pissed right now.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
And Canadians are like the nicest people ever. So for them to get upset, you've done something really wrong. So going back to retaliation. So there's a political incentive to retaliate. There's also a strategic incentive. So if you don't retaliate, you're basically encouraging bad behavior by the initial actor. This is all game theory stuff, right? You see a lot of retaliation in this space. But –
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
How do you retaliate? Well, you don't want to just do blanket tariffs like Donald Trump did. You want to hit politically influential groups. So you're going to go after pork producers. Pork guys carry a lot of weight. So you're going to go after pork imports. You're going to go after steel producers. imports. They famously went after bourbon because of Mitch McConnell and Kentucky bourbon.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
So this is very standard practice. You try to do these targeted hits. Well, that's a shame.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Yeah, $350 billion right off the top, right? And I would add, even if this all goes away tonight, I think this may be a good place to close. There are still reasons to expect this to be damaging in the long term, because the United States today has effectively abrogated its free trade agreement commitments with its closest trading partners. And
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
and has done it in a way that is just clearly absurd and damaging. And so if you are a foreign government official, and you are looking to increase economic integration. And you have, on the one hand, China, Xi Jinping, total pain in the butt, lots of problems with China's economic models and human rights.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
Compared to what you just got with Donald Trump and the United States, the calculus has changed. And I think that this is going to do long-term damage to government's willingness to increase integration with the United States. That just means slower growth, less competitiveness for the US economy, onward and onward.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
I would note, as one of our adjuncts posted over the weekend, it also could come back to bite us when there's another global crisis because governments tend to work together, whether it's through public health or monetary policy or whatever. Trade agreement partners tend to do the best when it comes to working together in these things.
The Bulwark Podcast
Will Saletan and Scott Lincicome: A Crime Boss Has Taken Over
But now we're basically destroying those relationships in real time.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Well, it was a joke that I guess has increasing relevance.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Yeah. So on Saturday, the president issued three executive orders invoking a national emergency with respect to fentanyl and the importation of fentanyl from China, Canada, and Mexico.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Correct, correct. And, of course, then applying tariffs on imports of all goods from these three countries. 10% for China, because they already had 25% tariffs on a bunch of stuff. And then 25% on all imports from Canada and Mexico. Leaving aside whether there is a Canadian fentanyl crisis.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Yes. Well, it's – and the big point and I think the point that I think is going to be litigated is even if you grant all of these crises, the remedy is utterly disconnected from the emergency itself. I mean how does applying tariffs on avocados solve the fentanyl crisis?
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
That's the big – I think the bigger issue here is that the remedy is really damaging for the US economy, for the United States global reputation, whatever – however you want to call that. I really mean that in terms of international economic agreements. Because, you know, Canada and Mexico are our biggest trading partners.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
They have had relatively free trade with the United States since 1994 because of the North American Free Trade Agreement, which then Trump rebranded the USMCA and said it was the greatest trade deal ever. So Trump's trade deal, all of that has been thrown away. along with, of course, all of the microeconomic stuff, right? So you have supply chains that have evolved over decades.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Automotive parts will cross the US-Mexico border five, six, seven times before getting put into a vehicle. And they do that, again, because of this free trade zone. This has been a relatively good thing for the US economy overall, right? Yes, there have been discrete harms for certain workers and companies. But overall, it's been a good thing.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
It's allowed US firms to compete against Asian supply chains and European supply chains by diversifying. So all of this is good. And yet, Trump's going to implode all of it because of fentanyl. It just it really makes no sense.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Well, they're very nice people.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
And Trump was on Truth Social bringing up the trade balances, bringing up that this is going to be a great thing for manufacturing. So yeah, the fentanyl thing kind of disappeared within about 12 hours, right? And I would add, it's not just their words that show they understand this is going to be painful for the US economy. It's the actions as well, because they carved out
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
canadian oil so canadian oil gets a special 10 tariff not the full 25 now why would you do that if this is going to be good for the american economy well you do it because in reality it's going to raise gas prices in the midwest because we import a ton of canadian crude oil we do that not because we're not energy independent or any of that nonsense we do it because canada makes a certain type of crude oil that goes in the refineries that are in the midwest
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
And again, we have this wonderful free trade relationship with Canadians. So we stopped buying OPEC oil. We started buying Canadian heavy crude. Everybody ends up better off, or at least they did, right? So even in their actions, their formal actions, they understand that this is going to be painful. But now, of course, it's just the great covering and distraction.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Yeah, and it really reveals a fundamental flaw in a lot of kind of the protectionist mindset is that a lot of the imports from Canada and Mexico are complementary to US production. They do not push out US production. They actually support US production. So a huge chunk of what we import from Canada and Mexico are industrial inputs, so things that we put in cars or microwave ovens or whatever.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
And that allows us to make more of those things. It allows us to create cheaper gasoline, right? So these are – complementary supply chains. They are not just simply zero-sum directly competitive. And the whole protectionist idea with trade deficits and imports bad, exports goods really fails when you understand these complementaries, right?
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
When you understand that production actually goes up in the United States as imports go up. So, it's a big problem for them. And for better or worse, assuming these tariffs actually happen, I think we're going to get a lot of real-world lessons in the next couple weeks of how these complementaries work in practice.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Yeah, so we talk about tariffs when we talk about legal incidents and economic incidents. Legal incidents is who pays at the border. Almost always, it's an American importer. There are a few little exceptions, but forget about those. So a good cross at the border, customs basically hands you a bill. Typically, you actually get the bill later, but you get the idea. And then you pay it.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
The economic incidence is trickier, right? Because foreign producers can, in theory, lower their prices to offset the tariff, right? So if you used to be charging 100 and there's a 25% tariff, you start charging 80. 80 plus 20, you're back to 100. Everything's good, right? Another thing is there are currency movements. So the economic incidence is harder.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Generally, though, we have a ton of recent evidence from the Trump 1.0 tariffs. And we found that the economic incidence, the burden of these tariffs was primarily falling on domestic American companies and consumers.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
You still get the exact same legal framework. Customs collects the duty from the importer. The only thing that changes is the import price of the good. So basically, a foreign producer can say, you know what, I'm going to lower my prices and effectively offset any additional tariff that's applied at the border. It happens occasionally. And I would imagine you're going to see some –
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
of this with these new tariffs. But in general, most of it is going to be paid by Americans. And the other thing we should note, though, is there's then an invisible tariff. Because tariffs don't just raise the price of imports. They raise the price of domestic goods, too. Because if you're a domestic producer, you suddenly have more demand and less competition and less supply in the market.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
So we, Econ 101, you raise your prices, right? Supply and demand. Yeah. So this morning, Wall Street Journal had the most predictable headline ever, which is that U.S. steelmakers are raising their prices right now. because of these tariffs.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
And great for manufacturers, because you and I, I mean, actually, I don't know about your shopping habits, Tim, but I don't go out and buy big hunks of steel.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Okay. So, that's all American manufacturers. So,
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
automakers aircraft manufacturers energy pipeline producers you name it these are the folks that are going to be eating these new higher prices as well as any higher import prices as well i love that little economics lesson okay just one more time on crossing the border i want you to do the sesame street style all right so we've got like you're imagining it's a cartoon i guess sesame street isn't a cartoon we're gonna do a pbs cartoon
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
No, it's by value. Typically by value. Sometimes they do it by weight or whatever, but most of our tariffs are what we call ad valorem. It's dumb Latin. It just means by value. So if you have a 25% tariff and you're bringing over $100 worth of avocados, you're going to get a bill at the border for $25.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
They charge the importer, yeah.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
That's actually a really important point. Mexico isn't launching avocados across the border. These are – I mean – Not yet.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Almost all trade has a willing consumer on the other end, an importer. So think of a company like Walmart. Walmart is buying from a seller in China or Japan or wherever, Mexico. And when the boat arrives with Walmart's purchases, Walmart is then actually taking possession of those at the border. And it's not a guy with avocados from Mexico.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
It's actually, they're shipping it, Walmart's taking possession, and that's when they're paying the bill of customs.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
So just last week on Cato, my RA and I did a blog post on the automotive sector and North American automotive supply chain. And we had this nice little map that we showed a single product because Bloomberg went out good for them. They actually tracked a single product that crossed the border several times to go into a car seat.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
So in the olden days, so pre these executive orders, that widget, it was a capacitor, could actually cross the US-Mexico border the five times that it did, end up in a car seat, and have zero tariff supply. This time, it's going to get tariffed every single time it crosses the border. Why was it going across five times? Comparative advantage.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
So you have certain factories in the United States are good at certain things, like creating circuit boards.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
So it gets put into another thing that gets put into another thing. So engines are another example of this. They start out as an engine block. They keep getting more stuff added to them. There is a little buried provision in both of the Canada and Mexico executive orders, not to get too wonky on you, that is barring what we call duty drawback.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
This is a system that effectively allows importers to not pay duties if they're exporting the same thing they just imported. So let's say you import an avocado, you make guacamole, you put that in a container and you export the guacamole. You can actually get a refund on the tariff you paid on the avocado. We call that duty drawback.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Makes perfect sense because it's not actually entering the United States for consumption. You're actually just processing it. And we want to get that processing value, right? So that's normal.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
They removed duty drawbacks. So I've heard from several people. who are in these supply chains who are like, what, what the heck, what are we even going to do?
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Yeah. And you know, I'm all sanitized. So we have this question of compounding tariffs. So if you go back to the automotive example, You could have a good that gets a tariff as its starting point, gets incorporated into something, crosses again, gets another tariff, crosses again, gets another tariff.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
By the end of it, you actually – because your tariffs apply – this is, sorry, really wonky – to the gross value of the product. That means – They don't apply to just the value you've added to a product in a certain place. So let's go back to our guacamole example. Even though the guacamole part of it is only half of the – avocado is half of the cost. The guacamole is the half of the cost.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Tariffs don't do that. They don't say, oh, we're only going to tariff the additional stuff you did. They just give you the full 100% of the new value of the product, right? So – You're effectively, because of this system, which makes sense, it's hard to determine value-add at the border. Nobody's going to do that.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Because of the system, though, you can end up with tariffs that are just exponentially increasing because these things cross the border so many times.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
This is another one of those kind of hugely underreported things. So the de minimis exception does have raised some concerns, right?
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Because effectively, after the China tariffs were applied, a bunch of manufacturers realized they could set up warehouses in Mexico and Canada and bring in small shipments from China, store them in the warehouse, and then send them to the United States duty-free, right? Because they're small dollar values. Got it.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
There are needs for reforms, but by simply banning all de minimis shipments, you're actually hitting a lot of perfectly legal trade and a lot of stuff, like you said, like grandma's cookies from Canada. But the other big point is – I don't know how customs is actually going to enforce this.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
So some people look – because de minimis reform has been a thing that has been discussed for years now because of the kind of Sheehan and Timu taking advantage of this system, which by the way, again, just to be clear, was never a problem until we had all these tariffs in place, right?
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Well, this is what we're getting at. 30,000 new customs agents or more. Customs officials have said to Congress and whatever, the amount of resources it would need to actually inspect individual de minimis shipments is outrageous. It's crazy. They do inspect. They do a sampling system. They scan them. They do everything they can. Sure.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
But there's been this, I mean, we're talking about, I seem to remember 4 million parcels a day crossing via the de minimis exception now. Now, again, I'll just put on my libertarian free trader hat and say, maybe it was actually better to have bulk shipments coming directly from China than having 4 million packages sent across from Mexico. But sorry, your tariffs have caused this big mess.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
So this is tariffs 101, right? Tariffs, when you apply them to an input, fertilizer is an input. It's going to harm your downstream producers. Farmers are downstream producers. And tariffs always lead to cronyism and lobbying because everybody wants an exception or exemption or they want their own tariffs.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Well, for sure. Well, the last time Trump implemented a bunch of tariffs, there was an exemption process through both Commerce Department and USTR.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
And then a bunch of enterprising economists went back and looked and they found that you actually had a much better likelihood of getting your exemption if you donated to Republican candidates and hired a lobbyist who had connections to the Trump administration. So, you know, this is DC 101, right, man?
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
That's also trade 101. Retaliation is almost inevitable because politicians in these other places can't look weak to their own domestic constituents. You can't just look like a patsy to Donald Trump. You understand that import tariffs are going to be costly because you're not a mercantilist like Donald Trump. You actually understand this is going to be painful.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
But you have to do it because you need to get reelected or there's national solidarity, all that kind of stuff. And you can actually – apparently, the Canadians are really pissed right now.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
And Canadians are like the nicest people ever. So for them to get upset, you've done something really wrong. So going back to retaliation. So there's a political incentive to retaliate. There's also a strategic incentive. So if you don't retaliate, you're basically encouraging bad behavior by the initial actor. This is all game theory stuff, right? You see a lot of retaliation in this space. But –
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
How do you retaliate? Well, you don't want to just do blanket tariffs like Donald Trump did. You want to hit politically influential groups. So you're going to go after pork producers. Pork guys carry a lot of weight. So you're going to go after pork imports. You're going to go after steel producers. imports. They famously went after bourbon because of Mitch McConnell and Kentucky bourbon.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
So this is very standard practice. You try to do these targeted hits. Well, that's a shame.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Yeah, $350 billion right off the top, right? And I would add, even if this all goes away tonight, I think this may be a good place to close. There are still reasons to expect this to be damaging in the long term, because the United States today has effectively abrogated its free trade agreement commitments with its closest trading partners. And
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
and has done it in a way that is just clearly absurd and damaging. And so if you are a foreign government official, and you are looking to increase economic integration. And you have, on the one hand, China, Xi Jinping, total pain in the butt, lots of problems with China's economic models and human rights.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
Compared to what you just got with Donald Trump and the United States, the calculus has changed. And I think that this is going to do long-term damage to government's willingness to increase integration with the United States. That just means slower growth, less competitiveness for the US economy, onward and onward.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
I would note, as one of our adjuncts posted over the weekend, it also could come back to bite us when there's another global crisis because governments tend to work together, whether it's through public health or monetary policy or whatever. Trade agreement partners tend to do the best when it comes to working together in these things.
Young and Profiting (YAP) with Hala Taha
Reid Hoffman: Unlocking Limitless Human Possibilities With AI | Artificial Intelligence E333
But now we're basically destroying those relationships in real time.